Ripple Effects

From the NYT:

“Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening.

The sudden loss of credit, one of the ripple effects of the current financial turmoil, is affecting local governments in all parts of the country, rich and poor alike. Washington has shelved a planned bond offering to pay for terminal expansion and parking garages already under construction at Dulles and Reagan National Airports. Billings, Mont., is struggling to come up with $70 million more for a new emergency room. And Maine has been unable to raise $50 million for highway repairs.

“We really are in terra incognita here,†said Robert O. Lenna, executive director of the Maine Municipal Bond Bank, which helps that state’s towns and school districts raise money. He said he had worked in public finance for 34 years and had never before seen credit evaporate so completely.

Maine had already begun some of its road work when the bond markets stopped functioning, so now it is scrambling for bank loans to keep the dump trucks rolling. If money does not start flowing soon, Mr. Lenna said, Maine will have to cancel some of its road and bridge projects.”

Meanwhile, in Massachusetts:

“The most immediate need is $1.3 billion in quarterly payments that are scheduled to go out to cities and towns next week. Municipalities use the money to fund everything from teachers to trash collections.

Cahill said it appears likely that cities and towns will get their local aid payments – preventing layoffs and cutbacks in municipal budgets – but he said he has had to jump through a complex set of financial hoops to make it work. Cahill and other state officials characterize the borrowing maneuvers as common ways to make payments before all of the tax revenue comes in. But the state usually is not this strapped this early and facing interest payments this high.

The state yesterday borrowed $51 million in a short-term loan from investors, at an interest rate of 6 percent for a practice that normally charges 2 percent interest. In order to make local aid payments, the state still needs to borrow up to $349 million in similar loans before next week. State officials fear a similarly high interest rate.

“This stuff is unheard of,” Cahill said. “It’s like going to the loan shark for money.””

Heading into a recession is the worst time to cut back on projects like these, which provide people with good jobs, and can work to keep the economy going. The Federal Government can run a deficit, but most states cannot. So just at the time when people need these jobs the most, they end up having to cut back. It makes problems with the economy worse, when keeping these projects going would help to make it better.