| Rating History | |||
|---|---|---|---|
| Date | Action | Rating | Outlook |
| June 30, 2021 | Outlook change | AA | Stable |
| July 14, 2020 | Outlook change | AA | Negative |
| July 23 2018 | Rating upgrade | AA | Stable |
| September 5, 2017 | Outlook change | AA- | Positive |
| March 17, 2016 | Outlook change | AA- | Stable |
| July 20, 2015 | Outlook change | AA- | Positive |
Overview
Michigan's rating reflects its currently strong finances and liquidity, a cyclical economy which has emerged from the most recent recession better than originally anticipated, and projected stable reserve balances in the near future to help the state weather fiscal instability. Below-average income levels and economic concentration in manufacturing have been a constraining credit factor for the state.
S&P Global Ratings' baseline economic forecast reflects the U.S. economy slipping into a shallow recession in 2023. With supply-chain disruptions persisting and inflation remaining stubbornly high, although likely having peaked in third-quarter 2022, broader economic conditions will soften, and unemployment is expected to increase. (For additional information, see "Economic Outlook U.S. Q1 2023: Tipping Toward Recession," published Nov. 28, 2022, on RatingsDirect.) Michigan's economic resilience enabled it to recuperate quicker from the pandemic than during the prior recessions from the pandemic and has positioned the state to head strongly into the projected recession in 2023, with an unemployment rate closer to the 2019 annual unemployment rate. Due to very strong demand for its manufacturing products, particularly in vehicle production while national production is constrained by the global supply shortfall, its gross state product (GSP) continues to show strong growth.
The state's economy is likely to remain somewhat cyclical due to Michigan's larger-than-average manufacturing presence, but has shown increased resilience in recent years. IHS Markit estimates a state job count remained at 1.8% below the pre-pandemic, with steady gains, as of late 2022. It also forecasts growth in real GSP grow by an annual average of 3.0% per year from 2022 to 2026, a bit below the national rate of 3.5%. We expect Michigan's reliance on manufacturing will continue to support economic growth in the short term, but could limit the state's long-term growth potential, as could low population growth. At the same time, the percentage of the state's employment in manufacturing has fallen. Manufacturing is now Michigan's fifth-largest employment sector, compared with being the largest sector back in 2000, a long-term trend that could serve to lessen future cyclicality.
With stronger revenue performance compared to projections and additional federal funding which reduced the pressure on the state's general funds, Michigan has been able to grow and maintain adequate reserves. The state's budget stabilization fund (BSF) has steadily grown over the past few years to a high $1.6 billion in fiscal 2022, or 6% of ongoing budgetary basis expenditures. The state estimates BSF being above $1.8 billion by the end of 2023, which we believe is a prudent reserve to help the state weather fiscal uncertainty in 2024.
Michigan upwardly revised its fiscal 2023 consensus revenue forecast in January 2023, leading to an expected surplus which supports deposits to the BSF. The current enacted state budget for its fiscal year ending Sept. 30, 2023, also does not include substantial additional federal aid, which Michigan expects to spend primarily on one-time uses intended to expand and improve its program.
Environmental, social, and governance
We consider Michigan to have elevated social risks given its demographic pressures of slow population growth and economic concentration in manufacturing that, in our view, have slower long-term growth prospects than other sectors of the economy. We believe these long-term social risks could hamper statewide economic growth forecasts and the demographic shift could meaningfully alter revenue and spending demands that weigh on the state's financial position. However, we believe Michigan's historically strong management policy framework and financial management will help manage this risk. At the same time, we view the state's environmental and governance risks as being in line with the sector.
Proposed Fiscal 2024 Budget Highlights
- General fund/general purpose revenue are expected to be $15 billion, higher than expenditures, reflecting estimates of 2023 on the same line.
- Nearly 75% of recommended general fund appropriations are for health care, protection of vulnerable children and adults, human services, education, and public safety.
- Based on the 2023 Revenue Consensus Report, fiscal 2024 combined revenue collections are tracking a decrease of $524 million, or 1.9 % below previous-year revenue.
- A proposed $200 million deposit into the state's BSF is estimated to increase the balance to almost $2 billion by the end of fiscal 2024.
What We're Watching
- Shortages of other raw materials and labor shortages may constrain growth more than assumed, along with inflation increasing faster than expected.
- Demand for new vehicles will be high this coming year, which could generate higher sales than predicted. However, the semiconductor shortage has already limited vehicle production for several months and may continue to depress the number of vehicles for sale.
- We continue to monitor if general fund revenues will continue to exceed forecast levels longer term, given the phase-in of the permanent reduction in personal income taxes enacted in the 2022 legislative sessions, and potential national recessionary conditions next year.
| Audited GAAP Financial Results | ||||
|---|---|---|---|---|
| Combined General and School Aid Funds | ||||
| ($000) | ||||
| Fiscal Year ending 9/30 | 2021 | 2020 | 2019 | 2018 |
| Revenues | 62,648,117 | 54,540,926 | 50,863,661 | 49,181,248 |
| Expenditures | 59,330,911 | 53,583,531 | 51,417,939 | 49,269,970 |
| Net transfers and other financing sources | 1,361,701 | 1,369,175 | 847,315 | 851,532 |
| Net changes in fund balances | 4,667,483 | 2,326,570 | 293,037 | 762,809 |
| Net change in fund balances as % expenditures | 7.9 | 4.3 | 0.6 | 1.5 |
| Available (assigned and unassigned) fund balances | 4,494,057 | 2,462,843 | 1,051,472 | 964,801 |
| Budget Stabilization Fund | 1,382,400 | 829,100 | 1,148,600 | 1,006,000 |
| Combined available and BSF balances | 5,876,457 | 3,291,943 | 2,200,072 | 1,970,801 |
| Available and BSF balance as % of combined expenditures | 9.9 | 6.1 | 4.3 | 4.0 |
| Total fund balances | 11,454,429 | 6,755,771 | 4,429,201 | 4,136,165 |
| Combined fund balances as % of combined expenditures | 1.9 | 12.6 | 8.6 | 8.4 |
This report does not constitute a rating action.
| Primary Credit Analyst: | Ladunni M Okolo, Dallas + 1 (212) 438 1208; ladunni.okolo@spglobal.com |
| Secondary Contact: | David G Hitchcock, New York + 1 (212) 438 2022; david.hitchcock@spglobal.com |
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