With credit skintight, governments are in a bind

— -- Despite federal passage of the financial bailout, state and local governments face budget shortfalls and continued tight credit.

Numerous states have warned of trouble ahead and it's unclear when credit might begin flowing again at acceptable prices, freeing up money for everything from payrolls to sewage system upgrades.

"We're in wait-and-see mode," says Amy Resnick, editor of trade publication The Bond Buyer.

The weak economy is an even bigger concern, says Sujit CanagaRetna, of The Council of State Governments, Southern Legislative Conference.

Twenty-nine states bridged budget shortfalls when they enacted budgets for fiscal 2009, which began July 1 for many. Since then, new gaps have opened up in at least 15 states, CanagaRetna says.

"Small states and big states are looking at a sea of red ink," he says. Some face spending cuts; others will trim services, delay maintenance and dip into rainy-day funds, he says. One difference now from 2001, when many state budgets also suffered, is the credit situation. Then, states borrowed big. That's not feasible now, he says.

"We're looking at a really difficult two fiscal years," says Scott Pattison, executive director of the National Association of State Budget Officers.

Local governments will suffer more than states, given less ability to raise revenue, says Matt Fong, former state treasurer of California. He, too, says services are likely to decline, as are benefits for state and local government workers. "The fat has been gone, and they're having to go now for the bone."

The dire credit situation notched up last week when California said it might need the federal government to buy $7 billion of debt the state was unable to sell. California faces running out of cash by month's end without the money.

Massachusetts was unable to raise $68 million to boost cash reserves. Florida hadn't been able to borrow money for almost three weeks, although it was not in dire need. Typically, Massachusetts would pay 2% to borrow. Last week, that was 4% to 6%, says spokeswoman Francy Ronayne.