States, Cities Hit Hard by Credit Crisis, Falling Revenues

Even though the markets are looking for a boost from the expected passage of the bailout bill, which means they have faith in the US government’s ability to pay, that trust does not appear to extend to states and municipalities, who like companies, are having trouble raising money in the credit markets. Some government bodies have gone as far as cutting spending. California is at risk of missing its end-of-October payroll.

From Bloomberg:

U.S. states and municipalities from New York to California are facing deteriorating finances as investors shun their bonds in a credit market averse to all but the safest debt and a slowing economy erodes revenue.

New York Governor David Paterson called for a special legislative session to confront a budget deficit that has ballooned to $1.2 billion and Massachusetts Governor Deval Patrick ordered spending cuts as states and cities from Louisiana to Illinois canceled debt sales.

Tax-exempt borrowers this week sold less than 15 percent of a typical week’s sales, data compiled by Bloomberg show, and their costs to borrow long term soared to the highest in eight years. California Governor Arnold Schwarzenegger today warned that his and other states may need emergency loans if a $700 billion financial-rescue package isn’t passed by Congress soon…

“The state of California, the eighth-largest economy in the world, will not be able to meet payroll at the end of this month,” California Representative Zoe Lofgren, a Democrat, said during floor debate in the House…

States and cities have postponed more than $12 billion in note and bond deals since Lehman Brothers Holdings Inc. declared bankruptcy on Sept. 15, according to data compiled by Bloomberg. California may run out of cash at the end of the month if the state can’t sell billions in short-term debt, Treasurer Bill Lockyer, a Democrat, said Oct. 1…

New York’s budget office projects tax collections to fall $1.3 billion below what it expected in a July 30 report. The state, which relies on Wall Street workers and companies for 20 percent of its tax revenue, has been hit by losses and job cuts at banks and securities firms.

“I don’t think we have seen yet how serious the problem is,” New York’s Paterson, a Democrat, said.

Paterson called the Legislature back into session on Nov. 18, the second time this year lawmakers will return to address diminishing revenue.

He said he will seek $2 billion of spending cuts in November, not the $1.2 billion shortfall identified by the budget department. He said the deficit for next year will be larger than the $5.4 billion projected in August.

“We can’t wait for all the numbers to be there” before planning spending cuts, Paterson said, after meeting with legislative leaders in New York today.

In Massachusetts, Patrick, a Democrat, ordered a 7 percent spending reduction in the executive branch and asked legislative leaders to follow, citing a $223 million shortfall in tax collections. The state this week canceled the sale of commercial paper and withdrew $310 million from its budget reserves.

“The cash flow is enormously tight,” State Treasurer Timothy Cahill, a Democrat, said in a speech in Boston yesterday…

Louisiana postponed plans to sell $500 million of bonds this month and Chicago school officials delayed a similar offering. Erie County, New York, put off dozens of capital projects and a Florida low-interest loan program for counties stopped new financing after its short-term borrowing costs jumped from less than 1 percent to more than 7 percent…

“At least 13 states are cutting K-12 and early education programs and at least 19 states have proposed or implemented reduction to their state workforce,” T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York, said in a note to clients yesterday. “As the cuts are implemented later this year and in 2009, local economies throughout the U.S. will lose more and more momentum.”

Print Friendly, PDF & Email


  1. eh

    Saw an earlier story that reported California had asked the federal government for a $7b loan. However, with the deficit likely to set a record this year, not to mention the debt set to surpass $10t within days, I have no idea why Schwarzenegger believes they have money to loan out. Maybe he ought to ask the Chinese or the Arabs — they’re the ones with the money.

    You could not make this stuff up.

  2. maynardGKeynes

    If there is one group of entities I wouldn’t worry about, it’s the state governments and municipalities. These are the most politically connected people in the country, and rest assured, Congress is going to give them whatever money they need to meet their obligations, deserving or not. Moreover, it’s pretty obvious that the states are a primary transmission mechanism for the Keynesian stimulus — — the federal highway money, infrastructure projects, federal aid to education, welfare, Medicaid etc. etc. In the short to intermediate term, the Treasury can easily intervene directly to assist the frozen municipal issuance market, the source of California’s current short-term funding problem, by swapping short duration paper. Over the longer term, it would not surprise me to see the federal government try to grab the municipal bond insurance business vacated by Ambac and MBIA — — talk about a money maker for the Treasury.

  3. Anonymous

    “However, with the deficit likely to set a record this year, not to mention the debt set to surpass $10t within days, I have no idea why Schwarzenegger believes they have money to loan out.”

    I’m sure they can print it.

  4. Anonymous

    It used to be said by liberals that if we can put a man on the moon then certainly we can do blah,blah,blah. Now it will be said, for at least a couple of decades, “If we can give $700 billion to Wall Street then certainly we provide $$$ for blah, blah, blah.

  5. PrintFaster

    From Anonymous

    “However, with the deficit likely to set a record this year, not to mention the debt set to surpass $10t within days, I have no idea why Schwarzenegger believes they have money to loan out.”

    Ask the founder of the US Treasury, Alexander Hamilton. The US government finances were founded on Hamilton taking over states’ debt. He cemented federalism with his deft maneuver.

    The treasury does print money, everytime it prints tBills/notes/bonds. These are then monetized (this means turned into money, same as monetizing gold turns it into money) by the Fed.

  6. Richard Kline

    Gov. Schwartznegger: what an irresponsible grandstander. Got elected promising hugs and payouts to all—but no taxes. Borrowed $15B in a bond issue _at the height of the boom_ so as not to raise taxes. No signficant rainy day funds; no fiscal planning for the inevitable cyclical downturn. Revenue reform: bupkis. Turns up on Congress Sell-out Day pressuring the pols with a “Vote or we die” message. And then sticks his well-paid hand out and sez, “Now, wet my beak, too,” so he doesn’t have to raise taxes. Schmuck: that’s Austrian for self-dealing faker.

    —And on CA, no dice, no deal, no Payout. Let ’em reform their revenue and boost their intake first. Then, maybe we get Federal aid. Now, it’s just the users asking Daddy Feddy to pay for their fix. No. Freeze in the sun down there, folks, till yah clean up your lousy act. You want services?: Pay for ’em, just like everybody else. Out of your own pockets, for once.

Comments are closed.