With bonds in trouble, states seek federal help

In a development with important implications for local school budgets, California and other states scrambled on Oct. 7 to cope with bills coming due as they pressed Washington for assistance because the municipal bond markets remain largely closed to them, reports the New York Times. In Washington, White House officials said they were talking with state officials and reviewing the issue of aid. But despite the urgency of the problem, thorny legal issues have emerged. Though the federal government has taken extraordinary steps to lend money to corporations in the short-term markets and to provide more money to banks, officials have been stymied over how to assist local governments because of their status as issuers of tax-exempt bonds. A longstanding provision of the Internal Revenue Code bars the federal government from guaranteeing tax-exempt bonds. Officials are concerned that if the federal government helps states and others without Congressional action, it could put their tax exemption at risk. While officials seek a way around this obstacle, many local governments are running into severe cash squeezes. California has the largest and most pressing problem. The state has told the Treasury Department it might need an emergency loan of up to $7 billion to pay its day-to-day bills in the coming weeks, including those to school districts and municipal governments due on Oct. 29. Massachusetts has also reached out for help. "It’s critical," said Jeffrey L. Esser, executive director of the Government Finance Officers Association. "There are no buyers out there for the governments, to meet their short-term financing needs."

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