Actual finance blog

In the span of just 11 days, the Bush administration and lawmakers, seeing ominous warnings in the credit markets, rushed to create legislation to prevent a potential economic meltdown. Monday, the resulting $700 billion bailout package was defeated in a dramatic House vote.

The bill was designed to get financial institutions lending again by letting the U.S. Treasury buy up their troubled assets, most of which are tied to the housing market crash.

But after much contentious debate, and the addition of several taxpayer protections, the package was rejected by the House in a vote that was 228 to 205 against. The measure would have needed 218 votes for the House to pass. The next steps were not immediately clear but supporters were scrambling to put it up for another vote.

"I’m disappointed," said House Financial Services Chairman Barney Frank, D-Mass., talking to reporters after the vote. Noting that the Administration painted a dire picture of economic calamity if legislation didn’t pass, Frank said, "I’d like nothing better than to be proven wrong in the next few days. I was persuaded that we have a serious crisis and we’re threatened with a shutdown of the credit system when the economy is already weakened."

The credit markets had been seized up all day Monday, and after the vote, the Dow Jones Industrial Average started to plummet and ended the day down 778 points, the worst point drop ever. On a percentage basis, though, the Dow drop was only about 7%, far less than the 22% slide on Black Monday in 1987.

Here’s a quick breakdown of some of the bill’s key provisions:

Doling the money out: The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury’s use. Authority to use the money would expire on Dec. 31, 2009, unless Congress certifies a one-year extension.

Protecting taxpayers: The ultimate cost to the taxpayer is not expected to be near the amount the Treasury invests in the program. That’s because the government would buy assets that have underlying value.

If the Treasury pays fair market value - which investors have had a hard time determining - taxpayers stand a chance to break even or even make a profit if those assets throw off income or appreciate in value by the time the government sells them. If it overpays for the assets, the government could be left with a net loss but would get something back on the open market for the assets when it eventually sells them.

If it ends up with a net loss, however, the bill says the president must propose legislation to recoup money from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.

In addition, Treasury would be allowed to take ownership stakes in participating companies.

Stemming foreclosures: The bill calls for the government, as an owner of a large number of mortgage securities, to exert influence on loan servicers to modify more troubled loans.

In cases where the government buys troubled mortgage loans directly from banks, it can adjust them more easily.

Limiting executive pay: Curbs would be placed on the compensation of executives at companies that sell mortgage assets to the Treasury quick payday. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000.

They also will not be allowed to write new contracts that allow for "golden parachutes" for their top 5 executives if they are fired or the company goes belly up. But the executives’ current contracts, which may include golden parachutes, would still stand.

Overseeing the program: The bill would establish two oversight boards.

The Financial Stability Oversight Board would be charged with ensuring the policies implemented protect taxpayers and are in the economic interests of the United States. It will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary.

A congressional oversight panel would be charged with reviewing the state of financial markets, the regulatory system and the Treasury’s use of its authority under the rescue plan. Sitting on the panel would be 5 outside experts appointed by House and Senate leaders.

Insuring against losses: Treasury must establish an insurance program - with risk-based premiums paid by the industry - to guarantee companies’ troubled assets, including mortgage-backed securities, purchased before March 14, 2008.

The amount the Treasury would spend to cover losses minus company-paid premiums would come out of the $700 billion the Treasury is allowed to use for the rescue plan. 

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Britain is set to nationalize troubled bank Bradford & Bingley on Monday after Spanish bank Santander agreed to buy its retail deposits and branch network.

B&B would be the second British bank nationalized this year and the latest in a string of high-profile banks in Europe and the United States to fall victim to the global credit crunch.

Santander will pay about 400 million pounds ($735 million) to acquire 2.7 million Bradford & Bingley customer savings accounts containing some 21 billion pounds of deposits, a company spokesman said.

It will also take over the mortgage lender’s network of around 200 branches, the spokesman said. The B&B brand will remain for now but the accounts will transfer to Abbey, a British bank bought by Santander in 2004.

Finance minister Alistair Darling is expected to announce plans early on Monday to nationalize the remainder of Bradford & Bingley, people familiar with the matter said free credit report.com.

The Treasury led intense talks on the rescue of Britain’s 9th biggest mortgage provider over the weekend.

The government would have preferred a private-sector buyer to acquire all of B&B, but rivals appeared unwilling to take on B&B’s 41 billion pound residential mortgage portfolio amid the global credit crisis and weakening British housing market.

B&B shares tumbled to a record low on Friday and closed at 20 pence, valuing the company at less than 300 million pounds. 

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Google Inc.’s announcement last year that it would give away software that could run cell phones was met by dizzy accolades from analysts who thought it would let the search engine company conquer the world of mobile advertising.

Fruit of that announcement is set to drop: T-Mobile USA will reveal Tuesday the first phone to use Android, Google’s software platform.

