CHICAGO - Standard & Poor's Tuesday raised its outlook on Michigan to positive from stable, saying the state is showing a fresh commitment to building its reserves a year after drawing them down for a one-time payment to Detroit's pensioners.
S&P affirmed its AA-minus rating on the state's general obligation debt and its A-plus rating on the appropriation-backed bonds.
The ratings agency said it might upgrade the state within the next two years if Michigan officials continue to rebuild its budget reserves.
The outlook could drop back down to stable, however, if Michigan "unexpectedly" taps its reserves to make payments to its distressed local governments like Wayne County or Detroit Public Schools, analysts warned.
"The positive outlook reflects current structural budget balance and a new commitment to rebuilding budget stabilization fund balances, as reflected in the enacted fiscal 2016 budget," S&P analyst David Hitchcock said in a statement, adding that the state undertook a "modest drawdown" of the reserves in fiscal 2014 to help settle the Detroit bankruptcy.
"We believe building reserves in good economic times, such as now, are of particular importance to state credit quality due to the cyclical nature of the state's economy and finances," Hitchcock said.
"Continued state commitment to building reserves could result in an upgrade over our two-year outlook horizon," S&P said. "Mid-fiscal 2016 shortfalls that result in significant use of the reserve, or unexpected use of the [budget stabilization fund] to help additional distressed local credits, such as Wayne County or Detroit Public Schools, could cause us to return our outlook to stable."
The ratings move comes ahead of the Michigan State Building Authority's sale of $990 million of revenue bonds next week.
It's the building authority's largest sale to date, and is made up mostly of refunding bonds.
Fitch Ratings has a AA rating on the state's GOs, AA-minus on the building authority bonds, and stable outlook on both. Moody's Investors Service rates the state Aa2 with a stable outlook.