California dreaming: how to raise money

US states and municipalities from California to New York 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 $US1.2 billion ($1.5 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% 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. Congress passed a $US700 billion financial-market rescue plan today designed to unlock credit markets, urged on by California Governor Arnold Schwarzenegger's warning that his and other states may need emergency loans without it.

``Passage of the bill is a step is a step in the right direction, but we are not out of the woods yet,'' Schwarzenegger told reporters in San Diego. ``If we can't get that loan through the normal course, we will go to the federal government to ask for help, and we have already set that into motion.''

States and cities have postponed more than $US12 billion in note and bond deals since Lehman Brothers 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.

Capital markets

``If we get to the point where capital markets can't loan money to state and local governments, which are pretty much the safest investments out there, then we're in a lot of trouble,'' said Nicholas Johnson, director of state fiscal policy studies at the Center for Budget and Policy Priorities in Washington.

An index of yields of municipal securities due in 20 years rose to 5.36% this week, the highest since 2000, as investors flocked to the safety of short-term Treasuries. The yield on the two-year US note touched 1.62% this week, the lowest since Sept. 18.

``This credit crisis has the power to grind the US economy to a halt,'' Schwarzenegger, a Republican, wrote in a letter e-mailed to Treasury Secretary Henry Paulson last night in which he said the state may ask for a $US7 billion federal loan if it can't access the credit market.

Federal rescue

The federal rescue plan is supposed to restart lending by authorizing the government to buy troubled assets from financial institutions reeling from record home foreclosures.

``It's definitely helpful in terms of the confidence and creating liquidity,'' Tom Boylen, a managing director and trader with BMO Capital Markets in Chicago, said before the bill's passage. ``Once you have got the liquidity, people will seek the best value. The best value in the market for fixed income can be found in munis.''

Even with the bailout, local economies must grapple with the jobs and taxes lost because of bank failures and consolidations brought on by the collapse of the housing market.

In New York State, which relies on Wall Street workers and companies for 20% of revenue, tax collections are projected to fall $US1.3 billion below what was expected in July.

Governor Patterson and legislative leaders today agreed to cut spending to deal with a $US1.2 billion budget deficit. Paterson, a Democrat, called the Legislature back into session on Nov. 18, the second time this year lawmakers will return to Albany to address diminishing revenue. As recently as August, the budget was said to be in surplus.

Seriousness not apparent

``I don't think we have seen yet how serious the problem is,'' Paterson said.

In New York City, where 9% of revenue comes from Wall Street, Mayor Michael Bloomberg said today that taxes will ``probably'' need to rise to help close the city's $US2.3 billion budget gap for the next fiscal year. He ordered spending cut by 2.5% this year and 5% next year.

``We don't have enough money to balance the budget,'' he said during a weekly radio appearance. ``We're going to have to find additional revenue sources.''
Massachusetts Governor Patrick, a Democrat, yesterday ordered a 7% spending cut in the executive branch and asked legislative leaders to follow, citing a $US223 million shortfall in tax collections. The state this week canceled the sale of commercial paper and withdrew $US310 million from its budget reserves.

`Tight' cash flow

``The cash flow is enormously tight,'' State Treasurer Timothy Cahill, a Democrat, said in a speech in Boston yesterday.

Schwarzenegger wrote the California congressional delegation on Oct. 1 urging it to back the financial-industry rescue. Without it, he said, California would be unable to sell voter-approved bonds for highway, school, housing and water- construction projects and may have to delay salaries to teachers, lawyers and law-enforcement personnel.

``This plan is not a `bailout' for Wall Street,'' Schwarzenegger wrote to the legislators. ``The plan is about protecting Main Street.''
Passage of the financial-rescue package means Federal loans to states ``might not be necessary,'' House Financial Services Committee Chairman Barney Frank said in an interview today.

``California's situation is probably a little bit different in terms of the size,'' said Jeb Spaulding, Vermont's State Treasurer and the president-elect of the National Association of State Treasurers. ``I'm not aware of any other state that's looking for federal intervention.''

Postponed sale

Louisiana postponed plans to sell $US500 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% to more than 7%.

That means new projects may have to be canceled and services curtailed, analysts said.

``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 US will lose more and more momentum.''

Sewer bonds

Nowhere is the crunch being felt more than in Jefferson County, Alabama, where the credit crisis is threatening to force the biggest municipal bankruptcy since Orange County, California, collapsed because of bad investments in 1994.

The county, home to Birmingham, may have to seek protection from JPMorgan Chase & Co. and other creditors because interest rates on $US3 billion of bonds jumped as high as 10%.

Commissioner Shelia Smoot, a Democrat, has said the US government should come to its aid because it is bailing out Wall Street banks that arranged the floating-rate bond and derivative deals that may bring down the county.

``They at least owe us a conversation,'' she said.

Bloomberg News