Cities finding it hard to get money thanks to credit crisis

Investors normally jump at the chance of tax free municipal bonds, and cities normally don't have any trouble funding projects they want to do using those types of bonds. Well, the bond funds have dried up for many municipalities that have lower credit ratings, according to the Washington Post this morning. Chicago was forced to cancel a $960 million bond deal, Miami-Dade had to pull a $540 million bond deal for its airport and Washington, D.C. stopped the sale of $350 million in bonds for schools, parks and roads. The municipal bond market is a $2.5 trillion market that raises funds for buildings, ballparks and other key projects for cities and school systems.

Why is this happening? Because the bond insurers, which normally would back these bonds, are overextended due to the mortgage mess. They need to cover steep losses because of the massive mortgage write-downs and they don't have the capital to insure new projects.

Municipalities have to choose between paying higher rates because they can't get the secondary bond insurance or put off intended projects. If they pay higher interest rates, the taxpayers will have to foot the bill. So many cities with lower credit ratings have decided to pull back the bond offers and delay needed projects. They face a double whammy because tax revenues for many of these cities will also drop as their core source of funding -- property taxes -- fall as the value of homes is falling.