Despite having one of the weakest economies in the nation, Michigan’s near-term fiscal position is expected to remain solid while it may face additional economic problems over the long term, analysts at Standard &Poor’s said in a recent report on the state’s financial situation.
In affirming the AA-minus general obligation rating and stable outlook, analysts noted that Michigan’s economic base is diversifying and that the state enjoys low debt and pension burdens. In addition, state leaders have shown strong budget management, including conservative revenue estimates, that will prove important to managing economic shortfalls, according to analyst James Wiemken.
The conservative revenue estimates, along with a small boost from the federal tax return, should “limit the magnitude of any budget shortfalls that might arise from a slow national economy,” Wiemken wrote.
But over the longer term, Michigan faces several challenges, including rising health care and corrections costs, declining personal income tax revenue beginning in 2011, and the expiration of the Michigan Business Tax surcharge in 2017.
“Meeting these challenges with demands for new and existing services might require additional budget restructuring,” Wiemken said.
The decline in the state’s manufacturing industry has resulted in falling wages and salary employment every year since 2001. The decline is expected to continue through 2009. Michigan also has ended six of the last seven years with a general fund deficit.
The state’s pension funding is considered a bright spot — the state’s judicial and legislative pension systems are overfunded by $925 million, while the public employees and state police pensions systems are funded at 86% and 87%, respectively.
“The stable outlook reflects Standard & Poor’s expectation that fairly conservative revenue estimates, continued strong budget management, and some stimulus from federal tax rebates should all serve to limit the magnitude of any shortfalls that might arise from a slowing national economy,” Wiemken wrote.
Michigan has $1.4 billion in direct GO debt, and another $1.8 billion in tax-supported revenue debt. The GO debt burden is considered low at $145 per capita, or 0.4% of personal income. In 2007, the state’s school revolving loan fund took over responsibility for funding school district loans, lowering the state’s amount of direct GO debt.
Moody’s Investors Service rates Michigan Aa3, while Fitch Ratings assigns n AA-minus with a negative outlook.