$5B boost for strapped states and cities

Bailed-out Citigroup making loans to struggling states and cities. Money can be used for infrastructure projects or to refinance into lower-cost debt.

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By Tami Luhby, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Cash-strapped cities and states will get a $5 billion boost from Citigroup.

The bank announced Tuesday that it will lend up to $5 billion to states and local governments, municipal agencies and universities and nonprofit hospitals to help finance construction and other capital projects. The money can fund the construction of schools, airports, roads, hospitals and other infrastructure projects.

Municipalities can also use the three-year loans to refinance existing variable-rate debt. Only those with AA rating can access the funds.

The initiative is part of four lending programs Citi unveiled in a report on how it's using government bailout funds. The Treasury Department has pumped $45 billion into the troubled institution. Citi now has $1.6 billion in outstanding loans to municipalities.

State and local governments, which depend on debt to fund capital projects, have suffered as the credit crisis pushed up interest rates to unaffordable levels. Many, such as California, had to put work on hold until they could once again access the bond markets.

Nearly one in two city finance officers reported difficulties in gaining access to credit and bond financing, according to a National League of Cities February report.

Rates have come down and financing is getting easier to obtain, but it's still not normal yet, said Sujit CanagaRetna, senior fiscal analyst at the Council of State Governments, a research group.

This credit crunch comes on top of a general fiscal crisis that's gripping state and local governments, which are struggling to balance their budgets amid declining tax revenues.

Citi's financing won't help public officials cover their daily operating expenses, but it will help jumpstart some projects that have idled and lower the pricetag of some borrowing, experts said.

While most municipalities favor issuing bonds over taking loans, they can put the money to work. Citi said it has made proposals to potential borrowers for more than half the funds. While the rates depend on many factors, the loans might carry a floating 1.5% rate, rather than a variable rate of up to 4%.

"Anything that will drive down the cost of capital is advantageous for state and local governments," said Bart Hildreth, director of the Kansas Public Finance Center.

Since $5 billion is not a lot of money to spread around for construction projects, most recipients will likely use it to refinance existing debt, he said. Some might use it to get infrastructure programs off the ground before issuing bonds to cover the bulk of the costs.

States and cities are already working to spend $27 billion on highway infrastructure, as well as billions more for airports, schools and public transit, as part of the $787 billion federal stimulus package.  To top of page

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