Michigan's 'AAA' & 'AA+' Debt Ratings Placed on CreditWatch Negative; Budget Gap Cited
Analyst:
James Wiemken, Chicago (1) 312-233-7005; Steven J Murphy, New York (1) 212-438-2066
Publication date: 03-Nov-03, 14:15:42 EST
CHICAGO (Standard & Poor's) Nov. 3, 2003—Standard & Poor's Ratings Services has placed its 'AAA' and 'AA+' ratings on debt backed by the state of Michigan's GO and annual appropriation pledges on CreditWatch with negative implications pending the resolution of the state's current budget gap.
The state had anticipated ending fiscal 2003 with a $350 million general fund balance, which would allow the state to put $75 million back into the budget stabilization reserve, keep $60 million in the Medicaid trust fund, and place an additional $75 million into a new school reserve fund. After the October revenue revisions, the state now expects to end fiscal 2003 with only about $58 million, placing the anticipated 2004 reserves in jeopardy even before considering the $595 million shortfall in 2004. How the state responds to the current shortfall will affect the immediate reserve position of the state, as well as its ability to continue to rebuild its reserves--both of which weigh heavily on the rating. Standard & Poor's Ratings Services expects the state to address the budget gap before the end of the calendar year.
Credit factors for the state's ratings include effective financial management structure and procedures and policies, several of which contain constitutionally mandated actions on the part of state officials. Additional credit factors include gains in economic diversification, which have reduced, but not eliminated, the relative severity of the effect of national economic softness; a low debt burden; and the relatively solid position of the state's pension liabilities.
Several months of employment losses after apparent stabilization and slow income growth suggest that Michigan will lag the nation in its economic recovery, the question is what the extent of the lag will be. Michigan wage and salary employment is now forecast to grow only 0.6% during calendar year 2004, down from 1.4% as predicted in May. Personal income is forecast to grow 3.8% (down from 5%), while wages and salaries are forecast to grow 3.1% (down from 4.3%). While the state's forecasts are more conservative than others, spent-up demand for automobiles, ongoing market share losses by local automakers, and an uncertain near-term outlook for the office furniture industry suggest that such caution is warranted.
Michigan's combined direct GO and appropriation debt burden remains low at $536 per capita and 1.8% of personal income. Michigan issued $1.2 billion in cash flow notes earlier this year for the first time since 1998. Additional cash flow issuance is expected in fiscal 2004. Although market conditions will likely create some additional pension funding needs, the state's relatively strong funding position is a strength. With the exception of the military retirement plan, which is funded on a pay-as-you-go basis, three of the five defined-benefit pension plans into which the state pays were overfunded as of Sept. 30, 2002; the other two plans' funding ratios were 91.5% and 98.7%. Legislation further requires that state employees hired after March 31, 1997, become members of state-sponsored defined contribution plans, reducing the likelihood of future volatility in funding requirements.
Approximately $15.9 billion of outstanding debt is affected.
Pittsburgh, PA's GO Bonds Rating Lowered Five Notches to 'BB'; On Watch Developing
Analyst:
Karl Jacob, New York (1) 212-438-2111; Jeffrey Panger, New York (1) 212-438-2076
Publication date: 15-Oct-03, 11:05:10 EST
Reprinted from RatingsDirect
NEW YORK (Standard & Poor's) Oct. 15, 2003—Standard & Poor's Ratings Services said today it lowered its rating on Pittsburgh, Pa.'s outstanding general obligation bonds five notches, to 'BB' from 'A-', and placed the rating on CreditWatch with developing implications. The rating was previously placed on CreditWatch with negative implications on Aug. 26.
The rating action reflects disclosure in the "notes to financial statements" section of Pittsburgh's recently released audit questioning the city's ability to operate as a going concern. The note states that "if the city should fail to receive additional taxing authority from the commonwealth and subsequently fails to receive the necessary approval from the city council for tax increases and service cuts, the city would then consider a number of options including those available under Chapter 9 of the Federal Bankruptcy Code."
Standard & Poor's had previously noted the city's significant fiscal stress when placing the rating on CreditWatch in August. While Pittsburgh's fundamental credit characteristics have not changed since then, the unresolved status of the city's legislative requests, the audit note questioning the city's ability to operate as a going concern, and the city's statement that it would consider filing for bankruptcy is inconsistent with an investment grade rating.
"Should the city identify and implement budget-balancing options under its control or successfully negotiate expanded revenue and tax authority, which requires state legislative action, the rating could be restored to investment grade", said Standard & Poor's credit analyst Karl Jacob. "However, if the city continues to consider bankruptcy as an option to its current fiscal situation, a non-investment grade rating would be maintained, and if the city actually availed itself of protection under the bankruptcy code, the rating would be lowered further."
The downgrade affects approximately $879 million of outstanding city general obligation debt.
(For further information on the city's general credit characteristics,
please refer to the most recent analysis on Pittsburgh's general
obligation debt rating, dated Aug. 26, 2003, on RatingsDirect.)
Oregon's GO Debt Rating Lowered to 'AA-' on Weakened Financial Position
Analyst:
Parry Young, New York (1) 212-438-2120; Gabriel Petek, San Francisco (1) 415-371-5042
Publication date: 09-Oct-03, 14:22:46 EST
Reprinted from RatingsDirect
NEW YORK (Standard & Poor's) Oct. 9, 2003—Standard & Poor's Ratings
Services said today it lowered its rating on Oregon's outstanding general
obligation debt to 'AA-' from 'AA', reflecting the state's weakened
financial position resulting from a prolonged economic slowdown.
Following a significant decline in revenues during the 2001-2003
biennium, fund balances at June 30, 2003, are estimated to be minimal,
with a general fund unreserved undesignated balance of $20 million-$30
million. State unemployment is the highest in the nation at 8%.
Credit strengths include a diversified economic base and low debt burden
as a percent of market value.
The outlook is stable, reflecting the expectation that the risks to
implementing the 2003-2005 biennium budget will be manageable, assuming
satisfactory disposition of various legal and other challenges.
This rating action does not affect the rating on the state's $1.02
billion of outstanding general obligation veteran's welfare bonds, which
remain at 'AA' with a stable outlook.
Standard & Poor's also assigned its 'AA-' rating to Oregon's $2 billion
general obligation pension bonds series 2003.
The state pledges its full faith and credit taxing power, excluding the
power to levy ad valorem taxes, to secure the pension bonds, which are
scheduled to sell Oct. 20. The bonds are being issued to pay a substantial
portion of the state's unfunded liability to the Oregon Public Employees
Retirement System. The projected savings from the pension bonds is about
$90 million for the 2003-2005 biennium, with uniform savings in subsequent
years, and total present value savings over the 25-year the life of the
bonds of $500 million.
The downgrade affects approximately $1.1 billion outstanding general
obligation debt.
