Moody's Investors Service has upgraded the State of Michigan's general obligation rating to Aa1 from Aa2, and the Michigan State Building Authority's (SBA) appropriation debt to Aa2 from Aa3. We have also
upgraded the Michigan School Bond Qualification and Loan Program (new mechanics) to Aa1 from Aa2, the SBQLP (old mechanics) to Aa2 from Aa3, and we expect to adjust the ratings on the individual financings within the next several days. We have also upgraded the Michigan Finance Authority's Student Loan Revenue Bonds supported by the state's moral obligation pledge to Aa3 from A1. The outlook has been revised to stable from positive.
We have also assigned a Aa2 rating to the SBA's upcoming transaction of $990 million Series 2015I Revenue and Revenue Refunding Bonds (Facilities Program), which is scheduled to price July 30.
SUMMARY RATING RATIONALE
The upgrade to Aa1 from Aa2 reflects improvement in the state's financial position, particularly growth in the state's rainy day fund, bolstered by a strong tax revenue trend; a robust growth rate in the economy that has featured an improvement in the auto sector; and moderate debt and pension burdens. The rating also recognizes our expectation that the state will continue to oversee local government distress with manageable direct state financial exposure.
The upgrade to Aa2 on the SBA's appropriation debt reflects the upgrade of the general obligation rating. The appropriation debt is rated a notch below the state's general obligation rating, which is attributable to the requirement for annual legislative appropriation of the lease payments that provide for debt service payments on the bonds.
The upgrade to Aa3 on the MFA's moral obligation debt also results from the upgrade of the general obligation rating. The moral obligation rating is two notches below the state's general obligation rating,
reflecting the contingent nature of the moral obligation pledge.
OUTLOOK
The stable outlook recognizes the state's healthy fund balance and liquidity position, and a likelihood of growth in rainy day reserves over the next few years. The outlook also reflects the stabilization and recent growth in the state's economy, which we expect will continue to rebound.
WHAT COULD MAKE THE RATING GO UP
Structural changes in the state's economy leading to greater diversity and resilience to recessions
Successful resolution of multiple challenges related to public school districts, including pension funding and the state's constitutional guarantee of most debt service
WHAT COULD MAKE THE RATING GO DOWN
Costs associated with assisting local governments greater than levels currently anticipated
Deterioration in economic forecast versus current assumptions
Erosion in fund balance and/or liquidity
