Broad Challenges Seen For Michigan in Flint Water Crisis

CHICAGO – Fiscal strains on Michigan could deepen because of the Flint water contamination crisis, Standard & Poor's says in a new report.

For the time being, no rating action is being taken on any credits, Standard & Poor's said in a report published Monday.

At the state level, the political costs for Michigan have been greater than the financial tab so far, Standard & Poor's says as calls continue for Gov. Rick Snyder to resign over the state's handling of the crisis. "However, we could see financial pressures on the state deepen as answers to the financing of infrastructure replacement and social services, coupled with potential legal settlements, unfold," S&P wrote.

It's too early to assess the extent of the fiscal burden of Flint water crisis and its impact on the state credit, the report said. "We do not expect that the solution to the water crisis will play out in fiscal 2016-2017 budgets alone, and we anticipate that the economic and social costs, on top of the financial responsibility, will unfold over a long time," it said.

The crisis began after the city, under oversight of a state-appointed emergency manager, broke off from the Detroit Water and Sewerage System in 2014 to save money when its contract to receive Detroit-supplied water ended. The city began pulling water from the Flint River with the intention of using it until the 2016 completion of a partly bond-financed new pipeline from Port Huron being built by the regional Karegnondi Water Authority.

The river water wasn't property treated and corroded pipes throughout the system. The city, with state financial help, reconnected to Detroit's system last year but it did not solve the city's problems because the delivery system's pipes had become contaminated with lead.

The water crisis illustrates a deep-rooted challenge for the state in some of its cities that were once dominated by manufacturing and now are grappling with shrinking employment opportunities and declining populations, the rating agency said.

"The fiscal crises unfolding among some of Michigan's local governments illustrate how toxic—from both a credit and humanitarian perspective—the combination of persistent economic weakness, financial mismanagement, and infrastructure neglect can be," credit analyst Carol Spain wrote. "It also illuminates that short-term solutions to communities' fiscal stresses can have unintended long-term costs."

Michigan has approved $28 million in emergency funding for the crisis and Snyder is expected to announce more in his budget address next week. The state operates on a nearly $10 billion general fund and too big a cost could cut into state effort to rebuild reserves, the rating agency said. Federal authorities are speeding up the distribution of a modest amount of state revolving fund monies. Several members of Congress have pitched up to $400 million in federal help with a state match required. A full infrastructure fix could carry a price tag of more than $1 billion.

"Given the local tax base limitations, coupled with the fact that the drinking water was contaminated with lead starting when the city was under the control of a state-appointed emergency manager, we expect that there will be a state role in financing the cost of fixing the city's water infrastructure," S&P says.

The Flint aid would come with the state facing other fiscal pressures to provide more help for Detroit Public Schools and other struggling districts and to improve the state's pension funding levels.

Spillover from the crisis could also impact the region's general economic reputation including that of the surrounding local governments. "While it's difficult to quantify the financial impacts, the reputational damage with negative economic implications to other communities in Genesee County could also persist for some time," the report warns.

The report is titled "Credit Challenges Tied to the Flint Water Crisis Run Deep for Michigan."

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