City fiscal conditions from Main Street to Wall Street.

• Author: Hoene, Chris

The authors, who wrote the National League of Cities' City Fiscal Conditions in 2008, adapted the report for Government Finance Review. The annual survey report was released in September 2008.

The recent financial turmoil on Wall Street had well-publicized effects on Main Street. But the current and pending fiscal challenges facing cities, other local governments, and states will also affect Wall Street and the health of the U.S. economy Combined, the state and local government sector comprises 13 percent of the U.S. gross domestic product, according to the U.S. Bureau of Economic Analysis. When local and state governments are hurting, the nation is hurting. Three sets of concerns are worth highlighting: the effects on cities of problems in credit and capital markets, stemming from the global financial crisis; the fiscal conditions in cities, in relation to the broader economic downturn; and the fiscal conditions of state governments, and the implications for resulting state aid to cities.

THE FINANCIAL CRISIS AND CREDIT

One set of challenges facing many local and state governments is the lack of credit that is a result of the global financial crisis. The inability or unwillingness of financial institutions to lend money is constraining public- and private-sector borrowing in the shorter and longer term.

In the very near term, some local and state governments have an immediate need for short-term access to credit. Local and state governments need access to credit to pay the men and women who police our streets, teach our children, and collect our trash. Very often, state and local governments depend on short-term credit to float between revenue streams. Most local revenues are collected at different intervals throughout the year, and cities often access short-term credit, through banks, that is secured by the promise of these future revenue collections. If that credit is suddenly limited, or the costs associated with the borrowing increase dramatically as a result of interest rate increases (the interest rate on variable-rate bonds, for instance, climbed from 1.79 percent on September 10, 2008, to 7.96 percent on Sept. 24), it is then more difficult for local and state governments to pay their bills. Early warning signs on this front emerged at the state level when the governors of California and Massachusetts requested federal assistance in the event that their state treasuries would be unable to find credit to cover their short-term obligations. Nevertheless, there are signs that the short-term borrowing challenges may subside in the coming months.

Yet, in the longer term, there is larger concern that financial market turmoil is curtailing the ability of cities and states to borrow money for ready-to-go capital projects like roads and bridges. The struggles in the credit...