(Reuters) - Standard & Poor's Ratings Services on Thursday lowered the outlook on Michigan's credit rating to stable from positive, citing burgeoning costs associated with a lead-tainted water crisis in the city of Flint and with the cash-strapped Detroit Public Schools (DPS).
"The revised outlook reflects our view that rising costs tied to the Flint water crisis and Detroit Public Schools' distressed financial position will limit the state's ability to build reserves over the next two fiscal years," said S&P analyst Carol Spain in a statement.
The state, through the appointment of emergency managers, had been running Flint when the decision was made to switch water supplies to the Flint River from Detroit's water system in 2014, to save money. Flint is a working-class, mostly African-American city of 100,000 people northwest of Detroit.
The switch led to contamination of Flint's drinking water with lead, which is toxic and can damage the nervous system.
Governor Rick Snyder, who testified before a U.S. House committee on Thursday, has been seeking more than $200 million in state funds to aid the city.
U.S. lawmakers on Thursday called for the resignations of Snyder and Environmental Protection Agency Administrator Gina McCarthy over the Flint water crisis.
Michigan governors, including Snyder, also appointed managers for DPS, which is running out of money and is on track to close schools for 47,000 students next month unless it receives an influx of state cash. Snyder has asked the state legislature to approve an initial $50 million for the district.
The credit rating agency, which rates Michigan's general obligation bonds AA-minus, said the state may have to tap its budget stabilization fund in the future to help distressed local governments.
"Michigan currently has the wherewithal to support projected additional costs and maintain the current rating, but if costs related to the Flint water crisis or distressed local credits escalate, there could be credit pressure," Spain said.
(Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis)