Michigan's Credit Quality Outlook and Local Impact
By: Darlene Janulis

While daily accounts of the State's budget situation capture our attention, it is equally interesting to see how Michigan is viewed by fiscal analysts outside our State. In a March 12, 2007 publication on Public Finance, Standard and Poor's reveals that Michigan (AA/Negative) is the only state with a negative outlook. They report that this is due to a struggling economy and a sizable structural imbalance.

According to the Standard and Poor's report, the negative outlook reflects the 2007 and 2008 fiscal year deficits caused by both the repeal of the Single Business Tax and the additional budget shortfalls. Standard and Poor's further suggests that if the State passes a tax reform and budget package that address the current imbalance in a timely manner, the outlook could return to being stable, but challenges will remain that may keep the rating below its previously higher levels.

Moody's has recently downgraded the State of Michigan from AA2 to AA3. What does this, along with the outlook of Standard and Poor's, mean for Michigan schools and municipalities? As mentioned in last month's newsletter, it becomes increasingly important to focus on matters that will maintain a strong local credit rating and financial position, such as:

• Continue short-term and long-term operational planning;
• Maintain structural balance between revenue sources and expenditures;
• Maintain adequate cash reserves;
• Create and maintain capital plans that address short-term and long-term objectives along with manageable debt structures.

Activities and decisions at the State level will have potential impact to you locally. Therefore, it is important to be proactive in creating and managing flexible operational and capital plans to maintain a strong financial position and credit rating. If you would like further information, or if Umbaugh can be of assistance in your planning process, please contact us at footnotes@umbaugh.com.