DALLAS -- Michigan received an outlook upgrade despite future budget pressures that could test the more than $800 million the state has in reserves.
S&P Global Ratings revised the outlook on Michigan to positive from stable and affirmed its AA-minus rating on the state’s general obligation bonds. The rating agency also affirmed the A-plus rating on the state’s appropriation-backed debt.
"The revised outlook reflects improvement in the state's employment and demographic indicators, and projected growth in reserve levels," said S&P analyst Carol Spain.
The state is selling $120 million in GO new money and refunding bonds competitively Tuesday, with a $79 million taxable piece and a $40.6 taxable piece. Dykema Gossett PLLC is bond counsel and Robert W. Baird & Co. is the financial advisor.
The positive outlook reflects the sustained growth of the state’s economy over the last five years after several years of underperforming. Michigan has been experiencing economic growth since 2010, exceeding the U.S. average in some of those years. The state has reported record low unemployment rates in past years and at the same time a boom in population growth, both trends support the positive outlook, according to S&P.
“The state has also taken action to manage any future economic volatility through increasing its reserves, structurally aligning its budgets and adopting pension reforms,” S&P said.
Michigan has contributed to the rainy day fund four out of the past five fiscal years, and it projects additional deposits over the next two years. In fiscal 2014, Michigan withdrew $194.8 million to provide aid for Detroit, but has since deposited $17.5 million annually to repay the 2014 withdrawal. It has budgeted for deposits for $75 million and $150 million in fiscal years 2017 and 2018, which would increase the rainy day fund balance to $886.2 million. The projected balance is less than the $1 billion proposed in Gov. Rick Snyder’s executive budget because of a one-time payment of $200 million to pay down pension liabilities.
The state anticipates a fiscal 2018 projected general fund/general purpose ending fund balance of $13.3 million. “Although this is a significant improvement from $2.2 million to end fiscal 2011, the state's past use of reserves and revenue declines during past economic downturns suggest that [rainy day]balances only partly mitigate the state's economic volatility,” said S&P.
S&P warned that going forward the state could find balancing its budget more challenging on slower revenue growth.
“I am pleased Standard & Poor’s has acknowledged the hard work and effort taken to improve the state’s financial position and economy in recent years,” State Treasurer Nick Khouri said. “It also reaffirms that we will continue to be good stewards of taxpayers’ money as the economy continues to grow and becomes more diversified.”
Moody’s Investors Service rates the GO bonds Aa1 and Fitch Rating affirmed its AA ratings on the bonds. Both assign stable outlooks.
In August, a report from the Citizens Research Council projected that the state’s $10 billion general fund could see a decrease by more than $2 billion by 2022 on because of tax cuts, increased road construction, past economic development incentives and other factors. The state said it has accounted for the additional pressure on its general fund.
The state is also facing pressure from issues that include Flint’s water contamination crisis.
Michigan has budgeted $47.8 million in its fiscal 2018 budget for Flint, bringing total state support to $294.8 million, and the 2018 budget completes funding for the Flint Settlement Agreement. However ongoing health and human service needs and pending lawsuits mean 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.