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Reinventing Michigan

Reinventing Michigan

5/1/2014

STATE LEGISLATURES MAGAZINE | MAY 2014

As the nation began descending into economic crisis in early 2008, no state was falling faster or further than Michigan.

By Suzanne Weiss

For Michigan, the once-mighty industrial giant—home of the Big 3 automakers, and a leading producer of everything from kitchen appliances to machinery to sporting goods—the Great Recession accelerated a downward spiral that had been under way for nearly a decade.

Suddenly, all of the problems that Michigan was coping with—numerous plant closings, rising unemployment, declining population, shrinking per-capita income, widening state budget deficits and dangerously high unfunded liabilities—got a whole lot worse. 

The state had already lost nearly 450,000 jobs since 2000, and once the national recession hit, that number nearly doubled to a staggering 862,000. By 2009, the unemployment rate stood at 14 percent, the highest in the nation; per-capita income had dropped to 87 percent of the national average; and Michigan was the only state to have experienced several consecutive years of net population loss.
 “We were in a very deep hole, no question about it,” says Representative Al Pscholka (R), House majority leader. 

The extent to which the state has managed to pull itself out of that hole over the past four years— “The Michigan Comeback,” as political and business leaders like to call it—has drawn considerable attention.

Rebounding

The state’s manufacturing sector has rebounded, thanks largely to the federal bailout of General Motors and Chrysler and the remarkable turnaround of Ford Motor Co. Beginning in 2011, Michigan’s economy has ranked among the fastest-growing in the nation from year to year, according to the U.S. Bureau of Economic Analysis. 

The unemployment rate has steadily decreased, going as low as 8.4 percent in spring 2013 and currently holding at just under 9 percent. Per-capita income is now growing at 3.5 percent, close to the national average, and Michigan has experienced modest population increases each of the past three years. Housing sales and building permits are up, and agricultural exports have increased 16 percent since 2012. The state’s credit rating was upgraded to AA last year, the first time it has rated above AA- since 2007. 

Pscholka says that much of the credit for the state’s economic recovery goes to tax restructuring and other initiatives set in motion in 2011, when Republicans captured the governorship and both houses of the Legislature.
 
“We’ve set Michigan on an upward trajectory,” says Senate Majority Leader Randy Richardville (R). “We’ve emphasized making the business climate better here in Michigan, starting with the elimination of a corporate tax that was a major impediment to economic growth.”

Not Out of the Woods

But those claims are hotly contested by Democratic legislators and others who say that, first, Michigan isn’t out of the woods yet. And, second, that the Republican initiatives don’t provide the fundamentals for a stronger economy. 

 “Yes, we’ve seen some economic growth and a reduction in unemployment, but that’s really a reflection of the national recovery,” says Representative Tim Greimel (D), House minority leader. “And most of the job growth has been in the auto industry, which was the result of the federal bailout and has nothing to do with Republican policies.” 

Greimel and others point out that many of the new jobs being created in Michigan—at the rate of about 65,000 a year—pay lower wages than jobs lost during the 2000s. “And the fact is that our unemployment rate remains third-highest in the nation, which is what it was when the Republicans took over,” he says.

Charles Ballard, a Michigan State University economics professor who conducts the annual State of the State Survey, agrees with Greimel about the impact of the federal bailout. “It is, by far, the most important policy of the last five years. Without it, an additional one million jobs would have been lost here in Michigan and in Ohio, and we would have been dealing not with a recession but something more like the Great Depression. It would have been a catastrophe.”

Partisan Battles

Greimel characterizes the Republican tax restructuring initiatives approved in the 2011 and 2012 sessions as “a retread of trickle-down economics.” Democrats supported “overall reduction of business tax liability— we have no problem with that,” he says. “But to pay for it by taking money out of the pockets of middle-class families, seniors and the working poor is simply unjust.”

The centerpiece of the Republican plan was the replacement of the complex and deeply unpopular Michigan Business Tax with a flat 6 percent corporate income tax, which is expected to reduce corporations’ tax liability by roughly $1.8 billion a year. 

The Legislature gave Michigan businesses an additional $590 million annual tax break by approving a 10-year phase-out of the state’s personal property tax, which is levied against industrial and commercial equipment and constitutes a major source of revenue for cities with a large industrial base. 

