Our graph, from the Bond Buyer, the nation's leading newspaper of municipal finance, shows the sharp drop-off in money being lent to cities and states over the last three weeks.
To make matters worse, three of the firms that insure bonds, guaranteeing payment of municipal debt for investors, were downgraded by credit agencies last week. The city insures about $1.2 billion worth of debt through Financial Security Assurance, which is owned by a European company called Dexia that's facing its own financial crisis.
All this means that cities and states are having a hard time getting credit. California recently announced it might need a $9 billion loan from the feds if more funds aren't available soon. This is really scary when you consider how much credit cities and states rely on for daily operations.
For example: The sporadic way that tax revenue comes in means most cities have to use TRANS bonds (tax revenue anticipation bonds) to even out their cash flow. It's become difficult to generate any interest in these normally rock-solid investments.
For cities like ours, this credit squeeze puts a higher price on daily operations. Philadelphia borrows about $350 million a year against future tax revenue for routine expenses like payroll and buying supplies. Markets turmoil has made borrowing more expensive by $7 million since January.
According to city finance director Rob Dubow, the current turmoil is "unprecedented" and "the worst crisis in bond market history." Plans to borrow money for capital projects like the new Youth Study Center may be put on hold if the market doesn't improve soon. The city could also see increased costs for routine transactions like payroll.
