CHICAGO - As unlikely as it may seem, Michigan can provide something of a model for states facing revenue and job losses stemming from a deteriorating U.S. automobile industry, Moody's Investors Service analysts said yesterday after releasing a report on the likely impacts from the fallout.

Despite having lost half its auto-related blue collar jobs since 2000, Michigan is doing "remarkably well," said Moody's analyst Edith Behr. Deep spending cuts and tax increases allowed the state to end its 2008 fiscal year in September with a small surplus. And though it now faces a $500 million shortfall, that is less than many neighboring states, and officials quickly implemented a round of cuts to bring that shortfall down.

The key to Michigan's resilience has been its political willingness to cut spending and raise taxes, analysts say. Other states and local governments, especially in the Midwest, must be willing to do the same to prepare for falling revenues and job losses as the U.S. auto industry is restructured over the next 12 to 24 months. In the report, Moody's analysts detailed likely impacts of the floundering U.S. auto industry on a number of industries and state and local governments.

Analysts outlined three scenarios facing the Detroit's Big Three - freefall bankruptcy, considered the least likely scenario; a government bailout without near-term bankruptcy; and "prepackaged" bankruptcy coupled with government assistance, considered the most likely scenario. Prepackaged bankruptcy is a plan that has been worked out between the lenders and creditors before a bankruptcy filing is made in court.

For state and local governments, all three possibilities mean revenue and job losses. But the extent of the damage depends on the scenario. Under the grim prospect of freefall bankruptcy, states across the country would suffer budget shortfalls, and states like Michigan, Ohio, Indiana, Illinois, and Missouri would face intense shortfalls, according to Moody's analyst Ken Kurtz. The national unemployment rate could spike to 11%.

A government bailout without a near-term bankruptcy would have the least impact on states and cities, though they would continue to face some jobs and revenue losses and the risk remains that auto manufacturers or suppliers would end up having to file bankruptcy anyway, Moody's said.

If the industry moves into a prepackaged bankruptcy coupled with short-term government assistance, the impact would be largely contained to those states with a significant automobile presence. But those states would face significant revenue shortfalls, according to Kurtz. As automakers lobby Washington for emergency short-term funds to make it through early 2009, Midwestern states are revising revenue forecasts, he said.

"All of the states with big automobile concentrations are already projecting job losses in these sectors and are factoring that in [to their revenue forecasts]," Kurtz said. "Maybe the cutbacks that we're projecting in this prepackaged bankruptcy might be a little larger than what they're projecting, but not at an order of magnitude."

Of the three states most affected by auto industry problems, Indiana and Michigan are in relatively good shape, while Ohio faces major challenges, Behr said. Indiana, the source of 11% of the nation's auto-manufacturing gross domestic product, is doing fine, according to Behr. With about $1.2 billion in reserves, the state has moved to cut spending every time it has a shortfall.

"Ohio is the one that is under the most pressure at this time," she said. "It's not only the auto industry, but other issues. It's very highly rated [Aa1] and has an economy that has been bad for a protracted period of time. Depending on how it deals with these further pressures will determine how we react with rating action."

Moody's revised its outlook to negative from stable on Ohio's GOs in February 2007.

While states have large revenue sources and powers to raise taxes, local governments with auto manufacturing or supply plants are more vulnerable, Kurtz said.

Nationally, domestic manufacturing and suppliers represent greater than 3% of property valuation in 21 cities rated by Moody's. Of the top 10, nine are in Michigan. The highest concentration - 50.6% - is in Wayne, Mich. Outside Michigan, the highest concentration is 13.6% in Wentzville, Mo. In Detroit, the sector makes up 9.5% of taxable valuation. Already troubled with a slew of fiscal and political challenges, Detroit is expected to face a fresh set of pressures as the auto industry restructures over the next few years, Kurtz said .

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