Pew study: Michigan on track for California-style money woes

Recession-rocked Michigan is one of nine states on the verge of a California-style economic disaster, according to a report released today by the Pew Center on the States.

The Washington, D.C.-based public policy think tank found that after the auto industry collapse plunged this state into recession in 2001, from which it has never recovered, leaders here have failed to modernize the tax code, have used temporary solutions to resolve budget deficits and have been slow to diversify its auto-reliant economy.

"Michigan's recovery is going to be a long haul," the report says. "Even if the state were to immediately begin growing at the rapid rates of the 1990s, it would be 2025 or 2030 before it replaced all the jobs it lost this decade."

The state will have lost more than a million jobs by the end of this decade, more than a third of those this year, and 268,000 of them in the auto industry. The state's 15.3 percent unemployment rate is highest in the nation.

Susan Urahn, managing director of the Pew Center, added today: "These state budget problems are likely to get worse before they get better."

She said many states, including Michigan, face even tougher challenges in 2011. She cited as an example that Gov. Jennifer Granholm has notified state departments to prepare for 20 percent cuts next year.

California, slammed by a housing market bust, has sent out IOUs to state employees and contractors, closed state offices on Fridays and unsuccessfully sought a $7 billion federal loan in an attempt to make ends meet.

The Pew report says the Golden State "is in a league of its own" when it comes to fiscal woes, but Michigan is among states bowing under similar pressures. The others are Arizona, Florida, Illinois, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.

"While the national economy may be out of deep water, many states are still at risk of drowning," Urahn said.

Because these 10 states have one-third of the nation's population and national economic output, continued problems in these states threaten to slow the national recovery, she said.

Granholm and lawmakers recently approved a budget that used $1.3 billion in cuts and $1.5 billion in federal stimulus money to wipe out a growing deficit. School aid, college scholarships, health care for the poor and revenue sharing cities use to pay police and fire fighters suffered deep reductions. Leaders say wholesale reforms are needed to avoid even more dramatic cuts next year.

"The recession accelerated drops in state revenues and has left Michigan's government trying to deal with today's problems on a 1960-sized budget," the report says.

The state has not come to grips with the fact that it is no longer one of the nation's most prosperous states, according to the study.

In addition, the state's aging population and "generous income tax exemptions for pensions and other retirement income" will take a toll on future revenues.

"In 20 years, we're going to look like Florida does now if the demographic trends continue, and no one's going to be paying taxes except those that are working," Michigan House Fiscal Agency Director Mitchell Bean told Pew researchers.

The Pew report does give the state credit for downsizing state government and "getting control of its long-term obligations to public sector retirees."

The Pure Michigan travel promotion campaign was singled out as an effective tool to boost tourism. The study noted other efforts to diversify the economy, including the movie maker tax credits, Michigan Economic Growth Authority business tax breaks, and credits for the advanced battery industry.

"Still, the state foregoes revenue through such programs," the report says. "As of 2008, the state offered $6.3 billion more in total tax exemptions than it actually collected in taxes."

Pew chose six factors that have contributed to California's fiscal crisis and applied them to all the states. The factors are: loss of state revenue, relative size of budget gaps, increasing joblessness, high foreclosure rates, obstacles to balanced budgets and poor money-management practices.

Michigan's score on these factors ranks it ahead of California, Arizona and Rhode Island but behind the six other states in the study.

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