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Rating Update:

MOODY'S AFFIRMS Aa2, Aa3 RATINGS, STABLE OUTLOOK, ON MICHIGAN SCHOOL BOND QUALIFICATION AND LOAN PROGRAM

01 Jul 2011

APPROXIMATELY $14.4 BILLION OF OUTSTANDING DEBT AFFECTED

Michigan School Bond Qual.& Loan Prog. (Org.)
Primary & Secondary Education
MI

Opinion

NEW YORK, Jul 1, 2011 -- Moody's Investors Service has affirmed the Aa2 rating and stable outlook for debt enhanced by the Michigan School Bond Qualification and Loan Program (new mechanics) and the Aa3 rating and stable outlook for debt enhanced by the Michigan School Bond Qualification and Loan Program (old mechanics) in conjunction with the affirmation of the Aa2 rating on the State of Michigan's general obligation debt. The program (old and new mechanics) currently totals approximately $14.4 billion of outstanding debt.

SUMMARY RATING RATIONALE

The rating reflects the strength of the state's constitutional obligation to pay debt service of bonds qualified for the School Bond Qualification and Loan Program and the history and mechanics of the program. The rating also reflects the strength of the state's general obligations, which are rated Aa2, stable. For additional information regarding Moody's action affecting the State of Michigan's rating and outlook, please refer to our new issue report dated June 28, 2011.

The rating distinction between the new program mechanics and the old program mechanics reflects the additional credit strength of independent third-party notification to the state in the event of debt service insufficiency provided for in the new program mechanics.

At this time, we do not expect stand-alone or underlying ratings to be directly affected by rating actions taken on the state's debt. The same factors that challenge the State of Michigan -- a weakened economy and diminished reserves -- could, over time, affect the underlying credit quality of individual municipalities and school districts should there be further reductions in state aid. Following the passage of Proposal A in 1994, school districts have been significantly reliant on state aid. We will continue to monitor the impact of these credit factors on individual credits.

STRENGTHS

--State's constitutional obligation to pay debt service of bonds qualified for the School Bond Qualification and Loan Program

--Satisfactory notification of debt service payment required in program mechanics (new mechanics)

CHALLENGES

--State financial and economic stresses

DETAILED CREDIT DISCUSSION

Program Type: State Guarantee

Approximate Debt Affected: $14.4 billion

Brief Description:

Under this program, the state has a constitutional obligation to provide a school district with sufficient funds to make timely debt service payments, if necessary. Fundamental to the program's rating are its sound mechanics to ensure timely payment, which include a provision for independent third-party notification to the state in the event of debt service insufficiency (new mechanics), and the strength of the state's general obligations, currently rated Aa2 with a stable outlook.

Sufficiency of Funds:

The program was established in 1955 to provide loans to school districts to moderate the local tax burden for debt service on qualified bonds, prevent a default, and cure a default. As part of the program and if necessary, the state has a constitutional obligation to provide a school district with sufficient funds to make timely debt service payments. The state issued general obligation debt and established the School Loan Revolving Fund (SLRF) to assist school districts with making debt service payments on qualified bonds issued under the program. The state may continue to issue bonds or notes without voter approval to capitalize the fund. In the event that the fund balance is insufficient to make a loan, the state is required to provide funds from other available resources in an amount necessary to make the loan.

Program Mechanics:

Program mechanics require the school district to transfer the debt service payment to the paying agent five business days prior to the due date. If payment is not made within this time, the paying agent must notify the school district of the insufficiency the next business day. Should the school district fail to transfer the necessary funds, the Michigan Department of Treasury is notified of the deficiency by the paying agent three business days prior to the debt service payment date, at which time the state treasurer must make a loan from the fund to ensure timely debt service payment. Pre-October 1998 mechanics do not include provisions an independent, third-party notification.

Outlook

The outlook on the State of Michigan's School Loan Bond Qualification and Loan program is stable, reflecting the state's outlook, and the program's rating is expected to move with the rating of the state.

What could change the state's rating - UP:

-Steady trend of rebuilding financial reserves

-Demonstration of lasting structural balance

-Economic performance in line with nation based on job growth and other measures

What could change the state's rating - DOWN:

-Renewed reliance on deficit financing or other non-recurring measures to achieve budget balance

-Indications of significantly reduced liquidity

-Deterioration in economic forecast versus current assumptions

-Assumption of burdensome financial commitments in support of local governments

The principal methodology used in these ratings was Moody's State Rating Methodology, published in November of 2004.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Edward Hampton
Analyst
Public Finance Group
Moody's Investors Service

Elizabeth Foos
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S AFFIRMS Aa2, Aa3 RATINGS, STABLE OUTLOOK, ON MICHIGAN SCHOOL BOND QUALIFICATION AND LOAN PROGRAM
No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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