Michigan legislature passes 2025 budget; road bonds expected

Michigan’s $82.5 billion fiscal 2025 budget — which Gov. Gretchen Whitmer is expected to sign — includes investments in roads and bridges financed by the $700 million final tranche of Rebuilding Michigan Plan bonds, which will be issued later this year.

According to a press release from the governor’s office, projects funded by the bonds range from repairs to a key bridge in Erie Township to road repairs on I-94 near Detroit Metro Airport to work on I-696 from Southfield to Warren.

The state’s teacher retirement unfunded liability is projected to be paid off next year, which also freed up some money to fund K-12 education, said Craig Thiel, research director at the Citizens Research Council of Michigan, a nonpartisan policy research nonprofit.

Fitch Ratings assigns Michigan a long-term issuer default rating of AA-plus. Moody’s Ratings gives the state a rating of Aa1. S&P Global Ratings assigns a long-term general obligation rating of AA. The outlook from all three rating agencies is stable.

Michigan has diverse tax revenues and no material limits on its ability to levy new taxes or pass tax rate hikes, Fitch noted, and the state has shown “a consistent willingness to make material budgetary adjustments … to maintain structural balance.”  

Michigan’s debt and retiree obligations are low compared to other states, with long-term debt and net pension liabilities at 2.6% of personal income, well below the 4% median Fitch found for U.S. states, Fitch Director Tammy Gamerman said.

“In the past few years, the state has used surplus funds to pay down long-term liabilities, including supplemental deposits to the Michigan Public School Employees Retirement System and the Michigan Public Employees Retirement System,” Gamerman told The Bond Buyer. “Fitch expects the state’s long-term liability burden to remain low even with expected new debt issuance.”

Moody’s likewise pointed to Michigan’s “proactive financial management,” but said school district debt and retirement benefit liabilities and exposure to financially troubled local governments are a factor in its credit profile. It noted the state’s susceptibility to changing economic cycles because of its dependence on the auto industry. 

“Michigan faces both the risk of further manufacturing base erosion and the potential to outperform economically if it becomes a hub for [electric vehicles], battery cells and related technology,” the rating agency said in a June 25 credit opinion.

S&P cited Michigan’s strong finances and liquidity, noting it recovered from the COVID slowdown more strongly than expected, with better-than-anticipated operating funds the last three fiscal years. The rating agency also pointed to the 2024 budget’s institution of a stabilization fund specifically for school funding. 

Asked about the projected paying down of the teacher retirement unfunded liability, S&P Director Ladunni Okolo said, “To the extent that the final enacted budget includes paying down unfunded retirement liabilities and significantly reduces the state’s overall fixed costs’ liability, we could view this as providing future flexibility in the state’s budget.” 

Okolo added, any rating action would hinge in part on Michigan’s liabilities. “We have noted that positive rating action could result from Michigan’s liability profile improving significantly,” Okolo said. “Alternatively, additional debt could increase the state’s liability which we currently view as moderate with a total debt outstanding of about $6 billion.”

Michigan’s budget includes $1.8 billion for revenue sharing, an increase from $1.7 billion in fiscal 2024.

“It’s a balanced budget that’s sustainable long-term,” the CRC’s Thiel said.

Dan Gilmartin of the Michigan Municipal League said in a statement the final budget “make[s] a significant investment in revenue sharing. … These resources will continue to ensure that we can invest in public safety and placemaking that enhances and promotes community engagement, well-being, and quality of life.”

The budget passed by the legislature does not fund free universal preschool, as Whitmer’s $80.7 billion budget proposal had called for, but it does fund free community college for all Michiganders and free preschool for families with incomes at or below 400% of the federal poverty level. 

A spokesperson for the governor declined to comment, but Whitmer said in a statement, “This budget puts students first by making historic investments to improve learning outcomes from pre-K through college, so that every child can get a world-class education.”

Regarding the decrease in overall K-12 education funding from the current year budget, “that wasn’t unexpected,” said Thiel, since the last two budget cycles included federal pandemic relief dollars and one-time state funds that have now been exhausted.

“This budget really is kind of a return to normal in terms of being based on the ongoing revenues that the state has at its disposal to support K-12 programming,” Thiel said. “There is almost a 4.5% decrease in the school aid budget when you look year over year. But that doesn’t mean that school districts aren’t going to see an increase in their available operating resources, because what the budget does is it relieves school districts from a portion of their retirement obligation next year.”

The paying down of the teacher retirement unfunded liability enabled a roughly $600 million allocation that will get distributed across all the schools that participate in the traditional pension retirement program, and those resources will provide a boost to compensate for the lack of increase in per-pupil funding, Thiel said.

That will bring a base increase in spending per student, he said. According to a statement by the governor, those payments will work out to an average $400 per pupil increase over fiscal 2024.

With federal COVID-19 relief money drying up, the state is “not in a position to backfill lost resources,” which will hit urban districts with high numbers of low-income pupils hardest, because they were the biggest beneficiaries of those funds, Thiel said.

“So some districts, they are going to be paring back,” he said. “That’s something to keep an eye on moving forward.”

Michigan Education Association President and CEO Chandra Madafferi said in a statement educators will see a 3% salary hike under the budget. But she criticized “deep cuts” to school safety and student mental health funding, adding, “Our hope is that state lawmakers will return after the summer break to pass a supplemental budget that funds these critical … priorities.”