S&P takes Michigan debt off CreditWatch; affirms AA GO rating.

CHICAGO -- Standard & Poor's Corp. removed $3.14 billion of Michigan debt from CreditWatch with negative implications and affirmed the state's AA general obligation rating last week, citting the fact that the state was able to eliminate a $1.4 billion deficit in its current year budget.

Vladimir Stadnyk, a managing director at the rating agency, warned, however, that the state was "definitely" not out of the woods yet. While Standard & Poor's removed its GO and other related debt from CreditWatch, where it was placed Jan. 23, 1991, the agency gave the state's rating a negative outlook.

The CreditWatch report released last week indicated the state is facing a $400 million deficit for fiscal 1992. In addition, the report said the state's commitment to containing tax increases while funding a possible property tax relief plan will "limit its financial flexibility."

Steve Murphy, a vice president at the agency, said the deficit could increase to $1.1 billion if the state does not institutionalize the 9.2% across-the-board cuts approved for the current budget last year.

Standard & Poor's in its statement last week said it believes the state "will develop long-term solutions to balance the state budget."

"They've got two months to resolve their 1992 budget," Mr. Stadnyk said. "What they demonstrated with the 1991 budget is they have a will and a way to do it."

The state Legislature and the administration of Gov. John Engler currently are setting spending target levels for the budget, according to Bill Kerans, deputy budget director. He said it was too early in the budget process to determine whether the state would face a deficit in fiscal 1992. In March, the governor proposed an $8 billion general fund budget that would downsize state government, fund a property tax cut plan, and increase spending on schools.

However, the stage is already being set for a lengthy budget battle after the legislature failed to meet the Republican governor's deadline to complete work on the budget by July 25. Said Steve Serkaian, a spokesman for House Speaker Lewis Dodak, D-Birch Run, "the official deadline for bringing the budget in is Oct. 1."

One of the budget hangups concerns the dueling property tax cut plans being pushed by the governor and the Democrat-controlled House. The Democrats are taking their property tax proposal, which would eliminate single business tax deductions for business to fund the relief, to the ballot in November 1992. Meanwhile, the governor included his three-year 20% tax cut plan in his proposed fiscal 1992 budget. Under the governor's plan, the state would need 8278 million in fiscal 1992 to fund a 5% cut in school property taxes.

Mr. Stadnyk said the ability of the state to fund property tax relief, as well as the effect of Michigan's cyclical economy on state revenues, continue to be concerns of the rating agency.

With the fiscal 1991 budget crisis, the state relied on nearly $750 million of onetime revenue measures, including the use of $222.5 million of the state's $400 million budget stabilization fund to balance the $7.6 billion general funds budget.

Nick Khourt, the state's chief deputy treasurer, said the administration would not rely on the one-time time measures to balance the next budget.

"In 1992, we want to make structural changes," he said.

Beyond fiscal 1992, the state will continue to face financial pressures. For example, Gov. Engler's property tax relief plan would need another $900 million of funding in fiscal 1993 and $1.2 billion in fiscal 1994.

In addition, Mr. Stadnyk pointed out that the state will have to come up with $400 million of revenues in fiscal 1993 to comply with an out-of-court settlement struck between the state and Oakland County in June. Under that settlement, the state agreed to pay $400 million more each year to local governments and schools to end a six-year-old lawsuit charging that the state was violating the Michigan constitution by not funding local governments for state-mandated mental health services.

The $3.14 bill of state debt that had been on CreditWatch included $189.3 million of the state's GO debt, as ell as Michigan Department of Management and Budget certificates of participation (Series 1987), Michigan Municipal Bond Authority local government program bonds (Series 1986A -- groups one through five, and seven through 14), Qualified Loan Program school district bonds, Michigan State Building Authority bonds, and bonds issued by eight state universities.

Michigan's GO debt is rated AA by Fitch Investors Service Inc. and A1 by Moody's Investors Service. Officials at the rating agencies did not return phone calls by deadline.

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