Financing Capital Plan May Cost A Bundle

1 comment February 15th, 2008

State officials haven’t approved a major capital construction plan since 1999, the first year of former Gov. George Ryan’s administration.

Whether they pull it off this year — amid continuing, maybe growing, acrimony in Springfield — is anybody’s guess. But even if they manage to clear their political obstacles, they may an emerging financial one. As Stateline.org reports, bonding — the type of borrowing the state must do to support a capital plan — is getting more expensive.

The problem isn’t with cities or states issuing the securities but with the insurance carriers that promise to pay interest and principal on municipal bonds in the unlikely event that states or local governments default. In recent years, the insurance carriers also began guaranteeing securities based on car loans, commercial real-estate deals, credit card debt and mortgages, including subprime loans that are now defaulting.

Here’s where it may hit home:

The bad loans are threatening to cause securities ratings firms such as Moody’s Investors Service, Fitch Ratings Ltd. and Standard & Poor’s to drop the credit rating of the insurers, which in turn would drop the credit rating of bonds they insure.

A ratings drop would drive up costs for state and local governments, forcing them to pay higher interest rates to borrow, or could keep investors away in a time of tight credit.

The Wall Street Journal has more, but you must be a subscriber to read the whole thing.