At the same time, Republicans pushed through a package of tax-code changes that Greimel and others say will result in roughly half of all Michiganders paying more in individual income taxes.  

They include imposing a new tax on the pensions of retired public employees; reducing the number of households that qualify for proper-ty-tax rebates; eliminating the annual $600 per-child tax deduction and tax credits for charitable donations; and reducing the state Earned Income Tax Credit from 20 percent to 6 percent of the federal credit. 

House Speaker Jase Bolger (R) disputes claims that the tax code changes will adversely affect taxpayers, saying that the changes were aimed primarily at “eliminating special deals”—for example, exempting retired public employees from the pension tax to which all other retirees have long been subject to. Moreover, many of the changes, Bolger says, will be offset by two other recently approved measures: reducing the state income tax rate from 4.35 percent to 4.25 percent and increasing the personal exemption from $3,700 to $3,950 per individual. 

Labor Pains

Over the past three years, the Michigan Legislature has also approved a variety of bills that collectively constitute what Senate Democratic Leader Gretchen Whitmer calls “a ghastly anti-worker, anti-labor agenda.”

Among them are measures eliminating prevailing-wage requirements that apply to construction workers on publicly funded projects; adding restrictions on police and firefighter arbitration rights; prohibiting paid time off for union officials wh
en conducting union business; and removing a requirement that employers notify striking unions when they are hiring replacement workers.
By far the most controversial of these initiatives was a bill approved in December 2012 that made Michigan—the cradle of the U.S. labor movement—the 24th right-to-work state. The legislation limits the extent to which established unions can require employees’ membership or payment of union dues, either before or after hiring. The right-to-work bill was pushed by Republican leaders as a way of making Michigan more competitive in terms of labor costs. 

Passage of the measure sparked several days of protest rallies inside and outside the state Capitol, and angry denunciations from Dem-ocratic leaders.

“No matter how they try to spin it, right-to-work is solely about taking away the strength of workers as they collectively bargain for a decent wage, better working conditions and improved benefits,” Whitmer said in a news conference after Governor Rick Snyder signed the bill. “It’s anti-worker, anti-family and, the way they passed it—at the 11th hour, under the cover of night, in a lame-duck session—simply anti-American.”

Speaker Bolger disagrees, saying that “unions will remain free to make their case to workers, but they will no longer be able to take workers for granted. Unions will have to be more accountable.” 

As for public opinion on the issue, Michigan residents appear to be about evenly divided over whether the right-to-work law will wind up helping or harming the state’s economy. The most recent poll, conducted in spring 2013 by Michigan State University, showed that 43 percent of those surveyed thought the law will benefit the economy, and 41 percent thought it would not—a statistical tie.

“The only evidence I have is anecdotal, but I can tell you that I have never been approached publicly about any issue more than right-to-work,” Bolger says. “And by far the majority of people I’ve talked to, both before and since the law was passed, have said they favor it.” 

In a recent development, the Michigan Supreme Court has agreed to hear arguments about whether the right-to-work law applies to 34,000 state civil service workers who belong to unions. A lower-court decision in mid-2013 went against those workers, who contended the law is trumped by a constitutional provision empowering only the Michigan Civil Service Commission to set work rules for state employees.

Looking back over the past several years, Whitmer says the level of partisan conflict in the Legislature has been troublingly  high. “Despite Republicans’ promise to allow good legislation to be voted on regardless of which party it came from, only 8 percent of the nearly 1,000 bills passed in 2011 and 2012 came from my Democratic colleagues,” she says.

But Greimel, Pscholka and others point to a number of issues on which Republican and Democratic legislators have worked together productively.

They include the expansion of the state’s Medicaid program in 2013 to include an additional 470,000 low-income residents, the adoption of Common Core standards for K-12 schools and increased investment in early childhood education.

“Despite our differences, we’ve accomplished a lot since 2011,” Pscholka says. “We’ve created a simpler, fairer tax system. We’ve reduced our unfunded liabilities by $20 billion, and rebuilt our rainy-day fund, which is now at $505 million. The Legislature has enacted a balanced budget ahead of deadline, for three years running. So we’ve put our house in order, and that’s something to be proud of.” 

Investment Strategy

As Michigan’s fiscal difficulties have eased, political and business leaders have begun calling for closer attention to education, transportation and other sectors that have been weakened by years of declining state support.
 
