CHICAGO - Local and state governments in Michigan, Ohio and Indiana, many already struggling with declining revenues, will face fresh pressures if the failing U.S. automobile industry follows through with widespread plant closures and job cuts, credit analysts warn.

Already rating agencies have taken negative actions on a number of credits ranging from small towns in Michigan to large counties in Ohio and the state of Michigan itself, based almost solely on exposure to the ailing automobile industry.

Those actions could become a trend depending on the Big Three Detroit automakers' final restructuring plans.

In a report released last week, Moody's Investors Service warned that the auto industry's deterioration has "growing potential to put downward pressure on credit ratings of U.S. local and state governments that historically have relied on the industry for tax revenue and employment opportunities."

Meanwhile, as automakers face government-imposed deadlines to restructure, state officials in Michigan, Indiana, and Ohio are in the midst of crafting new budgets. Trying to forecast revenues without knowing what the auto industry will look like in six months is tough, said one of Michigan's top fiscal officials.

"It's more uncertainty than I've ever seen before in this process," said Mitchell Bean, director of Michigan's nonpartisan Senate Fiscal Agency, where he has been for 15 years. His agency is building financial models that incorporate various scenarios for the automakers - including those that assume bankruptcy.

"People I've talked to who have been around for 30, 40 years - no one has seen anything to this extent," he said.

General Motors Corp. said this week that it would cut 21,000 jobs - from a current total of roughly 63,000 - and shutter at least 13 plants. It has not announced which plants would close. Neither Ford Motor Co. nor Chrysler LLC have announced final measures but cuts are expected to be widespread. If final restructuring plans are not approved by the federal government, GM and Chrysler have said they would likely declare bankruptcy.

In either scenario, large-scale plant closures and job cuts are expected, and those measures will cut into local government and state revenue across the board. Income, sales, and property tax revenue will decline in those areas and demands for government resources like Medicaid will increase. Health care providers already strained with rising bad debt and charity care will likely be asked to care for more uninsured patients.

"In the near term these revenue declines, which in many cases are likely to be compounded by reductions in state aid, will likely pressure the operating budgets of local governments, forcing issuers to cut expenditures or raise taxes," analyst Ted Damutz wrote in a Moody's report, "Challenges of U.S. Domestic Auto Industry Weigh Heavily on Certain Midwestern State and Local Governments."

"In the long term, where the local economy is unable to replace lost jobs or redevelop the site of former plants, an extended period of credit decline is possible," he added.

While the region has been dealing with the steady decline of manufacturing jobs for more than a decade, the current shifts in the automobile industry signal a fundamental transformation, according to analysts.

"Local governments have been dealing with auto restructurings for several years now, but the situation has become much more acute in the last six to eight months," said Fitch Ratings analyst Melanie Shaker, who covers local governments in the Midwest. "While they're accustomed to dealing with declining employment, now they're facing wholesale plant closures to a greater degree. Large plant closures, the folding of smaller parts suppliers, spiking unemployment, and revenue weakening, if significant, could all have a negative impact on rating levels."

Michigan remains the most vulnerable to fallout from the industry's contraction, as it has no foreign car plants and many cities rely on the Big Three for significant property tax revenue. Moody's rates Michigan's GO debt at Aa3 with a negative outlook. Standard & Poor's rates it AA-minus with a stable outlook. Fitch also rates the debt AA-minus, but with a negative outlook.

Detroit, where GM is headquartered and Ford and Chrysler have a significant presence, is the "epicenter" of the auto industry, said Moody's. The city was hit with a trio of downgrades from all three rating agencies earlier this year, leaving it by and large at junk-bond status. Analysts cited auto-related woes as a chief economic pressure.

Many Michigan cities, like Dearborn - the corporate headquarters of Ford - and Wayne and Auburn Hills could see big chunks of their property tax base shrivel depending on the final form of the restructuring plans, Moody's said. In Wayne, for example, Ford accounts for 44% of the tax base.

While many governments in Michigan rely on property tax revenue generated from the auto industry, cities and counties in Ohio and Indiana are more likely to rely on the industry's contribution of income- and sales-tax revenue, said analysts.

Cities that rely on income taxes "should immediately experience declines in this revenue stream due to job cuts," warned Moody's. The impact on sales tax comes as unemployment rises and consumers cut back on spending.

"Michigan has more dominance of the Big Three, but in Ohio it can be harder to see," said Fitch's Shaker. "Their form of concentration is more industrial, such as smaller parts suppliers. Whether one big plant or five smaller plants [go under] it will have the same effect. They don't often make the news, but they have a similar impact on employment."

Indiana remains in better fiscal shape than most other Midwestern states largely because it enjoys a $1.2 billion cash reserve, but it has a "startling" level of auto-industry related concentration, according to one analyst. The degree to which Indiana's rating is pressured will depend on the ultimate form of the Detroit Three restructuring, as well as the state's own economic downturn and how it handles its current revenue losses, Moody's said.

Despite the gloomy future, local and state officials have some flexibility and options to help manage the expected downturn, Moody's said. Factors that could help troubled credits include the use of federal and state funds to offset shortfalls, efforts to diversify economies, willingness to cut spending and raise revenue, and the ability to maintain reserves.

Moody' rates Indiana at Aa1 and Standard & Poor's rates it AAA; both have stable outlooks.

In Michigan, Bean said the Senate Fiscal Agency expects federal funds to provide a welcome shot of relief for the state as it puts together its 2010 budget and tries to manage its way through falling revenues. He said the state is expected to receive $7 billion in direct funding under the federal stimulus program, and the money will free up around $2.3 billion over the next two years.

"We do have this other revenue source - even though it's temporary - from the federal stimulus package that we can use to mitigate the loss of revenue we're getting from the disruption in the economy caused by the domestic automobile industry contracting," Bean said. "That doesn't mean that there won't have to be some very serious decisions made, but we'll now have more time to make those decisions."

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