Brother, Can You Spare a Billion?

There’s a perfect financial storm brewing for states. First, the Washington Post reports that many states are being hit by the current financial crisis in much the same way that some big firms are. Some states, notably California and Massachusetts, have raised concerns about their ability to access tight credit markets for vital short-term borrowing. California may end up joining the ranks of big banks and Wall Street firms needing federal assistance to stay afloat. Paging, Hank Paulson.

Those same problematic credit markets are causing trouble for states and cities relying on bonds to finance key projects. The market for state and municipal bonds, traditionally a safe haven, is also under tremendous pressure and has seen its weakest year since 1999. Massachusetts has pulled a $750 million offering based on market turmoil and uncertain demand. Fewer buyers and higher costs are putting governments in a squeeze.

Lastly, the slow economy is continuing to yield lower than expected sales tax revenues while property taxes and real estate transaction fees are being hit by the collapse of the housing market. Just to top things off, gas tax revenues and other user fees are also falling with reduced driving and slower economic growth. The Center on Budget and Polity Priorities released a new report showing that 15 more states are facing a budget shortfall. The mid-fiscal year gap is estimated at nearly $6 billion and is almost certain to grow.

These trends may be temporary and based on current economic events, but they demonstrate the longer-term investment challenges that states and regions face with uncertain funding sources. Voters will have the chance to weigh-in on new funding measures in 22 states or communities this fall. That new investment may be needed now more than ever.