CHICAGO — Standard & Poor’s has upgraded 10 local borrowers that have issued debt through the Michigan Transportation Fund — boosting most of them to top AAA marks— primarily due to high debt-service coverage.
The upgrades come despite Michigan transportation advocates warning that the state needs to find new sources of money to offset declining transportation-related revenues.
The local issuers upgraded by Standard & Poor’s enjoy such high debt-service coverage — sometimes more than 30 times — that they are in many ways protected from possible dips in the statewide revenue source, analysts said.
“For us to have upgraded the issuer, the coverage is high enough that they’re basically insulated from fluctuations,” said analyst Jane Ridley.
The Michigan Transportation Fund enhances city and county transportation bonds and notes by pledging a first-lien pledge on annual gas and weight taxes and other fees the state distributes to local governments.
State law requires that any future changes to the distribution formula cannot adversely affect the ability of local issuers to pay back their debt, and it restricts the amount of debt a borrower can issue based on the previous year’s distribution.
Standard & Poor’s maintains a AA “floor” for local transportation fund issuers based on a minimum of two times debt service, according to Ridley.
Most local borrowers, however, demonstrate debt-service coverage that is well beyond two times.
Pontiac, for example, a financially stressed city that the state has declared to be in a state of fiscal emergency, enjoys 32.88 times coverage on its debt issued through the Transportation Fund, making it one of the eight Michigan issuers upgraded to AAA by Standard & Poor’s.
In most cases, the issuers that were upgraded have historically enjoyed strong debt-service coverage, and are being upgraded now as Standard & Poor’s continue to revise its criteria for municipal debt.
“Our criteria has evolved over time and if some of the issuers have particularly strong coverage levels, they do not have to stay at AA,” Ridley said. “We are upgrading in some cases where we think higher ratings are warranted.”
In addition to upgrading 10 issuers, the agency affirmed its rating on five additional borrowers under the fund.
Eight issuers were upgraded to AAA from AA — Pontiac, the Livingston County Board of County Road Commissioners, Ann Arbor, Eaton County, Gladwin County, Troy, Cheboygan County, and the Montcalm County Board of County Road Commissioners. Battle Creek and Burton were upgraded to AA-plus from AA. St. Clair Shores, Romulus, Springfield, Rochester, and Saline all had their AA ratings affirmed.
For the fiscal year ending Sept. 30, 2009, the Transportation Fund totaled $1.84 billion, of which $1.63 billion was distributed among the various funds, including $322 million for municipalities, $563 million for counties, $155 million for the comprehensive transportation fund for public transportation, and $586 million for the state trunkline fund for highway projects, according to the fund’s annual revenue report.
In related news, Standard & Poor’s also upgraded 63 school districts across Illinois, Michigan, and Missouri.
The upgrades are the largely the result of revised criteria published in 2008 that looks closely at the factors that lead to financial stability in smaller or more remote communities.
The upgraded districts in Michigan are those analysts expect to weather budget cuts tied to the state’s decision this year to cut education funding to help balance its budget.
“Any district that was upgraded, we feel, has some resilience to any further adjustments the state could make in per-pupil revenues,” Ridley said.