CHICAGO - Michigan Gov. Rick Snyder knew the state's $195 million contribution to Detroit's bankruptcy plan could pose a concern for ratings agencies, but believed it was important, his spokeswoman said a day after Standard & Poor's revised its outlook on Michigan to stable from positive.
The ratings agency said the downward outlook revision is due to several economic and fiscal factors, including softening revenue.
Another factor analysts cited was the state's recent decision to dip into its rainy day fund to appropriate a $195 million contribution to the bankrupt city's pensions. It's part of a grand bargain that is crucial to Detroit's bankruptcy exit plan.
S&P said the appropriation "raises questions as to potential future state contributions to other distressed localities and school districts, and we will monitor the uniqueness of this event."
The rating remains AA-minus.
The move is a blow to Snyder and top budget officials who have repeatedly said one of their top priorities is to regain the state's prized triple-A rating.
The governor was aware of analysts' concerns about the Detroit legislation, his spokesman Sara Wurfel said in an email to The Bond Buyer.
"We knew the Detroit settlement package and [budget stabilization fund] was a concern with the rating agencies, which is why the governor felt it was important to address head on and show why the package was a financially responsible, smart way for the state to address Detroit, with benefits not only to Detroit and Detroiters but to the entire state and Michiganders," Wurfel said.
She added that the contribution was unlikely to set a precedent for other distressed local governments.
"The Detroit situation is an incredibly unique situation that really can't and shouldn't be used to draw any broader parallels," she said.
She noted that earlier this week Fitch Ratings affirmed its AA rating and stable outlook on the state's general obligation bonds, and Moody's Investors Service affirmed its Aa2 rating with a positive outlook.
The ratings come as the state gears up to sell $86 million of general obligation bonds.
S&P's downward outlook revision reflects weakening revenue projections and other possible challenges, analyst David Hitchcock said in a statement.
"The outlook revision reflects recent softening in projected fiscal 2014 revenues, expected slow economic growth, and anticipated declines in general fund and budget stabilization reserve fund balances in fiscal 2014 because of weak April income tax receipts, budgeted general fund drawdowns, and a lower-than-expected balance in the state's budget stabilization reserve fund," said Hitchcock.
The state's strengths include an improved fund balance in 2013, strong cash position, and good budget management.
But "the cyclical nature of the state economy, with its exposure to vehicle manufacturing and consequent cyclical financial pressures offset these strengths," Hitchcock said. He also cited pending litigation against recent state pension reforms.
