GM's possible bankruptcy weighs heavily on Detroit

CHICAGO Tue Nov 18, 2008 3:56pm EST

CHICAGO (Reuters) - Devastating.

That's the word being used to describe the impact on Michigan and its largest city, Detroit, should financially ailing automaker General Motors (GM.N) file for bankruptcy protection.

"It would be devastating," said Liz Boyd, spokeswoman for Gov. Jennifer Granholm, who is already anticipating the state's new budget will face a revenue shortfall.

"It would be a devastating blow," said Dana Johnson, chief economist at Comerica Bank (CMA.N), noting that the "relentless decline" in automotive employment over the last eight years was the main cause of the weakness in the Michigan economy.

Michigan's September seasonally adjusted unemployment rate hit 8.7 percent, up from 7.3 percent in September 2007, also topping the U.S. rate of 6.1 percent. Unemployment in the Detroit area that month stood at 8.5 percent, higher than the year-ago rate of 7.9 percent.

Johnson said the automotive industry accounts for 3.5 percent of the jobs in Michigan, compared with only 0.6 percent nationally.

"No state has more concentrated auto employment than Michigan." he said, adding there was probably an even higher concentration of those jobs in the Detroit area.

Detroit also hosts GM's headquarters in the downtown Renaissance Center, where a slew of white-collar workers are employed.

"The income tax is the issue," said Melanie Shaker, a municipal analyst at Fitch Ratings. "The potential loss of GM is a big vulnerability for the Detroit economy, which is already struggling."

A GM bankruptcy would be incorporated into the city's current "BBB" rating with a negative outlook in terms of the number of job cuts and their time frame, she said, as well as the resulting affect on Detroit's income tax, which is levied on both residents and nonresidents and on corporations.

Worsening budget problems loom for the governments.

Detroit's new Mayor Kenneth Cockrel pegged the city's current deficit at up to $126 million as of last month, but a report from the city council's fiscal analysis division points to an accumulated deficit of at least $132 million.

The city has also yet to finalize a lease transaction for the Windsor Tunnel or an alternative plan to raise $65 million for the current budget.

Granholm, whose state has been through a series of tough budgets, is presuming the need for executive order cuts in the spending plan for fiscal year 2009, which began October 1, according to Leslee Fritz, a state budget office spokeswoman.

She said a serious conversation about a GM bankruptcy would have been laughable several months ago.

"Now we have to have those conversations," Fritz added.

(Reporting by Karen Pierog; editing by Gary Crosse)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.