States, Cities Short On Cash As Bond Interest Rates Skyrocket
Frozen credit markets and tighter lending policies have made it more and more difficult for state and local governments not only to finance large-scale projects but also to take care of their day-to-day bills. Bond sales are the lifeblood of states, towns and counties because they provide a funding mechanism to finance new projects, make public improvements, build new schools and roads and pay the salaries of public employees. To pay for the projects, however, there must be investors to buy the bonds. And that’s not happening.
For weeks, the dismal state of the credit markets has reverberated loud and clear in the $2.66 trillion market for state and city bonds, where trading is now almost nonexistent and exorbitant interest rates the norm. Just last week, the governor of California - the country’s biggest state and the world’s sixth-biggest economy - put pen to paper to relay his concerns to Treasury Secretary Henry Paulson about the financial troubles engulfing the Golden State. The situation apparently is so bad that Gov. Arnold Schwarzenegger says he may need to solicit help from the federal government in the form of an emergency $7 billion loan in the coming months. (Schwarzenegger’s letter can be viewed at http://www.latimes.com/media/acrobat/2008-10/42718750.pdf).
California is far from alone in having to deal with bond issues stemming to the global credit crunch. In Springfield, Massachusetts, improvements for city streets were put on hold this week because raising money by floating municipal bonds had become prohibitively expensive. Only recently was Massachusetts itself able to sell $750 million in revenue bonds at decent interest rates, thus securing enough money to stay afloat until late November.
Other states such as Louisiana and New Mexico also are feeling the effects of the country’s financial markets. Both states postponed multimillion-dollar bond sales. Lewiston, Maine, met a similar fate on Oct. 13, when a $30 million scheduled municipal bond sale was put on the back burner. In San Francisco, the interest rate on about $780 million worth of variable-rate municipal bonds for airport improvements rose four-fold in just two weeks in September, taking interest costs from $275,000 a week to more than $1 million. And, in Hawaii, poor market conditions have forced it to delay the sale of more than $600 million worth of state bonds.
In each of these cases, the deadlock in the credit markets ultimately could spell a potential cash crisis for city and state governments. As reported Oct.3 in the New York Times, California’s inability to access short-term financing has left its cash reserves dangerously low - so low, in fact, that according to California’s state treasurer Bill Lockyear, they will be drained completely by the end of October. That means payments for state-financed services like teachers’ salaries, nursing homes and law and fire personnel all are at risk.
Since writing his first letter to Treasury Secretary Paulson, Governor Schwarzenegger now says he is “cautiously optimistic” that California may in, fact, no longer need the government’s financial help, and that recent actions by the U.S. Treasury Department to inject $250 billion of capital into the nation’s banks could be the catalyst necessary to get the credit markets moving once again.
Some economists would disagree. They contend the government’s plan to make equity investments into thousands of financial firms holds tremendous potential to backfire and that it could tempt some banks to hoard the money to help their own balance sheets or perhaps take unnecessary risks at the government’s - rather, taxpayers’ - expense.
The response from the stock markets to the government’s plan to free up lending has been less than positive, as well. One day after staging its largest rally since 1933, the Dow Jones Industrial Average fell once again on Oct. 14, ending the day at 9310.99. Another sign that the plan to revive U.S. financial markets is failing to inspire confidence: The London Interbank Offered Rate (LIBOR), which is what banks charge each other to borrow money, has barely moved.
Meanwhile, as state and local governments struggle to find solutions to their individual credit crises, many small business owners are inching closer to losing the battle altogether. A survey conducted by American Express OPEN Small Business Monitor in October reveals that nearly 20% of small business owners are at risk of going out of business because of current economic conditions, up from 9% in August.
Nearly two-thirds of those surveyed said the uncertainty of the economy has created a negative impact on their business operations, compared to 50% in August. As a result, 12% have made layoffs, nearly 80% say sales are decreasing and 51% say they’ve been forced to use personal resources in order to pay business expenses.
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