Gov. Jennifer Granholm summed up our situation perfectly in the first few lines of her State of the State speech:

"Tonight we are at a turning point - a decisive moment in Michigan's journey. The decisions we make in the years ahead will shape Michigan's future for decades to come."

Nobody can quarrel with that.

Though the governor was largely upbeat in her Feb. 6 speech, the facts on the ground are nothing short of scary.

The clearest and best outline of the real situation is sketched clearly in the authoritative report of her Emergency Financial Advisory Panel -- a group that included two governors, two university presidents, and some of the state's best leaders.

They produced a report that was downplayed by the major news media. Some of the findings:

* Fiscal crisis: The school funding shortfall that must be resolved this month comes to $377 million, $224 per pupil. By September, the state must plug a $500 million deficit in the General Fund. The state faces a potential shortfall of another $2.6 billion for the 2007-2008 fiscal year, assuming the legislature does not find a way to replace tax revenue from the now repealed Single Business Tax. All that adds up to $3.5 billion in state services and programs promised, but without money to pay for them.

* Economy:  Michigan has experienced six straight years of job losses, the longest since the Great Depression. We've lost 246,000 manufacturing jobs since 2000. That's one out of every four jobs that existed as recently as when Bill Clinton was President. The state's per capita income is now five per cent below the national average, the lowest point since 1933. And in the latest index of economic momentum, Michigan is dead last among all the states.

* State revenues: General Fund revenue is today lower in absolute dollars than in 1996 and down 15.8 per cent since the start of the economic downturn in 2000. During that same period, Michigan ran up cumulative budget shortfalls of nearly $10 billion. Since state budget deficits are illegal, it avoided them by using up reserves (including $1.4 billion in rainy day funds), tapping one-time resources ($5.4 billion) and cutting more than $3 billion in spending.

* Tax cuts: Since the passage of Proposal A in 1994, Michigan has enacted tax cuts that have reduced current state revenue by $3.2 billion per year, while local property taxes have been cut by $5.4 billion. According the U.S. Census Bureau, Michigan ranked 25th in the nation in state and local tax revenue in 2004 as a share of personal income. We've cut taxes since then, too.

We're facing a financial train wreck.

So -- what do we do? Ideologues and those in a state of advanced denial claim cutting spending alone will do it.

That's pure nonsense.  A $3.5 billion deficit represents one in seven dollars in the general fund and the School Aid Fund combined.

Cutting this much is enough to eliminate funding for all our universities and community colleges and all mental health services. That, or it would take $2,000 from per-pupil aid to public schools.

I've argued in the past that the state needs first to face the music and make serious, structural cuts in the way our government works and spends. We could cut the costs of our prisons by $500 million to get in step with our neighboring states.

We could encourage, or even require consolidation of some of the myriad of expensive local government units. We could push, or even require school districts to consolidate business office functions.

We could cut back on top-heavy health care and pension programs for public employees. We could repeal Public Act 312 which requires expensive binding arbitration in labor disputes for police and fire.

Then and only then does the state have legitimacy for changing our tax system, whether by extending the sales tax to services or making the income tax more graduated so the rich pay more.

We have to do both if we want to get to the core of our financial problems. We need to recognize that we are facing a fundamental choice about what kind of state Michigan is going to be.

Because if we don't act soon, we're going to plunge over the tipping point when most mobile, hopeful, educated citizens are simply going to give up and move elsewhere.

Trouble is, not many people understand or care about how bad a fix we're in. Pollster Ed Sarpolus of EPIC/MRA says his surveys show most people have heard the state is financial trouble, but 38 per cent said they have not felt any effect from the budget cuts already enacted, with another 22 per cent saying they felt "only a little."

Sarpolis told Gongwer News Service, "Unless you tell how bad things are, how will people know things are so bad?"

Quite right. Our new legislative leaders, House Speaker Andy Dillon (D- Redford) and Senate Majority Leader Mike Bishop (R-Rochester Hills) are smart, interested in doing the right thing, aware of the depth of the problem. They should put together and take part in town hall meetings around the state to put the depth of our crisis in terms that Joe Six Pack can easily understand.

They should urge the governor to join them, as well.  After all, who truly understands what the abstract number $3.5 billion really means?  Every Michigan citizen should have a chance to find out.  For only if our citizens understand the facts will there be public pressure to find common ground to resolve our financial train wreck and lay the foundation for a better Michigan.

(The text of the Emergency Financial Advisory Panel's report is available at www.publicsectorconsultants.com.)

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Phil Power is a longtime observer of politics, economics and education issues in Michigan. He would be pleased to hear from readers at ppower@hcnnet.com. Phil Power is president of the Center for Michigan. However, these opinions and others expressed in Phil Power's columns are individual opinions and do not in any way represent official policy positions of the Center for Michigan.