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November 13, 2008

 

DiNapoli: Credit Crunch Hits Local Government Borrowers

The ability of New York’s local governments to access the credit markets is being hampered by the effects of the global credit crunch, according to a special report State Comptroller Thomas P. DiNapoli released today. The report warns that impaired access to capital could cause higher debt service costs and potentially delay planned projects.

“The credit crunch is squeezing local governments,” DiNapoli said. “The disruption in the markets could have serious implications for school districts and local governments, which need access to short-term credit to manage cash flow and finance infrastructure projects. Higher borrowing costs are making an already volatile fiscal situation more challenging for school districts and local governments. These are tough times, and local governments face hard choices. In today’s environment, local officials have to reevaluate their cash flow needs and pay very close attention to movements in the market.”

The DiNapoli report notes that several market conditions – notably decreased demand from banks, money market funds, and institutional investors – have combined to constrain access to the municipal bond market. In September, the volume of new issues fell approximately 40 percent nationally when compared with September 2007.

The DiNapoli report shows that New York’s local governments outside New York City issued $5.1 billion of short-term debt in 2007, with school districts accounting for more than half of the borrowing. The balance of short-term volume was driven by counties (19 percent), towns (14 percent), cities (10 percent), villages (6 percent), and fire districts (1 percent.) Local governments typically issue bond, tax, or revenue anticipation notes – BANs, TANs and RANs, respectively – to finance capital projects and meet seasonal cash flow needs.

The report recommends local government officials should:

  • Review their cash flow needs and prepare for tightening market conditions;
  • Develop contingency plans in case market conditions warrant postponing a note sale;
  • Ensure that revenue remains adequate and that an alternative source of repayment is available to finance notes that cannot be rolled over; and,
  • Make certain that debt service costs are budgeted conservatively and that their budgets are modified to reflect any higher costs.

Click here for a copy of the report.


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