In the view of Paul Hillegonds, a widely respected public official who served 18 years in the Michigan House, four as speaker, the state’s economic comeback is real and it hasn’t stalled of late, as some assert. But Michigan still faces a daunting array of challenges that state leaders have yet to address, he says.

“We need to have a sound investment strategy, and we need to fix our antiquated tax structure, which doesn’t support regional and local growth,” says Hillegonds, who currently is chairman of the newly created Regional Transit Authority. 

Over the past decade, the state’s revenue-sharing payments to Michigan cities and towns have been cut by more than $6 billion, a decrease of roughly 30 percent. And local governments’ ability to maintain services and undertake new projects is further constrained by two constitutional provisions, Hillegonds says. One prohibits them from levying a sales tax, and the other caps the growth rate of property tax assessments. 

Currently, six financially stressed Michigan cities, including Detroit, have been taken over by state-appointed emergency managers, and several others are under review for possible state intervention. Detroit’s financial crisis is particularly worrisome, says Greimel, because it “threatens all of southeast Michigan.” 

Even more important to building a strong foundation for future economic growth, says Hillegonds, is the need to increase funding for in-frastructure improvements, and K-12 and higher education. 

The issue of increased funding for roads, bridges and other transportation projects is thorny, Pscholka says. While many business and political leaders, including the governor, are pushing for an increase, Pscholka says legislators are reluctant to pay for it by raising the state’s gas tax or vehicle registration fees.

He notes that a number of legislators instead favor using part of the surplus to give Michigan residents a one-time income tax rebate, although Pscholka isn’t keen on that idea. The rebate “would probably amount to something like $60 or $70 a person, which isn’t even enough to replace the tire they blow hitting a pothole on one of those bad roads out there,” he says.

Greimel doesn’t think the rebate proposal will gain traction, “but I have to say that the cynic in me thinks that the Republicans might succeed in sending a rebate check out just in time for the elections this fall.”

The state began 2014 with a modest budget surplus, some of which may be tapped to fund infrastructure projects, Pscholka says. “We really need to do something in that area, and I think we will.”

Greimel and other Democratic leaders praise an initiative—led by Governor Snyder, and approved by the Legislature last year—to invest $120 million in preschool programs for disadvantaged 4-year-olds. 

On the other hand, Greimel says, the state has yet to make up for major cuts in its higher education budget—15 percent in 2011 alone—and it has decreased the per-pupil foundation allowance for K-12 schools by several hundred dollars a year. 

“What we’ve seen is a systematic disinvestment in education, which compromises our ability to maintain a strong workforce,” Greimel says.

But Pscholka points out that higher-education appropriations increased by 3.1 percent last year, and likely will be boosted again during the 2014 session. “We are strategically reinvesting in higher education, tying it to tuition restraints and performance funding,” he says.

“I think we are on the right track.”

Freelance writer Suzanne Weiss is a frequent contributor to State Legislatures magazine.

Detroit Rising

How did one of America’s largest and most prosperous cities—legendary for its grit, energy and ingenuity—come to stand as the ultimate symbol of urban decay and dysfunction?

When Detroit, crushed by more than $18 billion in debt to 100,000 creditors, was declared bankrupt by a federal court judge last December, it was the culmination of a decades-long decline driven by potent economic, social and political forces.  

Contributing factors range from local to global: from suburbanization, “white flight” and other demographic trends, to political corruption and mismanagement, to outsourcing, industrial restructuring and intensifying competition from foreign manufacturers, particularly in the automotive sector.  

In 1950, Detroit was the nation’s fifth most populous city (after only New York, Chicago, Philadelphia and Los Angeles) and boasted the highest per-capita income in the country. 
 
Like many industrial cities in the Midwest and Northeast, Detroit’s rapid growth during and after World War II was fueled by the migration of millions of African-Americans from Southern states, coupled with the key role its manufacturing plants played in producing planes, tanks, guns and other military equipment. And until the late 1970s, Detroit had another huge advantage, notes Michigan State University economics professor Charles Ballard—the lack of foreign competition in the automobile industry.“ In a very profitable industry, we had the playing field to ourselves,” Ballard says.

But since then, it’s been mostly downhill for Detroit.  

