Some States To Ask Fed Government To Backstop Debt
States and smaller municipal lenders are feeling increasingly shut out of the debt markets. Buyers have been demanding higher interest rates, while issuers have balked at issuing debt at historically high spreads. This dislocation has nearly paralyzed this market where states and municipalities seek financing to run basic services and finance capital projects, from schools to road maintenance.
Last week, the Port Authority of New York and New Jersey had to delay a $300 million bond issue when no bidders showed up.Pennsylvania decided to halve a planned $600 million bond issue slated for Tuesday because of what it sees as unreasonable rates.
"You get to the point where it becomes so cost prohibitive to borrow that, even if there is access to the markets, you are shut out," said Rick Dreher, director of Pennsylvania's Bureau of Revenue Capital and Debt.
In addition to Pennsylvania, Illinois, Ohio, California and several other states have been working on a letter to send select congressmen and senators as well as the Treasury Department and the Federal Reserve asking for a program tied in part to the Troubled Asset Relief Program. The participation of other states including Virginia, Arizona, Rhode Island and Arkansas is still in question. Some of the others may be holding out for stimulus-package aid, or just aren't interested.
The states are in dire straights. Ohio's predicament illustrates problems facing states that, until several months ago, had at least been holding their own. Since September, the state has been forced to shave $2.6 billion in projected general fund revenue because of rapid deterioration in the economy. Now the state is looking at a $4.7 billion budget deficit over the next two years, and is expected to record its first-ever decline in overall wages and salaries.
The budget officers' earlier attempts were rebuffed.
"Very early on, when we had the actual credit crunch, we inquired with the Fed and Treasury, and they said they didn't have the authority," said Scott Pattison, executive director of the National Association of State Budget Officers. "They said you really have to go to Congress."
As reported Wednesday by Dow Jones Newswires, the Fed said it doesn't have much power to help states under law, and the Treasury insists it is doing its part by stabilizing financial markets as a whole.
"The reality is none of us expected the swirl of circumstances, the swirl of impacts that surrounded the bankruptcy of Lehman Brothers [Holdings Inc.]," said Ohio Budget Director J. Pari Sabety, who has worked on the draft letter.
The letter, still in draft form, is expected to address three issues. The states are seeking to avoid what some have described as "costly and erratic" municipal debt markets, with rules that would allow them to refund bonds issued at higher rates if interest rates eventually come down.
To help with short-term funding, they want a short-term liquidity backstop like the one that the Fed has created for the commercial-paper market, making the federal government the buyer of last resort.
In addition, the participating states are looking for the government to guarantee some debt for troubled issuers who are unable to get insurance since most insurers have lost their triple-A ratings. The insurers had been able to wrap lesser-known credits in their stellar ratings for a fee, lowering lending costs.
Municipal debt spreads, the difference between rates for municipal debt such as that issued by Pennsylvania and the rates for safe-as-cash U.S. Treasury bonds have risen significantly in the past several months as demand slackened. In a stunning reversal Wednesday, municipal debt became more expensive to protect in the credit default swap market than U.S. investment grade bonds for the first time since the creation of a municipal derivative index in May.
Dreher said Pennsylvania can't afford to issue as much debt as it would like at current rates, which he said are around 6%, compared to about 4% several months ago. Tuesday's bond issue was priced in a range of 5% for one-year maturities to 5.6% for 30-year.
The funds are for infrastructure projects, much like those on which President-elect Barack Obama has promised to lavish stimulus money when he enters office. But states, Dreher said, are feeling the pain right now.
"If we can't borrow, we can't pay contractors and that has a direct economic impact on our state," Dreher said.
-By Andrew Edwards, Dow Jones Newswires; 201-938-5973; Andrew.Edwards@dowjones.com
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Publié le 10 Décembre 2008 Copyright © 2008 Dowjones
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