Fitch Upgrades Michigan GOs to 'AA'; Outlook Stable
NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following State of Michigan general obligation (GO) bonds:
--$200 million GO school loan bonds, series 2013A (taxable).
The bonds are expected to be offered via competitive sale on 10 April 2013.
In addition, Fitch upgrades approximately $2 billion in outstanding state GO debt to 'AA' from 'AA-', and upgrades various state-related ratings to 'AA-' from 'A+', as detailed at the end of this release.
The Rating Outlook is revised to Stable from Positive.
SECURITY
General obligations of the state, with full faith and credit pledged.
KEY RATING DRIVERS
UPGRADE LINKED TO ECONOMIC AND FISCAL REBOUND: The upgrade is based on the state's rebounding economic performance, including the improved competitive posture of the state's auto industry after its restructuring. Moreover, the state has made considerable progress in bolstering its finances, with structurally balanced budgeting, growing reserves and an improving cash balance.
MANUFACTURING DOMINANCE: The state's economy is dominated by manufacturing, notably in the cyclical automotive-related sectors. The state is likely to remain exposed to the economic and fiscal impacts of manufacturing cyclicality over the long term.
SOUND FINANCIAL MANAGEMENT: The state has a history of conservative financial operations. Recent budgets have achieved balance through structural measures rather than one time solutions. Economic and revenue gains have allowed the state to set aside a moderate level of reserves, and the state continues to prioritize building reserve balances.
LOW-TO-MODERATE LIABILITIES: Net tax-supported debt has been and is expected to remain in the low-to-moderate range. Obligations for retiree pensions and health care are manageable and the state continues to pursue additional savings.
RATING SENSITIVITIES
The rating is sensitive to changes to the outlook for the state economy, particularly from the manufacturing sector. The cyclicality and concentration of the Michigan economy is a limiting credit factor. The Stable Outlook assumes the continuation of prudent fiscal management and commitment to reserve replenishment that has marked recent years.
CREDIT PROFILE
The upgrade of Michigan's GO bond rating to 'AA' reflects the state's solid economic and fiscal recovery over the last two years. After a decade of persistent economic weakness, the result of manufacturing cyclicality and the near-collapse of the domestic auto sector, the state's economy is growing again, and structural changes in the automotive sector have improved its longer-term viability. The state has used the economic and revenue momentum of the last two fiscal years to stabilize state finances, with structurally balanced budgets, annual surpluses, higher liquidity and sizable deposits to the budget stabilization fund (BSF), the state's rainy day fund. The state's longstanding prudent fiscal management, combined with the actions taken in recent years, leaves it better positioned to address future economic and revenue uncertainty. The state's debt and retiree obligations are manageable, in part given the reforms that the state continues to pursue to contain the growth of liabilities. The upgrade to the 'AA' rating assumes that Michigan's manufacturing sector will remain a sizable and cyclical component of the state's economy.
ECONOMY
Michigan's economy lost jobs on an annual basis between 2001 and 2010, with the decline in 2009 particularly steep at 7% reflecting the combined impact of the national recession and domestic automotive weakness and associated restructuring. Employment rose 2.3% in 2011 and 1.8% in 2012, ahead of the national rate.
Despite recent improvement, the retrenchment in automotive employment has been significant and difficult for the state, with roughly two-thirds of automotive manufacturing and parts employment lost during the course of the last decade. Both sectors have logged sizable gains since 2010; as of Feb. 2013, the two sectors were up 11.2% and 3.8% year-over-year, respectively. Nonetheless, manufacturing sector jobs represent 13.6% of jobs in Michigan as of Feb. 2013, well ahead of the 8.9% U.S. level, exposing the state to future cyclicality. Unemployment is falling rapidly in Michigan but remains over U.S. levels, at 8.8% in February 2013 compared to 7.7% nationally, and compared to the state's peak of 13.4% in 2009. The state's Jan. 2013 consensus economic forecast estimates wage and salary employment rising 0.9% in 2013, before accelerating to a 1.2% gain in 2014.
Consistent with the state's significant employment losses, personal income growth lagged the nation throughout the last decade, and the decline in 2009 was more than 1% deeper than that of the nation. The state has enjoyed a strong rebound since then, rising 5.6% in 2011 and 3.5% in 2012 (on a preliminary basis); U.S. personal income rose 5.2% in 2011 and 3.5% over the same period. As of Jan. 2013, the state forecasts 2.6% growth in 2013 and 4.3% in 2014. By 2012 preliminary per capita personal income the state ranks 35th among the states at 87.8% of the national level.
FINANCES
Michigan has long taken a conservative approach to fiscal management, although a decade of economic and revenue weakness starting with the 2001 recession eroded the state's financial standing. During that time, the state took repeated remedial action to maintain budgetary balance, including revenue increases, spending austerity and the use of one-time resources. The latter included debt restructuring, depletion of budgetary reserves, and reliance on federal stimulus funding.
