· An Oct. 4 A-section article on the impact of the fiscal crisis on state and local governments incorrectly said that the Washington Metropolitan Airports Authority delayed a $2.2 billion bond sale. The authority delayed a $175 million bond sale.
Fiscal Crisis Is Hitting Some States Hard
Saturday, October 4, 2008
NEW YORK, Oct. 3 -- The U.S. financial crisis is hampering the ability of many state and local governments to borrow cash for short-term expenses and is threatening to delay long-term road, school and airport projects, including some in the Washington area.
The most dramatic impact of the Wall Street meltdown is in California, where Gov. Arnold Schwarzenegger (R) warned Treasury Secretary Henry M. Paulson Jr. this week that his state may need an emergency federal loan of $7 billion to meet its operating expenses.
"While some states may be able to absorb a delay or obtain high-interest financing through private banks, California is so large that our short-term cash flow needs exceed the entire budgets of some states," the governor wrote in a letter Thursday.
Many states routinely rely on short-term borrowing at this time of year to cover operating costs as they balance the ebb and flow of revenue. Most rely on tax receipts that generally do not arrive until spring.
"It's not just California," said Scott Pattison, executive director of the National Association of State Budget Officers. "People will tell you publicly that they are doing okay, but state financial officers are very concerned. At the moment, there's enough cash in the bank, but by November or December, if they still can't get access to the markets to borrow money to meet payroll or other expenses, then you might have 10 to 12 states that may not be able to cover their costs."
Experts were uncertain whether congressional passage of the $700 billion rescue plan would unclog credit channels next week.
"Now that the House has passed the legislation, we can hope the credit markets start working again," said Jeffrey Esser, executive director of the Government Finance Officers Association. "But I don't think anyone has any idea."
As state and local governments' access to short-term credit has been severely restricted, the bond market has also gone sour. Some governments have been forced to withdraw bond sales for long-term projects because no one is interested in buying them right now.
The Metropolitan Washington Airports Authority has postponed plans for a $2.2 billion bond sale to cover the costs of expanding the terminals at Dulles International and Reagan National airports. Maine put on hold a planned $50 million bond sale to finance 10 highway construction projects.
"There's probably about $100 billion of new infrastructure projects that haven't come to market," said Matt Fabian, senior analyst with Municipal Markets Advisors, a strategy and consulting firm specializing in municipal bonds. Unless the bond market recovers soon, he said, "projects will either be scaled back, postponed, or they'll have to rely more on government revenue."
Government officials and finance experts said the problems in the long-term bond market seem in many ways an irrational reaction among buyers, who normally flock to state and local bonds as a haven during times of economic uncertainty. Municipal bonds are considered extremely safe because governments rarely default.
A major problem for states and localities is that many of the large Wall Street investment houses that underwrote municipal bonds have collapsed, merged with others or fallen on hard times. "The muni industry has lost almost half of its large underwriters," Fabian said.