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VIDEO: What's A Good Credit Rating Mean for Michigan?
It sure sounds like a good thing: Fitch, the credit rating agency, announced this week that it's increasing Michigan's credit rating to an "AA" rating, the first time it rated Michigan above AA- since January 2007. That comes on top of both Standard & Poor's and Moody’s moving Michigan's outlook to "positive."
OK, great. But what's that all mean?
It's easy to understand why that matters to people who are trying to get a loan to buy a house (of course they want a good credit score), and it makes sense that a bank wouldn't want to lend to someone who's a bad bet (they want to get repaid, right?) But how is a state's credit rating calculated? Who cares if a state's credit rating is good or not? And how is that rating even calculated?
How A State's Credit Rating Is Calculated
Like you and me, states, cities, and other units of government sometimes need to borrow money (for things like building roads, bridges, or new office buildings). Institutions that lend that money want to know whether that government unit (states, in this case) will be able to pay off that loan -- in other words, whether they're a good bet. The better their rating, the less the bank will charge to lend the state the money.
To determine a state's rating, a rating agency will look at a state's balance sheet. Is the state spending more than it takes in? Does it have a deficit or a surplus? Is the state in debt or does it have savings? What are its long-term obligations, such as pensions? What's its economic future look like?
Periodically, some of the state's leaders -- such as the governor, treasurer, and budget director -- will meet with ratings agencies to share their fiscal story and discuss good things the state has done to improve their credit rating. They'll point to things like economic statistics and new policies that are intended to put the state on a better fiscal path. The rating agency will make their determination based on all that information.
Why A State's Credit Rating Matters
First and foremost, a good credit rating can save state tax payers millions of dollars in interest when it comes to borrowing money. But more than that, a state's credit rating matters for the simple reason that it's an independent measure of whether the state is on a good financial and economic path. If it's in good shape, it's less likely that the state will have to raise taxes on individuals or businesses, cut services, or take other actions that make it a worse place to live and work.
In other words, it all comes down to jobs. Businesses look at credit ratings when they decide where they want to locate and create new jobs. If a state has a bad credit rating -- and is on the wrong fiscal path -- a business is less likely to move there out of concern that taxes will be raised, cutting into its ability to turn a profit. Likewise, if a state is in bad fiscal health, workers will be less likely to want to live there, too, which means businesses will have a harder time finding the talented workforce they need.
Think of it this way: A state's credit score is sort of like a weather report. If it's warm and sunny, you'll probably want to be there. And if it's cold and gray, you'll want to stay away.
Why Michigan's Credit Rating is Improving
Michigan's credit rating is improving for the simple reason that the Great Lakes State is on a strong fiscal path.
The state’s budget is now in balance for the long term, its $1.5 billion deficit was wiped out, and it's saving money for a rainy day. That's great news, especially considering where Michigan has been. Back in 2010, Michigan only had $2.2 million in its Rainy Day Fund -- enough to run the state government for about 30 minutes. This year, that same depleted Rainy Day Fund now stands at $505 million, and is slated to grow to $580 million with the governor’s recommended budget for 2014.
Those are all good signs for credit ratings agencies, but more importantly, they're good signs for the people of Michigan.
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