Economic improvement beginning in 2010 was matched by revenue stabilization, with improving liquidity and sizable surplus balances in fiscal 2011 and fiscal 2012 in both the general and school aid funds. Improved liquidity has meant the state has not needed to borrow for cash flow purposes since fiscal 2011. The fiscal 2012 adopted budget incorporated $1.5 billion in ongoing spending cuts while accommodating a tax restructuring projected at the time to cost $535 million, primarily due to replacement of the Michigan business tax with a corporate income tax. Notable with the fiscal 2012 budget adoption, the state has added an additional forecast budget year, an improvement from past budget practice. Fiscal 2012 ended with a general fund unassigned balance of $979.2 million and a school aid fund balance of $440 million. The budget stabilization fund grew with a deposit of $362.7 million, its first sizable balance in about a decade.
The fiscal 2013 budget as adopted was structurally balanced and directed one-time revenues to one-time spending, including a $140 million BSF deposit. The May 2012 consensus forecast, upon which the adopted budget was based, anticipated a 1% decline in general fund revenues from fiscal 2012, while school aid fund revenues were projected to rise 2.7%. General fund expenditures grew 3.1% including one-time spending.
State fiscal performance has remained on track during this fiscal year. Actual taxes through December 2012 are down 4.5% in the general fund and up 4.6% in the school aid fund; general fund declines continue to reflect the tax restructuring enacted in the fiscal 2012 budget. As of the Jan. 2013 consensus forecast, the state anticipates fiscal 2013 net revenues declining 5.1% in the general fund and rising 2.3% in the school aid fund. The planned deposit of $140 million to the BSF would bring its balance to $505.1 million, equal to 6.1% of general fund revenues.
The governor's executive budget for fiscal 2014 projects ongoing budget balance and continued reserve deposits. The Jan. 2013 consensus forecasts tax revenues rising 5.4% in the general fund and 2.7% in the school aid fund. The budget proposes only minor revenue changes. Estimated expenditures rise 1.1% in the general fund and 2.4% in the school aid fund. The budget proposes that half of the anticipated $206 million savings from the state's Medicaid expansion under federal health reform be set aside in a new health savings fund, to offset future state Medicaid-related costs from the expansion. Other initiatives include higher funding for early childhood education, additional school funding for pension needs, and transportation improvements funded with new revenues (the latter outside the general fund). The governor's budget assumes another $75 million deposit to the BSF in fiscal 2014, bringing its balance to $580 million.
DEBT AND RETIREE OBLIGATIONS
The state's debt and retiree obligations are manageable. Net tax-supported debt, at $8 billion as of Sept. 30, 2012, represents 2.2% of 2012 preliminary personal income. GO debt amortization is rapid with 48% to be retired over the next five years and 86% to be retired over the next 10 years.
The state's retiree obligations are manageable. In 1997 the Michigan State Employees' Retirement System (MSERS) converted to defined contributions for newly-hired employees, and a similar change recently has been implemented for new hires in the Michigan Public School Employees' Retirement System (MPSERS).
The state has enacted various changes to state-administered retiree pension and health benefits in recent years to limit the growth of obligations to existing employees, although in some cases the changes are subject to litigation. Legislation passed in recent years also eliminated other post-employment benefits for new hires and lowered the state's unfunded liability. For MPSERS, recent reforms include the state assuming direct responsibility for contributions over a certain share of payroll.
The systems' funded ratios have been affected by past investment losses. On a reported basis, as of Sept. 30, 2011 the funded ratios of MSERS and MPSERS were 65.5% and 64.7%, respectively. Using Fitch's more conservative 7% discount rate assumption (compared to the systems' 8% assumption), the funded ratios would drop to 59% and 58.3%, respectively. Nonetheless, on a combined basis, net tax-supported debt and the pension liability attributable to the state are at 4.1% of 2012 preliminary personal income. The latter figure excludes the impact of the recent MPSERS reform.
In conjunction with the upgrade of the state's GO bond rating, Fitch also upgrades the following ratings that are linked to the state GO; the Rating Outlook on all are Stable:
Michigan State Building Authority
--Revenue bonds (Facilities Program) and (State Police Communications System) to 'AA-' from 'A+'.
Michigan Municipal Bond Authority
--School program bonds (local government loan program revenue bonds) to 'AA-' from 'A+';
--School loan revenue bonds to 'AA-' from 'A+'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria'(Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Facebook
Twitter
LinkedIn
Delicious
Reddit
StumbleUpon
Digg
MySpace
Newsvine
Google Bookmark
Yahoo! Bookmark
Email
Email 
