Any company facing disaster must do three things:

1) Cut costs to the bone in order to survive. 2) Stabilize its financial position to gain breathing room. 3) Invest heavily and systematically in whatever distinctive, proprietary and competitive assets it has. The goal has to be to drive sales up and gain market share.

Michigan is no different. We're facing financial disaster. And this state needs to right-size and stabilize itself fast -- while figuring out how to become more competitive in the future.

Let's look first at where we stand: State government faces a General Fund budget deficit that is now at least $686 million, and which must be resolved in less than six months.

But then a new fiscal year starts -- and the total projected shortfall for the 2007-2008 fiscal year that will begin October 1 is around $900 million. That's assuming the Single Business Tax that the legislature voted to repeal as of December 31 is fully replaced. That tax produces around $1.9 billion a year in money the state cannot afford to lose. Yet the legislature still isn't close to agreeing on any replacement tax, and the clock is ticking.

There's more; For years the state has been borrowing more than $1 billion every year to paper over the chronic General Fund deficit, a shortfall created by unrealistic economic assumptions.

Seven years ago, when we had a healthy "rainy day" fund, we were raking in nearly $140 million from interest income.

Today, the cupboard is bare, and we're spending $85 million a year in interest to finance the deficit. But the shell game is about over. Michigan is at its short-term borrowing limit, so we won't be able to finance our fiscal irresponsibility any longer, at least this year.

What all this means is that we need to launch - right now! - a far-reaching, broadly acceptable package of financial reforms modeled on what any company has to do in order to survive:

First, cut costs. Michigan is operating on a structure of government dating back to the 19th century that we simply cannot afford today. The buzz word is "restructure."

What that means is taking a hard look at how government is organized, what it does and how much it costs. For example:

If we imprisoned our criminals at the average rate of our neighboring states, we would save $500 million a year in our corrections budget. If we benchmarked what it costs our state government to provide services against other, better managed states, I'll bet we'd find at least that much in savings.

Thanks to the Home Rule Act, adopted in 1909, we have one of the most complex local government systems in the entire nation. We have 83 counties, 1,242 townships, 274 cities with less than 10,000 population, 259 villages and 553 school districts.

And each of those has its own overlapping and duplicating costs, bureaucracies and sources of funding. Do we really need those many school districts and townships? Of course we don't. We should require consolidation and cost sharing for any money for any money the locals get from the state.

Our teachers do, by and large, an okay job. But they're among the highest- paid in the country. And their pension and health care benefits are gold- plated, a legacy of the good old days when we were the world's automaker. Health care alone costs more than $1,200 per pupil, and best estimates are that one in every three dollars of School Aid funds will go to pensions and health care by 2018.

The total unfunded liability for state workers' and school district employees' pension and retiree health care benefits is $35 billion.

Workers in the private sector have had pension and health care benefits cut, so why shouldn't public employees share the pain?

Once we get serious about cutting costs, we then gain the moral legitimacy to bring the tax system kicking and screaming into the 21st century. In advocating a two percent sales tax on services, Gov. Granholm got the sequence wrong. She should have started with cutting government costs and only then looked to raise revenue.

Many people - including, very privately, many members of the legislature - believe we cannot simply cut our way to prosperity.

They expect that taxes are going to have to be raised. But it is not simply a question of turning a tap. It will take the Department of Treasury months to work out how to administer and collect whatever tax system the legislature passes and the governor signs.

Lansing, which will needs that money as soon as possible, needs to realize that time is rapidly running out.

If we fix the tax system, we have a chance to stabilize our financial position by curing - once and for all - the chronic, structural billion-dollar annual deficit in the General Fund. For years, the legislature and governor have papered over this deficit by a combination of one-time fixes, accounting gimmicks and midyear budget cuts. Left unresolved, this chronic budget deficit will result in a "fiscal train wreck," according to Tom Clay, the highly respected and semi-retired research director of the Citizens Research Council.

If we stabilize our financial position, we can generate the funds required for a sustained investment program to beef up Michigan's durable, distinctive, competitive assets. Those include our colleges and universities; the brains and skills of our people; our environment and the admirable quality of life it brings. Without such an investment program, we'll lose the competition with other states and enjoy chasing Alabama and Mississippi in the race to the bottom.

None of this is rocket science. Indeed, conversations I've had with thousands of Michiganders over the past year leads me to believe this program taps into the core of an emerging consensus of far-reaching reform principles for our state.

But a complete fix will be a complex and long-term matter, and nobody I've talked with thinks it can be enacted thoughtfully or competently by Lansing in the next few months.

What's much more likely in the short-term is that the governor and the legislature will cobble something together over the next month or two that just barely squeaks us past financial disaster.

But we can and should do some things right now, to startus on the longer term road for reform. Governor Granholm should re-summon the Emergency Financial Advisory Panel that seemed largely ignored after its far-seeing and intelligent report was released at the end of January. She might add to it a group of the state's most distinguished and powerful business leaders to add financial realism and just plain guts to the discussion.

The governor should also convene a panel of experts to examine the structure and costs of state and local government. One perfect vehicle for that already exists: The Center for Local, State and Urban Policy at the U of M's Ford School of Public Policy.

The hour is late. The full magnitude of the crisis is almost upon us. We're approaching Michigan's Defining Moment.

And we -- all of us -- better snap to it, before it's too late.

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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.