From the mid-1950s to 2008, the city’s major automakers—GM, Ford and Chrysler—collectively lost 40 percentage points of market share in the United States. The upheaval resulted in the loss of hundreds of thousands of high-paying union jobs.  

During those same years, Detroit’s population fell from a peak of 1.8 million to 700,000—a staggering 61 percent decline. The population now is predominantly African-American (82 percent) and overwhelmingly poor. One in every three Detroit residents—and more than half of those under the age of 18—live in poverty. The city’s unemployment rate stands at about 16 percent, more than twice the national average. 
Today, large swaths of the 139-square-mile city are blighted by vacant lots and the hulks of abandoned homes, churches, schools, shops, theaters and other buildings (some 78,000 structures, according to a recent count). For a number of years, Detroit has ranked as one of the nation’s most dangerous cities. While its homicide rate has fallen somewhat in the past couple of years, the 333 murders that occurred in 2013 were close to a 40-year high.  

Municipal services have been crippled by the city’s budget woes. More than half of Detroit’s public parks have been closed. Forty percent of the city’s streetlights aren’t in working order. The average police response time is 58 minutes, more than five times the national average.

In the face of these challenges, Detroit’s motto—adopted in the wake of a fire that nearly leveled the city in 1805—seems particularly apt: “Speramus meliora; resurget cineribus,” which translates roughly as “We hope for better things; we will arise from the ashes.”

Bottoming out in bankruptcy seems to have had a strikingly salutary effect on Detroit. “Of course, bankruptcy isn’t something you want to see happen. But at the end of the day, we’re finally dealing with problems that have been weighing the city down for decades,” says David Blaszkiewicz, president of Invest Detroit and CEO of the Downtown Detroit Partnership.

The city is under new leadership. Mike Duggan, a former businessman, prosecutor and county executive elected mayor last fall, is working closely with Detroit’s state-appointed “emergency manager” on a plan to get the city out from under its crushing debts and begin rebuilding basic services. 

With Duggan’s election, “the darkest days of corruption in city government appear to be a thing of the past,” says Ballard. “And once the bankruptcy is complete, the city may have a fresh start.” 

Blaszkiewicz points to the remarkable level and scope of activity in Detroit’s 7.2-square-mile downtown/midtown core, where 15,000 new jobs have been created in the past 18 months and occupancy rates in new and renovated apartment buildings have risen to above 95 percent. More than 250 new restaurants and shops have sprung up, and construction of 3.3-mile streetcar line along Woodward Avenue is under way. 
 
One outstanding example of investment in downtown Detroit is the effort of Quicken Loans CEO Dan Gilbert to create a seedbed for economic development by buying more than 40 buildings—9 million square feet of commercial space—and filling them up with technolo-gy-based software and design companies. Gilbert’s efforts “have advanced the re-densification of Detroit’s core by 10 years,” says Blaszkiewicz. 

As for other areas of the city, a 50-year blueprint called Detroit Future City has been developed to guide change, recovery and innovation in neighborhoods, supported by the coordinated efforts of the corporate, government and nonprofit sectors.   

For the first time in decades, Detroiters have reason to believe that the city “really is on its way back,” says Ned Staebler, vice president for economic development at Detroit’s Wayne State University. 

“For starters, this time there is no one big thing that we’re banking on, like the building of Renaissance Center or Comerica Park,” Staebler says. “Rather, it’s the aggregation of dozens of projects varying in size, scope, and ambition that is giving the city a vibrancy it hasn’t had in decades.”

Other positive developments include Whole Foods’ opening last summer of a $10 million, 21,000-square-foot market in midtown, its first store in the city of Detroit, and the completion of a new $72 million shopping center called Gateway Plaza in the north part of the city. 
Detroit will also get an economic shot in the arm when filming of “Batman vs. Superman,” starring Ben Affleck, begins this spring. It will be the largest movie production ever to be shot in Detroit. 

Staebler, who is a Detroit native, says he looks forward to the day when mentions of his hometown “aren’t followed by the words ‘bankruptcy’ or ‘crime’ or ‘urban decay.’”

More and more, he says, “the modern American city is being celebrated as the way forward, places where density and proximity lead to innovation, economic growth and a healthier environment. And it seems everybody in the country is rooting for ‘the D.’ ”

The New Michigan Capitalizes on Six Key Assets

The steady resurgence of the Big 3 automakers has been a major driver of Michigan’s economic recovery over the past several years, but a slowdown is on the near horizon.

