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Economic diversity, pension liability keeps MI from higher bond rating

January 25, 2017

Article courtesy of MIRS News Service

(ANN ARBOR) — Michigan’s bond rating remains a notch below the highest rating a state can earn, and that isn’t likely to change soon, according to Dan SEYMOUR of Moody’s.

Seymour spoke Wednesday at the first Economic Forecast Forum hosted by the Michigan Chamber of Commerce Foundation and the Michigan Bankers Association (MBA). 

“The outlook for the state is stable. I think AA1 portrays the inherent strength of the state, but also that it has a few uncertainties that keep it out of the top category,” Seymour told MIRS when asked about the short-term likelihood of a bond credit upgrade for the State of Michigan. 

What are those uncertainties? According to Seymour, questions remain whether the state has diversified its economy away from an overreliance on the auto industry. 

“One of the keys for Michigan going forward is the last recession exposed some vulnerabilities in the state’s economy,” Seymour said. “It was a pretty brutal recession. State revenues fell rather dramatically. There is a lot of reliance on a single industry and when that industry encountered difficulty it really affected the economy as a whole.” 

According to Seymour, the second “uncertainty” is the surging pension liability state government is taking on following reforms adopted in 2012. At that time, the state agreed to cap school districts’ pension contribution rates to 21 percent of payroll, with the state picking up the tab for any difference. 

That commitment, along with increasing pension liability and decreasing school payrolls, have led the state to go from holding 0 percent of the unfunded liability of the teachers’ pension system to holding 30 percent. 

“It’s now more than $1 billion (the state’s contribution),” Seymour said. “That’s a real impact, maybe you can say the main pressure for Michigan today.” 

During his presentation before the banking and business community, Seymour also hit upon the state’s $4 billion infrastructure funding gap that was recently outlined by Gov. Rick SNYDER.

“The reason for this is Michigan’s investment in capital assets is lower than almost any other state,” Seymour said. “Michigan has been accumulating hidden debt by not investing in highways and other areas.” 

Since 2002, the Moody’s official noted the state has experienced the third largest decline in capital investment of the 50 states. Today, the state has the third lowest spending level of all 50 states on capital investment (highways, bridges and other infrastructure.) 

“The identified $4 billion investment gap is roughly equivalent to the decline in infrastructure spending since 2002,” he added.

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