Michigan's Transportation Bonds Soar: Moody's Upgrades Reflect State's Fiscal Strength

In a significant development, Moody's Ratings (Moody's) has recently upgraded three Michigan Department of Transportation (MDOT) bonds, underscoring the state's robust credit profile and stable outlook. This move highlights Michigan's unwavering commitment to maintaining a strong financial foundation and its ability to effectively manage its transportation infrastructure investments.

Unlocking Opportunities: Michigan's Upgraded Transportation Bonds Pave the Way for Growth

Strengthening the State Trunkline Fund (STF)

The upgrade of the State Trunkline Fund (STF) bonds from Aa2 to Aa1, with approximately $2.8 billion in outstanding debt, reflects the general credit strengths of the State of Michigan and its dedication to transportation revenue sources. The STF, which is used to fund state highway (I, M, and US-route) construction projects, benefits from the state's commitment to allocating a broad range of transportation revenues, including motor fuel taxes and vehicle registration fees collected in the Michigan Transportation Fund (MTF), to service bond payments. This rating recognition underscores the state's stable and strong debt service coverage, which is expected to remain robust even with the anticipated issuance of additional debt under Governor Gretchen Whitmer's Rebuilding Michigan Program. Michigan's proactive policy changes, such as raising the state gasoline tax and indexing it to inflation, have bolstered highway revenue and helped offset the impact of stagnant motor fuel consumption and potential increases in debt service costs.

Elevating the Comprehensive Transportation Fund (CTF)

The upgrade of the Comprehensive Transportation Fund (CTF) bonds from Aa2 to Aa1, with approximately $23 million in outstanding debt, also reflects the general credit strengths of the State of Michigan and its ability to make bond payments. The CTF provides funding for various public transit, intercity bus, marine, and rail programs across the state. The state's commitment to depositing certain revenue sources, including sales tax collected on motor vehicle sales and state sales tax levied on motor fuels, into the CTF has contributed to the fund's enhanced creditworthiness.

Strengthening the Grant Anticipation Bonds (GARVEEs)

The upgrade of the Grant Anticipation Bonds (GARVEEs) from A2 to A1, with approximately $443 million in outstanding debt, is a testament to the state's fiscal management. While the GARVEE bonds are now three notches below the state's Aa1 issuer rating, the upgrade recognizes the somewhat broad nature of the pledged revenue, which are the state's Title 23 Federal Highway Administration grants, and the potential for pledged revenue disruption or reduction related to federal reauthorization risk. The strong debt service coverage and three times additional bonds test enhance the credit strength of the GARVEE bonds during the authorization term, although they do not fully offset the risk of disruption in federal highway aid. The payment of debt service remains subject to state appropriation of the pledged revenues.

Maintaining a Stable Outlook

The stable outlook on the State of Michigan applies to all three transportation bond programs, reflecting the state's governance and management practices, including its rapid response to developing economic or fiscal downturns. Additionally, the state's economy, while still linked to the automobile manufacturing industry, is becoming increasingly diversified, further strengthening its overall fiscal resilience.These upgrades by Moody's serve as a testament to Michigan's commitment to responsible fiscal management and its dedication to investing in the state's transportation infrastructure. By maintaining a strong credit profile and leveraging innovative financing strategies, Michigan is poised to unlock new opportunities for economic growth and enhance the quality of life for its residents.