The United Auto Workers strike against General Motors that began Monday poses a greater credit threat to Michigan and its local governments than to other states, said Moody's Investors Service.
Michigan is more vulnerable because of its higher exposure to the auto manufacturer relative to other U.S. states, Moody's said. That could lead to a decline in consumer purchases, drops in income and corporate tax revenues, and an increased demand on its unemployment insurance system, the rating agency said in a report Wednesday.
“Michigan derives far more of its wage and salary income from the car industry and from manufacturing in general than the US as a whole,” Moody’s said. “About 20% of Michigan's private-sector wage and salary income is from manufacturing, compared with 12% for the nation. Its auto sector accounts for 7%, compared with less than 2% nationally.”
GM plants in Michigan account for about one-third of the company's U.S. factory headcount. Local governments with exposure to GM's operations include Flint, Lansing and Detroit.
“In terms of state revenue impact, we do not anticipate that a strike of a typical length would significantly lower state tax revenue,” said Danelle Gittus, a Michigan Treasury spokesperson.
Gittus said that if all the hourly GM employees end up striking for a week, it would reduce tax withholding by approximately $1.5 million to $2.0 million. If the strike were to last more than a couple weeks and employees are not compensated, the total withholding decline from direct, indirect and induced impacts would be estimated to increase to between $3.5 million and $4.6 million per week, according to Gittus.
“For perspective, the monthly target for withholding this month is about $800 million statewide,” Gittus said. “Although we cannot predict the outcome of the strike, there could be offsetting increases in withholdings following the strike if overtime or higher wages result.”
Gittus said that a long strike could dampen sales tax receipts, “but historically these strikes have not caused a noticeable impact in tax collections,” she said.
Moody’s said in its report that Michigan’s revenue and financial reserves have historically been vulnerable to volatility in auto industry employment and sales but a $1 billion rainy day fund balance as of June 30, 2018, means the state is better positioned to handle any shortfalls than it was a decade ago.
The strike comes as 46,000 United Auto Workers members walked off the job at a dozen assembly plants, 19 parts distribution centers and 22 other plants in the United States to pressure the automaker to ensure job security, provide higher wages and protect their health care.
Moody’s said it is possible that GM provisions — including sweeteners devised to resolve the current contract impasse with the UAW — will eventually prove to be a financial benefit for Michigan and local governments. “GM has made public some incentives offered in the UAW negotiations, including plans to make investments that result in 5,400 new positions and $8,000 payments to each worker upon contract ratification,” the rating agency said.
The GM strike comes as the state faces stalled negotiations on a new state budget. Republican lawmakers and Democratic Gov. Gretchen Whitmer are at an impasse over school and road funding that could bring a government shutdown if no agreement is reached by an Oct. 1 deadline.
Michigan has $6.4 billion of outstanding debt, including $1.5 billion of GO bonds, $3.4 billion of general fund-secured appropriation debt, $677.2 million transportation tax-supported debt, and $728.6 million in unemployment insurance bonds that repaid federal unemployment fund loans and are backed by a tax on employers.
Moody’s rates Michigan's GO debt Aa1. Most appropriation debt is one notch lower. The outlook is stable.
S&P Global Ratings rates the state’s general obligation bonds AA, and appropriation backed debt and state building authority debt AA-minus. The outlook is stable. Fitch Ratings rates the state’s GOs and state appropriation debt AA. The outlook is stable.
