The recent national recession and the ongoing recovery have put Midwest states on a less than thrilling roller coaster ride.
While for some states the ride has meant inching up steep inclines or speeding uncontrollably down breathtaking slopes, for the 12 states in the nation's midsection it has been relatively uneventful.
The lack of extremes combined with lessons learned from the early 1980s have helped the debt ratings of the Midwest states to remain relatively stable.
Several states on the East and West Coasts saw their general obligation ratings drop during the most recent recession, but only one Midwestern state, Illinois, had its ratings downgraded.
Moreover, Illinois'downgrades by Moody's Investors Service and Standard & Poor's Corp. in 1991 and again in 1992 were related more to the state's chronic spending problems than to the impact of the national recession.
The economic recovery, likewise, has produced just as few upgrades among Midwest states.
Since the beginning of 1993, Minnesota is the only Midwest state to have its GO rating upgraded - by Moody's in March and by Fitch Investors Service last July.
lowa, which does not issue GO debt, received an upgrade in March from Standard & Poor's for its Facilities Improvement Corp. lease revenue bonds.
Indeed, the recent credit news in the Midwest states had more to do with outlooks than with
Over the last 13 months, Standard & Poor's has revised the rating outlooks for Minnesota, Missouri, and Michigan to stable from negative.
"The region was certainly less affected by the recession than the nation as a whole," said Robert Kurtter, a vice president in the state ratings group at Moody's. "And, [the region seems to be more stable coming out of the recession."
Lagging Southern Regions
As for the recovery, Steve Hochman, a vice president and assistant director of state ratings at Moody's said economic growth in the Midwest is lagging behind the southeast and southwest regions of the oountry.
"[The Midwest] is not bouncing back because it doesn't have as far to bounce back from," Hochman said.
The region experienced its share of economic extremes in the 1980s, when the recession hit the manufacturing-dominated Midwest hard.
The states' Rust Belt reputation proved to be bad news for ratings. Between 1980 and 1983, Standard & Poor's downgraded Minnesota and Wisconsin twice and Illinois, Michigan, and Ohio once.
Moody's, meanwhile, downgraded Michigan's rating twice and Minnesota's and Wisconsin's ratings once during those years.
After the states did some serious retooling of their economies, they enjoyed the boom times of the eighties along with the rest of the country.
Retooling, which diversified the economies to include a broader mix of industries, helped insulate Midwest states from extremes in the latest recession.
Still, states faced some problems in the nineties and were forced to make tough budget choices and raid rainy day funds.
Now, whatever economic rebound is occurring in the Midwest is allowing some states to restuff financial cushions worn flat during the latest economic downturn.
Steve Murphy, a director at Standard & Poor's, said that unlike the recession and subsequent recovery of the 1980s, the latest economic cycle is not producing rapid revenue growth for Midwest states that will enable them to quickly replenish their balances. Instead, the states are experiencing steady revenue growth.
"There's four, five, six percent of revenue growth coming out of the recession, and that is a lot less revenue growth than [the states] experienced in the past," Murphy said.
Still, such growth levels are allowing some of the states to bulk up their balances.
Ohio, which depleted its budget stabilization fund during the recession, is slowly beginning to rebuild its financial cushion.
Paolo De Maria, assistant director of the Ohio's office of budget and management, said the approximately $21 million currently in the fund should rise to $70 million to $80 million by June 30, 1995, the end of the states current biennium.
Indiana is projecting $289 million in its rainy day fund when the current fiscal year ends June 30. Mark Moore, the state's special liaison for public finance, said the fund should climb to $303 million at the end of fiscal 1995.
Earlier this year, Michigan, which is enjoying the positive results of some tough budget choices, as well as the fruits of a resurging auto industry, placed $286 million of a $312 million fiscal 1993 surplus into its depleted rainy day fund. The state's fiscal year ended on Sept. 30.
Minnesota is projecting that it will end its current biennium on June 30, 1995, with a $430 million surplus in the wake of implementing a number of reforms, including a wage freeze for state workers and cuts in welfare benefits. Improved finances led to Minnesota's upgrade to AAA from Aa-plus by Fitch last July and to Aa1 from Aa by Moody's in March.
Rebuilding financial balances could be a key to future upward movement in state ratings.
Richard Ciccarone, scnior vice president and director of tax-exempt, fixed-income research at Kemper Securities Inc., said he sees some "room for improvement" in ratings for Midwest states.
"The outlook is pretty good," he said. "But before we'll see rating changes, we'll have to see [the states'] balances come up."
Ciccarone listed Minnesota, Ohio, Indiana, and Wisconsin as the "best prospects" for rating upgrades during the 1990s.
But, Hochman said, higher balances might not be enough to trigger upgrades.
"Just as we didn't lower ratings as balances were significantly drawn down, we won't necessarily raise ratings as balances go up," he said.
Kurtter sud that Moody's looks for structural changes to states' finances that would affect a state over "the longer course of a business cycle." A structural change, for example, could be the creation of a financial cushion, like a rainy day fund that the state didn't have before, he said.
At best, state ratings in the Midwest may remain stable.
In its CreditWeek Municipal publication this week, Standard & Poor's said that Midwest states' economic performances are moving from the volatility of the past to a more stable position.
Trend Toward Stability
"The trends exhibited during the recession and recent recovery period point to a much more stable economic environment in the future," Standard & Poor's said. "If sustained, these trends will result in significantly less volatility in state and local municipal revenue sources and lessen the negative effects on credit quality seen in prior downturns."
Claire Cohen, vice chairman and senior credit officer of Fitch's credit criteria committee, said she also sees stability in ratings, mostly because many Midwest states are conservative and tend not to issue a lot of debt.
"I don't think debt has ever been that much of a problem in the Midwest because [the states] never had that much," Cohen said.
There is still some downside risk for ratings. Hochman said Moody's is watching states' responses to growing Medicaid spending and the governments' struggles to adequately and equally fund education.
For example, he said, Ohio is facing a lawsuit over inequities in education funding, while Michigan and Wisconsin have taken steps to push the predominant burden of funding elementary and secondary schools away from local property taxes and toward state revenue sources.
"[The states'l ability to shoulder the burden sufficiently with no undue risk will be another rating factor," Hochman said.
Medicaid spending, meanwhile, is particularly a problem in Illinois, Indiana, Iowa, Michigan, and Ohio, according to Kurtter.
"In most states, Medicaid spending is growing faster than revenue growth from the improved economy," Kurtter said.
For example, Illinois Gov. Jim Edgar has proposed a dramatic plan to restructure and refinance $1.5 billion of the state's outstanding debt to produce $700 million to help tackle the state's burgeoning Medicaid expenses.
That money would be combined with an equal amount of federal Medicaid matching funds to give the state $1.4 billion to pay a current backlog of Medicaid bills and future Medicaid expenses.
Ciccarone put Illinois on the list for a possible third downgrade in the 1990s, unless the state can address lingering problems such as Medicaid spending and school funding.