NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following actions on the State of Michigan as part of its continuous surveillance effort:
--State of Michigan general obligation bonds (GOs) affirmed at 'AA-'.
In addition, Fitch affirms the various state-related ratings at 'A+' as detailed at the end of this release.
The Rating Outlook for all bonds being affirmed is revised to Positive from Stable.
-- Michigan's 'AA-' GO bond rating reflects an economy that has weakened over the last decade, offset by the state's lower moderate debt position, adequately funded pensions, and prompt management efforts to maintain fiscal balance.
--The Positive Outlook reflects prudent budgeting and efforts to grow reserve levels in the context of an economy beginning to slowly rebound.
-- Michigan's economy had been contracting prior to the recent economic recession and the state's exposure to the U.S. automotive industry contributed to a significant escalation in employment losses in 2009. Employment has begun to rebound, although recovery is expected to lag that of the nation, and an above-average dependence on cyclical manufacturing is still present.
--The state has a demonstrated history of responding proactively to maintain fiscal balance despite continual revenue declines. The currently enacted budget was balanced without the use of one-time measures and management projects a return to structural balance. Monies have also been budgeted to begin to replenish the state's rainy day fund.
--State debt levels have been and are expected to remain in the lower moderate range. The state's pension systems remain adequately funded.
WHAT COULD TRIGGER A RATING ACTION
-- Evidence of a return to structural balance amid significant tax code changes and continued progress toward reserve fund replenishment;
-- Continued employment recovery and improvement in the high unemployment rate.
General obligations of the state, with full faith and credit pledged.
Michigan's 'AA-' GO bond rating reflects an economy that has weakened over the last decade, as highlighted by significant employment contraction and high unemployment levels. A lower moderate debt position, adequately funded pensions, and ongoing management efforts to maintain balance have bolstered the state's credit profile. The revision of the Rating Outlook to Positive from Stable reflects prudent budgeting and efforts to grow reserve levels in the context of an economy beginning to slowly rebound. Rating improvement is possible given evidence of a return to structural balance amid the significant, recently enacted tax code changes and continued progress toward reserve fund replenishment. Further evidence that the state's economic recovery has taken hold will also influence the rating.
Throughout much of the latter part of the last decade, Michigan's contracting economy has resulted in significant revenue declines, often in the middle of the fiscal year. The state has addressed budget shortfalls through revenue increases, spending austerity, and a variety of one-time measures, including federal economic stimulus monies. The enacted fiscal 2012 budget incorporates a significant $1.5 billion in ongoing spending cuts while accommodating a tax restructuring that is projected to cost $535 million. An improved revenue picture and expected surplus revenues from fiscal 2011 provided some one-time monies to soften the effects of certain cuts and provide for the first deposit into the state's rainy day fund in several years. Notable this year are the state's efforts to forecast spending in the succeeding fiscal year, a change from past budgeting practice.
Michigan's economy has lost jobs on an annual basis since 2001, and the combined impact of the national recession and domestic automotive restructuring resulted in a 7% decline in state employment in 2009. Employment in 2010 declined by 0.3%, comparing favorably with the nation's 0.8% decline, influenced in part by some growth in automotive part manufacturing employment. While the retrenchment in automotive employment has been significant and difficult for the state, with nearly two-thirds of automotive manufacturing and parts employment lost during the course of the last decade, the state's employment concentration in manufacturing, while still exceeding the nation, has been reduced. The state forecasts 1.7% employment growth in 2011 and continued positive growth in 2012 and 2013 as well. The state's unemployment rate for June 2011 of 10.5% remains high; the rate was 2.1% below that of one year prior.
Consistent with the state's significant employment losses, personal income growth lagged the nation throughout the last decade, and the decline in 2009 was nearly twice that of the nation. Preliminary 2010 growth was just behind the national rate and recent quarterly indications have been near or exceeding national levels. The state forecasts 4.9% growth in 2011 and more conservative growth of 2.9% in 2012. Per capita personal income continues to slip when measured nationally, now ranking 36th among the states at 88% of the 2010 national level.
Debt remains a lower moderate burden on resources. Net tax-supported debt as of Sept. 30, 2010 totaled $7.7 billion, representing 2.2% of preliminary 2010 personal income. GO debt amortization is above average with 41% to be retired over the next five years and 77% to be retired over the next 10 years. The funded levels of the Michigan's State Employees' and Public School Employees' Retirement Systems have declined slightly in recent years, and the Sept. 30, 2009 funded ratios were 78% and 78.9%, respectively. Using Fitch's more conservative 7% discount rate assumption, each system would remain adequately funded at just over 70% (see Fitch's report dated Feb. 17, 2011, 'Enhancing the Analysis of U.S. State and Local Government Pension Obligations' available on Fitch's web site at 'www.fitchratings.com').
In conjunction with the Outlook revision on the state's GO credit, Fitch has also affirmed the following Fitch rated bonds and revised the Rating Outlook to Positive from Stable:
Michigan State Building Authority
--Revenue bonds (Facilities Program) series and (State Police Communications System) at 'A+'.
Michigan Municipal Bond Authority
--School program bonds (local government loan program revenue bonds) at 'A+';
--School loan revenue refunding bonds at 'A+'.
Additional information is available at 'www.fitchratings.com'
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', dated 16 Aug. 2010.
'U.S. State Government Tax-Supported Rating Criteria', dated 8 Oct. 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria