Michigan Gov. Granholm Warns of $600M Deficit; GM, Ford Woes Grow

CHICAGO - As General Motors Corp. and Ford Motor Co. reported grim third-quarter earnings Friday, Michigan Gov. Jennifer Granholm warned that the state, just a few weeks into its fiscal year, already could face a deficit reaching up to $600 million.

In a series of moves aimed at bolstering the ailing state economy, Granholm last week requested federal aid for both U.S. automakers and the state, and said she would order budget cuts by the end of the year and release $150 million from the state treasury for banks to make loans to businesses and consumers.

While the decline of the manufacturing industry has beset Michigan for years, its fiscal problems are likely to be prolonged by the national economic downturn and deteriorating auto industry, said state officials.

Regarding the current year's deficit that could reach up to $600 million, Granholm said she would wait to announce details of cuts in December, after University of Michigan economists report their annual economic forecast at the end of the month. She added that a federal stimulus plan could lessen future budget cuts.

"We know we're going to have to cut," Granholm said at a press conference last week. "We don't know how much."

State officials have already lowered their revenue expectations for fiscal 2008 twice this year. Fiscal analysts said last month that Michigan could face a 2009 deficit ranging from $300 million to $900 million due to the national recession, auto industry weakness, and growing job losses.

While warning that Michigan's economic problems are likely to continue through 2009, rating analysts generally praise the state for conservative fiscal management. In fact, some analysts said because Michigan has been struggling with a weak economy for at least a decade, it could be better prepared for dwindling revenues than other states.

"The degree of these [downward revenue] revisions, however, should not be as large as those seen in other states," wrote Standard & Poor's analyst Jim Wiemken in a recent report. "As the Michigan economy has remained subdued since the early part of the decade, many consumers and businesses have already been spending on a more restrained basis."

Under Granholm's state treasury loan plan, Michigan would buy $150 million in certificates of deposits from state banks and credit unions that would then use the money to provide loans. Up to 80% of the loans would be used for Michigan businesses. The money would come from an investment cash fund.

Also last week, the governor wrote letters to top Democrats in Congress seeking additional assistance for U.S. automakers and up to $260 million in federal aid for a variety of infrastructure projects. She said the federal aid would create more than 4,000 jobs across the state.

Meanwhile, the day after GM and Ford executives visited lawmakers seeking increased federal aid, their companies on Friday reported worse-than-expected third-quarter losses and liquidity levels.

GM reported a net loss of $2.5 billion in the third quarter and estimated its available cash at $16.2 billion after spending more than $6.9 billion during the quarter. Ford reported a net loss of $129 million or an adjusted loss of $2.75 billion for the quarter. Ford spent $7.7 billion during the quarter and now has $18.9 billion in its bank account, according to earnings releases.

President-elect Barack Obama, who tapped Granholm to be on his transition economic advisory team, named the ailing U.S. auto industry as among his top economic priorities at a press conference Friday. Obama said he would like to speed up release of $25 billion aid package approved earlier this year and would "work on additional policy options to help the automobile industry adjust."

Fitch Ratings rates Michigan's general obligation debt AA-minus with a negative outlook, Standard & Poor's rates it AA-minus with a stable outlook, and Moody's Investors Service assigns a Aa3 with a stable outlook.

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