Fitch Revises Michigan Outlook to Positive

CHICAGO — Fitch Ratings this week revised Michigan’s outlook to positive from stable, affirming the state’s AA-minus rating.

Michigan is among the states rated lowest by all three major  agencies. Standard & Poor’s also rates Michigan’s general obligation debt AA-minus and Moody’s Investors Service rates it Aa2. Standard & Poor’s and Moody’s both maintain stable outlooks.

Fitch’s outlook revision reflects what analysts called prudent budgeting coupled with a slowly growing economy.

New York is the only other state with a positive outlook from Fitch.

The news for Michigan comes after Gov. Rick Snyder and his top finance officials traveled to New York to meet with the rating agencies in June.

Snyder, who took office in January, has said one of his top priorities is rebuilding the state’s bond ratings, and that he will “work relentlessly” to recapture its once-prized triple-A rating.

Michigan lost its AAA rating from Standard & Poor’s in 2003. Fitch downgraded Michigan two years ago to A-plus from AA-minus. The rating last year was boosted back to AA-minus as part of Fitch’s recalibration of its public finance ratings.

“When Michigan’s credit was downgraded, the state’s economy was facing automobile industry decline and pretty significant economic erosion,” Fitch analyst Ken Weinstein said Thursday. “What you have now is what seems to be some stabilization and slight recovery of the economy. The positive outlook reflects the prudent budgeting and efforts to grow their reserve levels.”

The fiscal 2012 budget includes a $225 million deposit into the rainy-day fund, which has hovered around $2 million for several years.

The budget relies less on one-time revenues than previous spending plans, according to Weinstein.

“There is more of an emphasis with this new budget on structural balance,” he said, noting that it implements $1.5 billion in cuts.

“The one-time money that they have built into this budget is mostly dedicated to one-time purposes,” like the rainy-day fund deposit, he said.

The new budget and related legislation feature a major overhaul of the state’s tax structure, including the elimination of the Michigan business tax. A new tax on retiree income is expected to offset much of the business tax revenue loss, but the restructuring is still expected to cost $535 million, according to Fitch.

The rating agency will monitor the affects of the restructuring and the economy on the state in 2012. Continued improvements, even modest, could mean an upgrade. An outlook is maintained for one to three years, Weinstein said.

Snyder’s effort to plan ahead is also considered a credit strength. For the first time in decades, lawmakers this year completed the new budget months in advance — Michigan’s fiscal year begins Oct. 1. In conjunction with the release of his 2012 budget proposal, Snyder also released a two-year preliminary spending and revenue plan.

“This is very positive and encouraging news,” the governor said in a statement. “Wall Street is recognizing Michigan’s hard work and commitment to returning our state’s fiscal integrity and fixing our structural deficit once and for all while starting to pay down our long-term debt and save for the future.”

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