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Commentary: Signs of a credit comeback

There was some significant good news about Michigan yesterday, though most media outlets ignored it. Fitch, one of the three big Wall Street credit rating agencies, upgraded the state’s bond rating in a number of categories, including general obligation bonds and school loan bonds. This should make it easier and cheaper for Michigan to raise and borrow money, something states do all the time.

The internationally influential rating agency also boosted the credit score of both the State Building Authority and the Municipal Bond Authority. Why did Fitch do this? Partly because of the auto industry’s rebound from the Great Recession.

Michigan, the Fitch report said, has shown “solid economic and fiscal recovery over the last two years. After a decade of persistent economic weakness,” in large part because of “the near-collapse of the domestic auto sector, the state’s economy is growing again.” But also, to give credit where credit is due, because of the financial policies of Governor Rick Snyder. In recent weeks Snyder, State Treasurer Andy Dillon and Budget Director John Nixon went to New York to meet with officials of all big three ratings firms.

The other two, Moody’s and Standard & Poor’s, also boosted Michigan’s ratings. S&P took the state’s credit outlook from stable to positive, and Moody’s did the same for our overall outlook.

Fitch yesterday said it was doing this because the state was doing a good job managing its tax-supported debt and retiree obligations. In a clear nod to Snyder’s policies, Fitch praised, quote, “the reforms the state continues to pursue to contain the growth of liabilities.”

For Michigan, this is highly good news. Sort of like you getting a letter saying your credit score is being upgraded, and as a result you’d have a smaller interest payment on your next car loan.

But this good news is in dramatic contrast with the situation in Detroit, where the city has had a so-called “junk bond,” below-investment grade status for some time. In fact, Fitch lowered its ratings for the city’s water and sewer bonds two days ago, and revised the outlook from stable to negative.

The agency plainly fears that the actions the emergency manager may take, including the possibility of bankruptcy, may “negatively impact” Detroit’s ability to pay creditors back.  Even so, the water and sewer bonds ratings are much higher than those of the city itself. That’s because the Detroit Water and Sewer Department serves a much broader area.

My guess is that this downgrade may increase efforts by Republicans in the legislature to remove the system from Detroit’s control and transfer it to a separate authority. That’s something Emergency Manager Kevyn Orr could do with a flick of his pen, presumably in return for a fair amount of dough.

There may be a silver lining here for the city, however. Years ago, former Detroit auditor Joe Harris told me Wall Street likes it when a state takes over a city far more than when a city goes into bankruptcy. If in a few months it looks like Orr is restoring fiscal sanity and Detroit can somehow avoid bankruptcy, we may see the city’s credit rating rise. And that would be good news indeed.

Jack Lessenberry is Michigan Radio’s political analyst. Views expressed in the essays by Lessenberry are his own and do not necessarily reflect those of Michigan Radio, its management or the station licensee, The University of Michigan.

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