Tags: bailout

Next in Line for Bailouts — Cities and States

Tuesday, 26 May 2009 03:46 PM

By Dan Weil

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Municipalities are the latest entities to beg the federal government for a bailout.

Large spending obligations and shrinking tax revenue are sending state and local budget deficits soaring, so the localities need money to fund their debt.

And thanks to the credit crisis, the municipal bond market isn’t as open to state and local governments as in the past.

California, where voters rejected government efforts to trim the deficit, has even asked for money from the Treasury’s Troubled Asset Relief Program (TARP), created to assist troubled banks.

Barney Frank, chairman of the House Financial Services Committee, is putting together a bill that would have the government back the $400 billion floating-rate muni bond market, which has locked up during the crisis, The New York Times reports.

The tax hit to states and municipalities stems from the failure of local businesses, the home foreclosure wave and widespread opposition to tax hikes.

So states and municipalities are heading to Washington with hats in hands. “The municipal sector has been asking for federal assistance since TARP was just a glimmer in Hank Paulson’s eye,” Matt Fabian, managing director at Municipal Market Advisors, tells The Times.

“But no one was pursuing it for months. Now, there has been a re-engagement in Washington.”

For muni bond investors, all this may represent a buying opportunity. “We think the municipal market is still attractive for long-term investors,” Harold Evensky, president of Evensky & Katz Wealth management, tells Moneynews.

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