Crucial week awaits governor, Michigan

Granholm faces challenge to set new course for state's ailing economy with her Tuesday speech, budget plan.

Charlie Cain and Mark Hornbeck / Detroit News Lansing Bureau

LANSING -- This week marks a defining moment for Gov. Jennifer Granholm's administration.

Fresh off an impressive electoral victory for a second and final term and facing a budget awash in red ink, Granholm's State of the State message on Tuesday and budget proposal on Thursday will set the course for a mightily struggling state.

The spotlight is on the governor.

Former Republican Senate Majority Leader Dan DeGrow of Port Huron, a member of the advisory group that called for a major tax increase Friday, said Granholm has a unique opportunity to chart a new direction for Michigan.

"I hope she steps up to the plate and hits a home run," said DeGrow, superintendent of St. Clair Intermediate School District. "This will be her defining week. We'll know by Friday whether it's just business as usual."

Will Granholm call for a revolutionary reinvention of state government or another patchwork solution intended to get the state by for another year? Will she go after the traditional targets in bad times, cutting money for universities, schools and local governments?

Will she heed the suggestions of her Emergency Financial Advisory Panel and endorse higher taxes, likely the sales tax or income tax? How will she replace the expiring $1.9 billion Single Business Tax to spur economic development in a state wracked by a declining domestic auto industry?

"It will require uncommon courage and I think she will be bold," said former Democratic Gov. James Blanchard, who co-chaired the advisory group. "I don't think there are any alternatives than to be bold. We have met the day of reckoning."

In 1983, in his first term as governor, Blanchard jammed through a 38 percent income tax increase that led to the recall of two Democratic senators who voted for it. State leaders have shied away from general tax hikes ever since, except for a voter-approved sales tax increase in 1994 in exchange for a massive property tax cut.

If she follows the advice of her blue-ribbon committee on taxes, Granholm -- who was keeping her intentions close to the vest -- may call for expanding the sales tax to services, a graduated income tax or an increase in the 3.9 percent flat income tax rate -- or some combination. She's also expected to call for sweeping government reforms and efficiencies, possibly including tether programs for nonviolent felons and consolidation of local governments and schools.

She may even go so far as to rankle a key constituency group, unionized teachers, and propose a plan to curb teacher health care and pension costs that are eating local school budgets alive. If nothing is done, one in every $3 in school funds will go for health care and pensions by 2018, according to the advisory panel report.

It remains to be seen whether she'll also offer a scorched-earth alternative that cuts billions without raising taxes.

"I think she recognizes this is the sweet hour of prayer as far as her administration is concerned. But more importantly, it's the sweet hour of prayer as far as the state is concerned," said former U.S. Rep. Joe Schwarz, a Battle Creek Republican and a member of the emergency panel.

"If we aren't bold, the downward spiral will continue. There could be political fallout but if a person's first consideration is political fallout, they don't belong in public office."

Granholm used recent public appearances to lay out the depth of Michigan's fiscal crisis: A $3.5 billion budget shortfall over the next 18 months, a general fund that has shrunk to 1996 levels, a state work force reduced to 1973 numbers and continually shrinking market share for the Big 3 automakers that will exacerbate the problem through 2008.

If the state does nothing but cut, Granholm points out, the alternatives are grim: A $2,000 per student cut in school aid, elimination of college and mental health funding, cutting health care for the poor or letting everybody out of prison. There's no real chance of those cutbacks happening, but they do show the depth of the problem.

"I like a good tax cut," Granholm said. "But we have to do what's good for the state, too."

Whatever she proposes also may involve a statewide swing to court public support, similar to a tour she made in 2003 to sell her budget-balancing ideas.

"The governor will reach out so the people of the state know about her economic plan," said Liz Boyd, Granholm's spokeswoman. "Will she be talking to people directly to highlight that plan? Absolutely."

Boyd conceded that the pressure is on.

"In any year, there's a great deal of effort devoted to the State of the State and the budget. This year has been particularly demanding given the grim financial picture that we are facing," Boyd said. "The governor has made it clear that there are no easy answers."

Boyd added that the governor will tell the statewide audience Tuesday "of her economic plan to create jobs, diversify our economy and promote education."

Perhaps the budget advisory panel said it best in its report.

"The crisis demands a shared commitment to a better future for our state. It demands that leaders lead."

You can reach Mark Hornbeck at (313) 222-2470 or mhornbeck@detnews.com.