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Michigan's credit outlook down a notch over Flint, DPS worries

Mar 18, 2016

Credit Matthileo / Flickr - http://j.mp/1SPGCl0

The water crisis in Flint and the financial crisis in Detroit Public Schools appear to be taking a toll on Michigan’s credit outlook.

Standard and Poor’s, one of the three major credit ratings agencies, revised Michigan’s outlook for general obligation debt down a notch, from “positive” to “stable” this week.

S&P is just one ratings agency, and these “outlooks” tend to fluctuate quite a bit. But what’s most notable about this particular change are the reasons S&P cites for it.

"The revised outlook reflects our view that rising costs tied to the Flint water crisis and Detroit Public Schools' (DPS) distressed financial position will limit the state's ability to build reserves over the next two fiscal years," said Standard & Poor's credit analyst Carol Spain in a release.

S&P seemed particularly concerned that the state will have to dip into its rainy day fund to cover Flint and DPS costs, as it faces “significant political pressure” to do so.

“Should costs tied to the Flint water crisis or assistance to distressed local governments exceed proposed amounts, S&P believes there is strong potential that [rainy day] funds could be tapped,” Spain said.

While S&P is concerned about the two crises putting an ongoing strain on the state budget, State Treasurer Nick Khouri suggested S&P is “overreacting.”

Khouri said the state is “disappointed” with S&P’s move. He thinks the agency is “underestimating” the overall progress of Michigan’s state budget and economy over the last few years.

Gov. Snyder has proposed sending $195 million to Flint in his next budget, with additional money for water infrastructure upgrades statewide; and another $720 million over seven years for DPS drawn out of the state’s tobacco settlement funds.

“We are convinced we can meet both our obligations [to Flint and DPS] from available funds, without straining the overall budget,” Khouri said.