CHICAGO -- Standard & Poor's Corp. on Friday affirmed the ratings on $87.3 million of tax increment finance debt in Michigan and removed the issues from CreditWatch, where they were placed last November with negative implications.
The rating agency affirmed an Aminus rating for $81.7 million of tax increment debt sold by the Detroit Downtown Development Authority and a BBB-minus rating for $5.6 million of the Lapeer Tax Increment Financing Authority's debt.
The rating action followed the passage of new laws by the Michigan legislature ensuring the funding of tax increment debt in the wake of the state's new school funding system. The new system was approved by voters in March after lawmakers last summer eliminated all school property taxes used for operating purposes.
The loss of school property taxes triggered the placement of the tax increment debt on CreditWatch. While there was concern over the impact the loss of the school tax revenues would have on Michigan tax increment debt in general, the Detroit and Lapeer debt was singled out for placement on CreditWatch for specific reasons.
Lapeer's debt is supported solely by its tax increment revenue stream, while Detroit's debt is backed by the city's general obligation pledge but is rated higher than the city's BBB rating.
Steve Murphy, a director at Standard & Poor's, said the rating agency is comfortable with the remedies approved by state lawmakers in June and signed into law last month by Gov. John Engler.
The new laws allow existing tax increment districts and new districts that were being planned as of last August to access property taxes collected by the state and by school districts, which after the reform are levying a smaller amount of property taxes, to pay off debt.
In addition, the tax increment districts will continue to receive property tax revenues collected within the district by other municipalities. If those revenue sources aren't sufficient to pay debt service, the state will make annual appropriations to cover the shortfall.
Murphy said that while the annual state appropriation presents a risk, the new mix of both state and local revenues to back tax increment debt "is at least equal in credit quality" to the backing that prevailed before the new school funding system was put into place and tax increment districts relied solely on local revenues.
In the case of the tax increment debt issued by Detroit and Lapeer, the rating agency said the new laws should ensure funding of the outstanding debt although debt service coverage levels on the bonds will be down slightly.
Officials at both the Lapeer and Detroit authorities said they expect to generate enough revenues in their districts to cover debt service and will not need a state appropriation.
Future tax increment debt issuance not covered by the new laws may be more difficult for development authorities in Michigan, according to Murphy.
"There are less taxes to capture," he said. "They can't capture the school levy; they can't go to the state for an appropriation. It will be harder to sell larger TIF debt."
The tax increment districts also will be constrained by a cap on the assessed valuation of property of 5%, or the rate of inflation, whichever is less, passed by voters as part of the new school funding system, Murphy said.
Jay Rising, an attorney at Miller, Canfield, Paddock & Stone, said tax increment debt will continue to be issued, but the issues may be smaller given the smaller tax base to be tapped.
Rising said the legislature may revisit the issue of using TIFs for infrastructure improvements for future large proposed development projects.
He said lawmakers are also expected to fix a technical error in the TIF bills when they return to session in September. That error, which limits the school taxes available for capture to the amount of other available revenues in the district, could result in a larger revenue shortfall for some tax increment districts, according to Standard & Poor's.
