Shutdown risk in Michigan not a rating concern

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Michigan could face a government shutdown as the budget battle between Republican lawmakers and Democratic Gov. Gretchen Whitmer over school and road funding looks no closer to being resolved by the Oct. 1 deadline.

Credit analysts at S&P Global Ratings and Fitch Ratings said that a temporary shutdown won’t impact the state’s credit.

S&P rates the state’s general obligation bonds AA, and appropriation backed debt and state building authority debt AA-minus. The outlook is stable. Fitch Ratings rates the state’s GOs and state appropriation debt AA. The outlook is stable. Moody’s Investors Service rates the GO debt Aa1. Most appropriation debt is one notch lower. The outlook is stable.

S&P analyst Carol Spain said a key consideration is that the stalemate is policy driven, and not a matter of structural budget balance.

“The issues at stake here aren’t really driving the rating and we don’t see near-term credit risk,” Spain said. “We take a look at the state's appropriation debt and it's structured in a way that we wouldn’t anticipate any issues in terms of paying debt service if there is a late budget.”

Michael D’Arcy, an analyst at Fitch Ratings, said that the budget impasse was not a concern for Fitch from a short-term perspective because Michigan remains in a better fiscal position than it's been in close to two decades.

“The rainy day fund is strong,” D’Arcy said. “It looks like the state will end the current fiscal year with another surplus and after that the rainy fund will probably be $1.3 billion by the end of September. Liquidity is strong and I think that the nonpolitical technocrats that run state government are very good at coping with all kinds of unanticipated surprises and these kinds of volatile situations.”

Howard Cure, director of municipal bond credit research for Evercore Wealth Management, said the state's balanced finances mean investors aren't panicking.

“The question is what the plan is for government shutdown and what are considered essential funding and as a bondholder you wonder if money is going to be appropriated for debt service,” Cure said. "Hopefully they will consider GO and appropriation debt as essential and then it becomes a matter on how much pain they will inflict on state services with things like state parks or the department of motor vehicles. There could be delays in getting tax refunds form the state. All of these things have to be decided."

Budget director Chris Kolb and state department directors have been actively preparing for this possibility for a couple of months now. Kolb has asked other state department directors to identify critical functions within their departments that must continue and those that could be temporarily halted if there is no budget in place when the next fiscal year begins.

State budget office spokesperson Kurt Weiss said on Thursday that debt service payments have already been deemed as essential.

“So those payments will be made accordingly in the event of a shutdown,” Weiss said.

D’Arcy said that the concern is whether over the medium term the state sees more of this political stalemate. He said that if this polarization lingers beyond the budget it could place stress on the state’s financial functions.

The last shutdown was in 2009. Whitmer succeeded Rick Snyder, who was a Republican working with GOP majorities in the legislature.

“Michigan has been lucky in the sense that there hasn’t been that political polarization that we have seen in some other states and in the country in general," D’Arcy said. “I think we are seeing something a little bit different now with Gov. Whitmer and Republican legislators being at loggerheads with how to pay for road repairs without raising taxes.”

Michigan’s Republican-led House and Senate already approved their own fiscal year 2020 budgets that includes education funding, but have not yet sent a final plan to Whitmer, who said she won’t sign a budget without a real plan to fix the roads.

Whitmer’s budget proposed $507 million for K-12 schools under a new weighted distribution formula that would provide extra funding for students with more costly educational needs, including at-risk, career tech and economically disadvantaged kids.

The Senate budget proposes $410 million in new classroom spending, while the House budget would boost school spending $226 million. Republican lawmakers said their proposed spending increases would still result in record spending on public education.

Michigan has $6.4 billion of outstanding debt, including $1.5 billion of GO bonds, $3.4 billion of general fund-secured appropriation debt, $677.2 million transportation tax-supported debt, and $728.6 million in unemployment insurance bonds that repaid federal unemployment fund loans and are backed by a tax on employers.

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State budgets Gretchen Whitmer State of Michigan Michigan