Cities and States Looking to To Treasury for Help; Beware Munis

States and local governments are asking for a piece of the $700 billion Troubled Asset Relief Program funds as revenue drops. This will have consequences for the Muni market.

States and local governments are asking for a piece of the $700 billion Troubled Asset Relief Program funds as revenue drops.  Bloomberg reports that:

" Philadelphia, Atlanta and Phoenix are asking the U.S. Treasury Department for part of the $700 billion financial rescue package to help them finance construction projects and pay bills. They seek $50 billion on behalf of cities nationally to spend on infrastructure and loans lasting for as long as a year to aid cash flow."

The revenue stress felt by states and local governments doesn't come as a surprise.  Since real estate underpins much of the local government tax base, falling home values will result in falling revenue.  Sprinkle in higher borrowing costs, lower sales and consumption taxes and you have a recipe for government distress.

If you invest in Municipal bonds, be sure that you understand the financial condition of the municpality issuing the bond or the project that is being financed.  As we've seen over the past six months, no entity is immune to failure.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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