LANSING – Michigan’s credit rating on its general obligation bonds has been downgraded by Moody’s Investors Services, a reflection of the state’s continued struggle with a poor economy.
The company lowered the rating on the state from AA1 to AA2, meaning the firm now considers the state’s overall risk as average for states. A number of other individual bond ratings on the state’s qualified school bond loan fund, the state building authority and the municipal bond authority also were lowered.
Despite the downgrading, Moody’s said the state’s overall fiscal outlook was stable, and praised the state’s management of its fiscal condition.
But the continued volatility of the state’s economy, still heavily dependent on automotive manufacturing, “continue(s) to strain Michigan’s ability to maintain more than an average financial performance,” Moody’s said in its analysis.
The move was called disappointing by a Department of Treasury spokesperson, who said it came “when we feel we’re turning a corner and starting to see an uptick.”
It was the second time in just over a year that the New York City rating firm lowered the state’s credit rating which until late 2003 was rated as AAA, the highest ranking the firm allots. The action lowering the state’s bond rating came a week after the revenue estimating conference of Treasurer Jay Rising and the House and Senate Fiscal agencies determined that for the current and upcoming fiscal year that state’s revenues will be short by about $1 billion.
On the same day, Governor Jennifer Granholm issued Executive Directive 2005-1 ordering state departments to implement savings and forward lists of proposed expenditure cuts in preparation for February 10 when the executive budget recommendation and an executive order cutting the current budget will be issued.
Last month, Michigan’s credit rating was lowered by Fitch Ratings. The third major rating agency, Standard and Poor’s, has taken no action recently on the state’s rating.
In its analysis of the state’s fiscal condition, Moody’s said the revenue estimating conference forecasts were “positive, but not enough to balance spending pressures despite several years of steady expenditure reductions. We believe Michigan will take the necessary steps towards restoration of structural balance although it will be difficult for the state to replenish reserves in the near term.”
The analysis said Michigan may start to see job growth this year, but that would not be enough to regain all the jobs lost in the state since 2000 when the economy slowed.
The state shows strong management in terms of spending controls both through the use of governor-issued executive orders and Budget Director Mary Lannoye’s ability to decrease allotments, Moody’s said. The state’s creditworthiness is also helped by having a lower than average debt ratio than most states.
For the state’s rating to be upgraded, the state will need to show sustained job growth, restoration of reserves in the state’s Budget Stabilization Fund, restoration of structural budget balances and a “reversal of the state’s negative general fund cash position,” Moody’s said.
And if the economy continues to weaken leading to more job losses, if there are continuing budget shortfalls and “increased use” of non-recurring solutions to balance budget, then Moody’s warned the state’s credit rating could fall again.
Terry Stanton, spokesperson for the department, said the department had conferred with Moody’s and the other rating agencies following the estimating conference. While the downgrade was small, “you never want to be downgraded,” he said.
While the action means any new bonds the state issues will carry a higher interest rate, Stanton said, “There’s not going to be an exorbitant additional cost to the citizens.”
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