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Despite mutual dislike, Michigan may need Detroit

Downtown Detroit, including the General Motors World Headquarters (2nd L), is pictured from a vacant lot along Woodward Avenue in Detroit, M
Downtown Detroit, including the General Motors World Headquarters (2nd L), is pictured from a vacant lot along Woodward Avenue in Detroit, M

By Nick Carey

DETROIT (Reuters) - Defending his decision to approve America's largest ever bankruptcy filing in Detroit last week, Rick Snyder returned to a point that he has been hitting on since his successful run for governor in 2010: for Michigan to thrive, Detroit must prosper.

"We're the comeback state in Michigan, but to be a great state we need...Detroit on the path to being a great city again," the Republican governor said at a press conference on Friday.

Snyder is one of a growing number of voices arguing that strong economic growth for the only U.S. state to lose population in the past decade cannot come from Detroit's thriving suburbs or smaller prosperous cities, and that the state has an interest in helping Detroit recover.

"There's no such thing as a growing regional economy that is not anchored by a growing, vibrant urban core," said Sandy Baruah, head of the Detroit Regional Chamber.

But when it comes to shelling out money to help, Snyder faces a tough sell with Republicans who feel the city has received too much statewide largesse already. The governor has ruled out a state bailout to cover the city's $18.5 billion in long-term debt but has said repeatedly he wants to help the city. In June Snyder announced a $100 million blight removal program using federal dollars that would benefit Detroit and four other cities in Michigan.

Conservatives say they are fed up with footing the bill for Detroit's mistakes and Detroit, a historically Democratic stronghold, should fix itself by cutting taxes and encouraging business.

"Snyder has won no friends on the left and his own political base thinks he's throwing good money after bad in Detroit," said Bill Ballenger, a longtime pundit and publisher of Inside Michigan Politics. "He's losing support in his own party."

URBAN CORE

Just as cities like Boston, which is a growth engine for Massachusetts with a high number of college graduates that help make it the No. 2 U.S. state for per capita income, Detroit was long the economic driver for Michigan. The Motor City was the cradle of the automotive industry, making Michigan the No. 9 state in terms of per capita income in 1950.

According to the Michigan Future Inc think tank, states like Massachusetts, New York, Illinois and California have leveraged an established industrial base in order to produce high per capita income by taking advantage of the density of well-educated people in their urban cores. Detroit, even in its withered state, has highways and density enough to become such a platform for Michigan's resurgence.

Last week, state-appointed emergency manager Kevyn Orr filed for Chapter 9 bankruptcy in order to tackle the city's $18.5 billion debt problem. The city's population fell 25 percent in the past decade to around 700,000, atrophied police and fire departments are ill-equipped to battle crime and arson, and basic infrastructure and city services desperately need repair.

Michigan is stagnant, too, falling to 35th place among states in per capita income in 2012. Its employment base has lost 350,000 manufacturing jobs since 2000.

The Detroit metropolitan area's gross domestic product accounts for nearly 46 percent of Michigan's GDP in 2011, the most recent year data is available.

The U.S. auto industry has rebounded after a 2009 government bailout, but it is not expected to create many more new jobs.

David Egner, executive director of the New Economy Initiative, a $100 million fund to aid entrepreneurs in Detroit, said the chances of a comeback all come down to one word. "Talent," he said. "If Detroit doesn't become a talent magnet, Michigan doesn't stand a prayer."

Companies can invest in Detroit at bargain rates, and in downtown, there have been some encouraging signs. Lou Glazer of think tank Michigan Future Inc notes that in late 2010, Google Inc paid more than $630 per square foot when it bought an office building in New York for $1.9 billion. Quicken Loans co-founder Dan Gilbert shelled out just $10 a foot for one downtown Detroit building a year later, part of the $1 billion he has invested in the past 18 months.

Detroit's boosters credit Snyder for timely investments that build on Gilbert's and other investment by philanthropic foundations and social entrepreneurs. He has helped establish lighting and transit authorities for Detroit, launched development of a new light rail line downtown and has backed a planned new bridge across the Windsor River to Canada to boost trade that will be mostly funded by the Canadian government.

Detroit is already the target for multiple state programs and tax provisions. Revenues from special levies add $164 million annually to Detroit revenues, a Snyder spokesman said.

Michigan treasury department data show that for fiscal year 2013 Detroit was slated to receive nearly $260 per person from the state, several times what other cities in the state receive. But even with revenue sharing and special levies, payments to Detroit total around $360 million for the current year, less than 1 percent of the state budget.

Convincing conservatives that Michigan should offer more help to Detroit can be a tall order.

"I am tired of tax money being sucked into that place to fix it," said Tina Dupont, an activist at the Tea Party of West Michigan. "But it's never fixed. We'd be better off without it."

Conservatives have opposed the bridge in particular as an example of government over-spending.

"Just as we have supported Governor Snyder on conservative issues where we agree with him, we will continue to oppose him energetically on issues such as tax increases, healthcare or the bridge to Canada where we disagree with him," said Scott Hagerstrom, Michigan state director of the conservative group Americans for Prosperity.

GAME CHANGER

After decades of mutual antipathy between solidly Democratic Detroit and Republican areas of the state, the city's boosters believe they have an ally in Snyder.

"Snyder knows he is not going to get any votes in Detroit regardless of what he does," said Brian Farkas, executive director of the Detroit Blight Authority, a non-profit dedicated to targeting blight, arguably one of the city's worst problems. "He's doing this because he knows it's the right thing to do."

Snyder's policies may have already dragged down his poll numbers. He faces a relative unknown in the 2014 gubernatorial race in former one-term Democratic Congressman Mark Schauer, but the two have been virtually tied in opinion polls.

Joe Lehman, president of conservative think-tank the Mackinac Center for Public Policy, argues more state aid is not the answer. "Detroit needs a game changer," such as elimination of the city income tax, he said.

Detroit emergency manager Orr has proposed lowering the city's income and property tax rates to levels competitive with surrounding communities.

If the state does let Detroit sink or swim without aid, it could have consequences for the rest of the state, according to a July 1 note from BlackRock analysts, written before the bankruptcy filing.

"Michigan's failure to intervene on Detroit's behalf could result in higher interest rates for other municipalities across the state, as well as potential downgrades as the rating agencies assess... the implications of the state's actions (or lack thereof)," they said.

(Editing by Claudia Parsons)

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