Michigan's long fiscal misery: as the automobile industry struggles to survive, is there hope for the state's recession-wracked economy?

• Author: Hornbeck, Mark

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Michigan's long-standing state budget crisis is inextricably linked to the domestic auto industry's freefall and, in some ways, one mirrors the other.

The Midwest state and its once-mighty car giants are in protracted down cycles, unprecedented in their length and severity. Both the state and the automakers have done some restructuring and downsizing, with labor wage concessions and retirement cost reductions among the austerity measures.

As 2009 opened, the Detroit-centered Big Three and the state of Michigan were depending heavily on the promise of federal bailouts. The automakers are hoping a $17.5 billion loan package will help them hold on while the state awaits agreement in Washington on a multi-billion-dollar federal stimulus plan from the new president. (State Legislatures went to press before final action on the economic recovery plan.)

"What's happened to the state budget is all about the deterioration of the American auto industry," says Mitchell Bean, director of Michigan's House Fiscal Agency. "We're seeing things we've never seen. The auto industry is not bouncing back like it has in the past. And we've never before had contraction in employment that has lasted this long--eight years and counting."

As a consequence, two governors and lawmakers in four legislative sessions have contended with eight consecutive years of recession. Aside from budget cuts, they have resorted to tax hikes, accounting gimmicks, borrowing against the lawsuit settlement with the big tobacco companies, and raids on countless other one-time funding pots. Critics say the state should have made changes in its revenue and spending structure that would have provided long-term stability.

Thanks partly to the financial market collapse and the national recession, the long fiscal nightmare in Michigan is far from over. The state enacted $134 million in executive order cuts in December, including the shutdown of a prison, a prison camp and a girls' reform school. Yet it still faces a $200 million shortfall in the budget year that ends Sept. 30, even when allowing for more than $700 million in carry-over cash from last fiscal year, according to the Senate Fiscal Agency.

What's more, the hole could grow to $1.5 billion in 2010, the number crunchers forecast. Much depends on the size of the federal stimulus windfall and how state policymakers decide to spend it.

"Michigan has been like an army that doesn't retreat very well," says Bob Emerson, state budget director the past two years and before that the Democratic leader in the Senate. "But given the amount of reductions that have occurred in the budget, we've coped reasonably well."

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Senate Majority Leader Mike Bishop says substantial reforms and cuts must be executed this year, adding that Michigan citizens "must accept a different form of government.

"I don't like to say we've got to cut, cut, cut. I never thought I'd be in government to say that. But it is the reality of our times. This is the discussion we have to have," says Bishop.

Governor Jennifer Granholm characterizes the state's fiscal woes this way: "The recession that is gripping the nation got its start...