DALLAS -- Michigan's underfunding of its infrastructure could crowd out the state's ability to fund other priorities such as improving pension funding at a time when tax revenues are beginning to slow, according to a Moody's Investors Service.
"The magnitude of Michigan's infrastructure gap means that catching up on deferred maintenance will crowd out other priorities," Moody's said in a comment Wednesday. "To do this during a period of slower revenue growth will render the crowding-out impact of infrastructure that much more difficult."
The state needs to spend $4 billion annually over the next 20 years to fund its infrastructure investment gap, according to a report commissioned by Michigan Gov. Rick Snyder.
The state is forecasting slower growth in both income and employment growth during 2017 and later years.
Moody's said that revenues slowed down in 2016, with a sharp decline in business and corporate taxes and a lackluster sales tax trajectory. Retail sales have also been trending down, and state GDP grew an estimated 1.6% in 2016, with forecasts for growth in 2017 are in the 2% range.
The rating agency said that the hefty bill on spending for roads, bridges, water systems and other critical infrastructure comes as the state is already grappling with the growing cost of contributing to the state's teacher's pension plan, the Michigan Public School Employees Retirement System, and having to take a more direct role in local government funding.
Moody's said that if the state were to move ahead with a plan to accelerate the amortization of the plan's liability and simultaneously begin to fill the infrastructure gap, it "would consume an unrealistically high share of revenues," or require increasing revenues at a rate unlikely to be achieved all at once.
"The state will have to select its priorities in the order it prefers without incurring rapid further growth in liabilities," said Moody's. However the rating agency is optimistic that Michigan will grapple with the growing costs in a way that maintains its credit quality.
Moody's rates Michigan Aa1 with a stable outlook.
The state is also sending more tax money to local governments. Michigan's budget for 2017 and 2018 focused heavily on Flint and Detroit. The state also contributed $195 million toward the "Grand Bargain" in the Detroit bankruptcy. "Although $195 million is a modest sum for a state with a $23 billion budget, this contribution represented a new type of direct financial impact for the state, said Moody's.
Detroit's public school restructuring last year came with a price tag of $617 million. As part of the plan, the state has earmarked $72 million of tobacco settlement revenues annually for the next 10 years to help fund the struggling district.
Moody's said that Michigan is likely to be on the hook for most of the costs of remediating Flint's water infrastructure. The state has already appropriated nearly $200 million in 2016 and 2017 combined to help Flint recover from its water lead contamination crisis.
In his State of the State address Wednesday, Snyder said Michigan's infrastructure is at the top of his to-do list.
