Michigan's survival plan: Find new industries – fast.

Long dependent on auto manufacturing, the state and its cities are bracing for even deeper budget cuts.

In plenty of towns around Michigan, signs of the flagging economy are already visible.

The state, which has been in recession for the past five years, has seen a steady loss of jobs every year since 2000.

But now, Michigan is peering over the edge of its bleakest prospects in decades – and keeping a close eye on negotiations in Washington, where representatives of the Big Three US car companies are making their case to Congress this week for why they deserve federal bailouts.

More than any other state, it would feel the effects of a failure – or even a severe contraction – of one or more of those companies.

"The Detroit Three are 12 times as concentrated in the state of Michigan as in the rest of the country, so whatever happens to them is going to have roughly 12 times the impact on Michigan as on the rest of the country," says Don Grimes, an economist at the University of Michigan in Ann Arbor. The state, he acknowledges, has been trying to diversify its economy and has made some progress, "but it's overwhelmed by the auto industry."

Since Michigan's fortunes are still so closely linked to those of GM, Ford, and Chrysler, the state's citizens and officials are worried not just about job losses but about massive cuts to state and local budgets, dwindling police forces, shrinking social services, falling area home prices, and rising foreclosure rates.

In Warren, where GM's Tech Center employs about 20,000 workers and both GM and Chrysler have manufacturing plants, Mayor James Fouts is worried about what major plant closings and layoffs will mean for his town.

Elected one year ago on promises of reform and fiscal prudence, Mayor Fouts has already cut everything he saw as expendable: He drives his own car (a Chrysler) to get to work, eliminated his police protection, and trimmed fat from countless departments.

But his city's revenue depends heavily on taxes from GM and Chrysler and on property taxes from auto workers whose homes have been declining in value. Many of those workers are already facing foreclosure.

"Seventy percent of the budget is people, mostly police and fire," he says. "If we have to make major cutbacks it would be public safety [that would be affected].... If something were to happen to GM, it would be like a dagger through the heart of this city."

In nearby Pontiac, Mich., which has been hit hard by declines in the auto industry and is home to several auto plants, public safety has already been affected by dwindling budgets. The police now have some 50 officers, down from 150 two years ago, says Fred Timpner, director of the Michigan Association of Police. Homicides, break-ins, and thefts have been rising. Reflecting residents' already strained finances, voters recently turned down a tax increase proposal that would have allowed the city to hire more police.

"Mayors are terrified," says Jennifer Granholm, the state's Democratic governor, who has spent most of her six years in office dealing with the state's economic crisis. Governor Granholm faces similar issues with the state budget, where, she says, "We're long beyond just cutting waste."

Granholm joined other governors on Tuesday in Philadelphia where they pleaded their case to President-elect Obama for federal aid to help with jobs and strapped budgets.

The governor recognizes the problems with having her state so dependent on a single industry and has long worked to diversify Michigan's economy, with some success. She's focused on businesses that dovetail with the state's history and strengths, utilizing its machining, tool-and-die, and research and development industries. Granholm sees a future – and has already helped to attract new jobs – in industries like defense manufacturing, alternative energy, and nanotechnology.

At the same time, she's restructured the education system so that every student is on a college-preparatory track, with the goal of doubling the number of college graduates and shifting the state's old paradigm of young people going straight from high school to a factory. Still, the process is a slow one.

"Sometimes leadership is like that old Chinese proverb, planting trees under whose shade you'll never sit," says Granholm.

For now, she is preparing a "rapid response plan" to deal with inevitable layoffs and more economic woes. The state's "No Worker Left Behind" program, for instance, will pay for the tuition of unemployed workers who undergo training in industries like healthcare, where the state has vacancies.

The Big Three employed roughly 250,000 people nationally at the end of last year – many of those jobs in Michigan. But analysts say that layoffs have a particularly drastic effect because each of those jobs are directly connected to so many others in related industries. "Auto has the highest multiplier in manufacturing. A job in an assembly plant might have a multiplier of eight, nine, or 10," says David Cole, chairman of the Center for Automotive Research, referring to the number of jobs that might be lost for each layoff. "The economic impact of jobs lost is going to escalate pretty dramatically."

Most officials are feeling optimistic that the federal government will come through with aid to the car companies, but the plans the companies are proposing this week involve severe job cuts and factory closings. GM, which has said it needs a $4 billion infusion of cash by the end of this month to remain solvent, told Congress on Tuesday that it would cut 20 percent of its workforce, close nine factories, and try to renegotiate contracts with the United Auto Workers Union.