Bloomberg: Michigan Heads for `Fiscal Train Wreck' 
Michigan Heads for `Fiscal Train Wreck'; All Aboard!: Joe Mysak
By Joe Mysak
Feb. 7 (Bloomberg) -- Michigan is on the brink.
The state ``faces a fiscal train wreck,'' says a new report by the Emergency Financial Advisory Panel, a bipartisan group assembled by Governor Jennifer Granholm to study the impending blowup.
``Leaders have only weeks, at most four months, to solve this crisis or face the rightful wrath of Wall Street, students, retirees, workers, and employers thinking of staying in or moving to Michigan,'' says the report, which is entitled ``Michigan's Defining Moment.''
For the last seven years, what has defined Michigan is spending that far exceeds what it takes in. The report observes that over the next 18 months, $3.5 billion in services and programs will be ``unsupported by revenues.''
In the past, the state used one-shots like refinancing bond issues, liquidated reserves, and cut spending to make ends meet. ``There are few rabbits left in the hat,'' the report says.
That certainly all sounds serious, doesn't it? Train wreck? Financial crisis? You don't toss these words around lightly.
Are you paying attention, hedge fund guys? Everyone knows there are more of you involved in Muniland nowadays. And there are more of your kind looking to become involved, desperately trying to fathom this dense, inert, opaque market. The Michigan story is an almost perfect illustration of life here.
Auto Industry
The Michigan story has everything. The problem seems intractable. There's an ``Alice in Wonderland'' quality to the element of time. There are endless quantities of numbers to digest. And of course there's the relative lack of reaction.
What happened in Michigan? You can certainly start with the implosion of the U.S. automobile industry. This has resulted in six consecutive years of job losses, the longest stretch, says this report, since the Great Depression.
``In just the past six years, production of vehicles in Michigan has dropped 27 percent, nearly 900,000 units,'' says the report. ``The impact is the equivalent of closing five assembly plants and losing 120,000 jobs throughout the state.''
You can begin with the automobile industry, and you could probably end there, too. If Fords were selling like Toyotas, Michigan probably wouldn't be in this mess.
There's another curious element to the Michigan meltdown. And that is, the state has been cutting taxes even as the auto industry contracted, and even as the state was gripped by recession.
Tax Cuts
``Since the passage of Proposal A in 1994, Michigan has enacted tax cuts which reduce current state revenue by $3.2 billion a year,'' says the report, which adds that local property taxes have been cut by $5.4 billion.
``In response to temporary good economic times, Michigan enacted permanent tax cuts,'' says the report. ``The state often cut taxes without an equivalent cut in services.''
On top of all this phased tax-cutting, in August 2006 the state eliminated the so-called single business tax, which is scheduled to die at the end of 2007. It did so without coming up with a replacement for the $2 billion or so the tax brings in.
This all looks pretty serious, doesn't it? Granholm, who was re-elected in November, is due to present her budget tomorrow. It promises to be an interesting document.
Equally interesting will be how the state's lawmakers deal with the situation. They have, at least according to the advisory panel report ``weeks, or at most four months.''
Bond Raters
Well, that's just great. The Michigan meltdown was years in the making. It will be weeks in the fixing. How reassuring.
The companies that evaluate the state's bonds are concerned -- up to a point. Fitch Investors Service last week cut the ratings on the state's general obligation bonds to AA- from AA. Moody's Investors Service revised the outlook on the state's debt to ``negative,'' while affirming its Aa2 rating.
``Michigan's economic downturn is not only remarkable because it is among the longest-running in the state's history, but also because it has occurred, in large part, during an expansion of the national economy,'' Moody's said in the usual measured cadences.
Everyone is confident that Michigan will do the right thing, and either slash spending or raise taxes or, probably, both.
That is, I think everyone is confident that's going to happen.
Except maybe for you hedge fund guys. This Michigan business is probably driving you all mad. You are out there trying to figure out how to short the state of Michigan, just like you would a stock.
Good luck, and welcome to Muniland.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
