APPROXIMATELY $14.4 BILLION OF OUTSTANDING DEBT AFFECTED
Michigan School Bond Qual.& Loan Prog. (Org.)
Primary & Secondary Education
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
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.
--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)
--State financial and economic stresses
DETAILED CREDIT DISCUSSION
Program Type: State Guarantee
Approximate Debt Affected: $14.4 billion
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 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.
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.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings and confidential and proprietary Moody's Investors
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.
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S AFFIRMS Aa2, Aa3 RATINGS, STABLE OUTLOOK, ON MICHIGAN SCHOOL BOND QUALIFICATION AND LOAN PROGRAM
Moody's Investors Service, Inc.
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New York, NY 10007