CHICAGO – A settlement tied to Flint, Michigan's water contamination crisis only minimally impacts the state government's finances but underscores a collective burden that poses longer term pressures, S&P Global Ratings says.

S&P weighed in on the impact of the latest development in the Flint water contamination crisis on Michigan finances. Adobe Stock

The settlement approved by a federal judge last week provides Flint, Mich. with $87 million from the state to help fund the replacement of 18,000 mostly lead water service lines by 2020. The state must come up with at least $47 million of non-federal funds earmarked for water improvement grants. Another $10 million would be available would be made available should the project costs grow.

The cost are minimal relative to the state's $56.3 billion budget, but the state is far from finished dealing with the financial fallout of the crisis and the burden could hurt the state's ability to build reserves.

"While related costs seem manageable for now, the agreement signifies that the state may be required to continue to support costs, the magnitude of which remains uncertain in the long term," the rating agency writes in a special commentary on the settlement published Monday.

"We could see financial pressures on the state persist as the costs of financing infrastructure replacement and social services, coupled with potential legal settlements, continue to grow," analysts write.

The agreement marked the latest development in the city's efforts to recover from a contamination crisis that's shone a light on local, state, and federal failures.

U.S. District Court Judge David M. Lawson last week approved the pact that resolves a civil complaint brought against the city and state in January 2016 by Concerned Pastors for Social Action, the Natural Resources Defense Council, American Civil Liberties Union of Michigan and other groups.

The funding covers only water line improvements, which were not specifically included in the governor's budget released in February 2017. The state has spent a total of $247 million to date and the budget proposal provides an additional $48.8 million in funding for nutrition services, early education programs for affected residents, water sampling costs, and a $25 million reserve for additional needs.

The city has estimated the financial fallout of upgrading water infrastructure and dealing with health damage to its residents at between $1 billion and $1.5 billion. S&P expects the state to continue bearing the recovery burden given local tax base limitations and that the crisis occurred when the city was under the control of a state-appointed emergency manager.

S&P believes additional costs could curb the state's commitment to build its reserves. Analysts consider fiscal year 2016 end reserve levels of $1.2 billion to be only at the adequate level.

"Should the economy begin to contract as financial challenges related to the Flint water crisis and other assistance to local governments grow, we could see the reserves remaining stagnant or depleting over the long term, creating credit pressures for the state," S&P wrote.

The lead contamination crisis developed after the city's contract with Detroit to receive Lake Huron water ended and the city shifted to Flint River water in April 2014 while awaiting the completion of the new $285 million pipeline that will provide Lake Huron water to Flint and other Genesee County communities.

Flint is on the hook for repayment of 34% of the $220 million bond issue for the project. The city shifted back to Detroit-supplied water in the fall of 2015, but the lead contamination of the city water continued because of pipe corrosion triggered by the improperly treated river water.

The complaint had charged the government entities with violating the federal Safe Drinking Water Act's Lead and Copper Rules for corrosion control treatment, tap water monitoring, notification, and reporting by allowing contaminated drinking water into homes.

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