No one is predicting anything as drastic as the auto industry’s near-collapse at the end of the last decade, which saw Ford Motor Co. mortgage virtually all its assets to stay in business, and General Motors Co. and Chrysler Group file for bankruptcy. 

But momentum appears to be slowing. U.S. auto sales are expected to rise only 2.6 percent this year and 1.9 percent next year, according to the University of Michigan. Both rates are far below the 7.6 percent increase in vehicle sales in 2013.

David Zin, an economist with the Michigan Senate Fiscal Agency, points to two converging trends that will have a direct impact on Michigan’s economic and job growth over the next several years.

First, vehicle sales levels are nearing the record highs experienced in the early and mid-2000s, and little growth is expected beyond re-placement demand. In addition, Zin said, the auto manufacturing sector will likely continue to exhibit strong productivity gains. 

“Today, the Big 3’s market share is stabilizing, they’ve done the downsizing they needed to do and they have narrowed the productivity gap with foreign automakers,” Zin said. 

Zin and others point out that Michigan remains the No. 1 state in the nation for vehicle research, development and production, and it is home to 47 of the top automotive suppliers.

Building on that strength is key to ensuring the state’s competitiveness and prosperity over the next decade and beyond, according to the Michigan Turnaround Plan, a proposal put forth in 2012 by Business Leaders for Michigan in conjunction with the global management firm McKinsey & Co. 

“We should aspire to make Michigan the world’s leader in R&D and manufacturing in areas like electric motors, powertrains, battery cells and cathode materials; lighter-weight materials that can be recycled; ‘connected vehicle’ technologies; safety innovations; and multi-modal transportation systems,” the plan says. 

A recent Federal Reserve Bank of Chicago study found that 22 percent of all auto jobs in Michigan in 2012 were in research and devel-opment, up from just 6 percent in 1970.

That percentage hike was partly due to the huge loss of assembly jobs in the state. But R&D jobs also nearly doubled from about 30,000 jobs in 1970 to 60,000 in 2012.

Today, nearly half of all auto jobs in the state are salaried positions. “At least by this measure, Michigan remains the nerve center and the creative engine of the U.S. auto industry, even as production jobs have dispersed,” the Federal Reserve study said.

In addition to the state’s pre-eminence in the automotive sector, the Michigan Turnaround Plan hones in on five other assets with the highest potential to generate jobs and strengthen the economy. They are: 

  • Engineering, production and manufacturing capacity. Michigan ranks No. 1 in the nation in engineers per capita and has a high concentration of technical talent. The report recommends branding and growing these competitive strengths “to develop an unrivaled reputation as the world’s Global Engineering Village.” 
  • Geographic advantages. Michigan has one of the largest U.S. air hubs to Asia, and it is a center link of the NAFTA (North American Free Trade Association) highway. The Port of Detroit is one of only two U.S. deepwater ports that can accommodate the largest container ships from the Atlantic, and it provides the Midwest’s closest freight route to Europe, the Middle East, South America and Africa. The report recommends investing in infrastructure projects that leverage these advantages to increase exports and attract direct foreign investment.
  • Higher education. Michigan ranks fourth in the nation for university- and industry-based innovations, and sixth in the nation in attracting federal research funding. The report recommends improving the quality, affordability and productivity of the state’s higher education system; strengthening university-business-entrepreneurial partnerships; expanding technical education programs; and increasing the enrollment of out-of-state and international students. 
  • Natural resources. Michigan agricultural, tourism and renewable energy sectors are strong and growing. The report recommends strategies focused on expanding leisure tourism, agricultural processing and exports, and the development of wind farms and other alternative energy technologies.
  • Health and medical expertise. Michigan turns out the eighth-highest number of university bio-science degrees in the nation. It has a growing bio-pharmaceutical industry and a unique combination of high-quality medical research facilities and an overcapacity of hospital acute-care facilities. The report recommends creating an incubation hub for bio-pharma start-ups; developing research, testing and medical laboratory services for the broader life science industry; and focusing on making Michigan a “destination of excellence for medical care of out-of-state and foreign patients, both in the high-end and lower-price markets.”
 

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