But a lot has happened in the world of cell phone software in the intervening year, and Google looks set for an uphill battle in trying to capture the desires of consumers and wireless carriers.

Research firm Strategy Analytics estimates T-Mobile could sell 400,000 phones this year, giving Google about 4 percent of the U.S. market for "smart" phones, a category dominated by Research in Motion Ltd.’s BlackBerry phones with competition from Apple Inc.’s iPhone, Palm Inc.’s Treos and Centros, and phones running Microsoft Corp.’s Windows Mobile software.

The new phone, called the G1 according to T-Mobile’s invitation, is widely expected to be a design from HTC Corp. of Taiwan. Based on previous Google demos of its software, it’s assumed that it will have a touch screen and a slide-out, full-alphabet keyboard.

The Wall Street Journal reported last week, citing unidentified sources, that the phone would sell for $199 and carry the Google brand absolutely free credit report. It’s likely that the phone will go on sale in a few weeks. Other details are scant, and it’s not clear exactly what the phone will be capable of, but Web browsing and e-mail are safe bets.

"This is the right moment for Google to answer some of the big questions that have been outstanding since Android was announced," said Morgan Gillis, executive director of the LiMo Foundation, which has created a rival cell phone software platform. "What will the consumer do on this handset that can’t be done on other handsets?"

The LiMo Foundation is behind one of the developments that has undermined the prospects for Android. In May, Verizon Wireless said LiMo, or Linux Mobile, would be the "preferred" software for its phones, starting next year, joining some European carriers.

Like Android, LiMo is based on Linux computer software and is given away free to phone makers. But the LiMo Foundation is designed as consortium of industry participants to assuage their fears that a single company would dominate phone software, like Microsoft does on PCs.

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Mortgage finance giant Fannie Mae, taken over by the government earlier this month, announced Friday the resignations of four senior executives and said it was restructuring its organization.

The company, the biggest buyer and guarantor of home loans in the country, and its sibling Freddie Mac (FRE, Fortune 500) were taken over on Sept. 7 in a rescue plan that eventually could require the Treasury Department to put up as much as $100 billion for each of them over time if needed to keep them afloat as mortgage losses mount.

The executives and boards of both companies are being replaced. Herbert Allison, the former head of the TIAA-CREF retirement investment fund, was immediately selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp (USB, Fortune 500), was chosen to head Freddie Mac.

The Fannie Mae (FNM, Fortune 500) executives whose resignations were announced Friday are Chief Business Officer Peter Niculescu, Executive Vice President and General Counsel Beth Wilkinson, Executive Vice President and Chief Information Officer Rahul Merchant, and Senior Vice President for Government and Industry Relations Duane Duncan.

In addition, Fannie Mae said its three lines of business - single-family mortgage guaranty, capital markets, and housing and community development - and their top managers will report directly to Allison, who is president and CEO pay day loan. The technology and operations division will report to Chief Operating Officer Michael Willliams, while the structure of the government and industry relations division is under review, the company said.

"Fannie Mae is building a new organizational structure as we take the company in a new direction to serve a dramatically changing market," Allison said in a statement. 

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Credit rating agencies, criticized for moving too slowly in cutting ratings on Wall Street firms and the complex instruments they devised, are now accused of acting too quickly.

As the credit crisis enters a new phase, the pendulum has swung too far back, critics argue. The agencies are still missing the mark, only now they are too aggressive, adding to market volatility, or changing their views within days or weeks.

Case in point: AIG.

A week ago, Standard & Poor’s warned that if insurance giant American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) didn’t demonstrate adequate access to capital in the short term, the rating company could cut its ratings by as much as three notches.

Late Monday, S&P, Moody’s Investors Service and Fitch Rating struck a triple blow to AIG’s investment-grade rating and warned more downgrades could follow.

Hours later, the U.S. government had rescued AIG with an $85 billion loan, and the rating companies scrambled once again to revise their outlooks.

“AIG was a signal they are being more aggressive in today’s environment,” said Joseph Mason, a finance professor at Louisiana State University payday advance lender. “They’ve had their backs against the wall, and they are being forced to cut.”

Credit market turmoil culminated this week in the government loan for AIG, once the world’s largest insurer based on market value; the bankruptcy filing of Lehman Brothers Holdings Inc(LEH.N: Quote, Profile, Research, Stock Buzz)(LEHMQ.PK: Quote, Profile, Research, Stock Buzz), spelling the demise of a 158-year-old trading company that was the parent of a major U.S. investment bank, and the hasty sale of Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz), the largest U.S. retail brokerage whose advertising symbol is the bull, to Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz). 

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Sunrise Senior Living and Conrad Properties Corp. are capitalizing on one of the few bright spots in the depressed housing market: They are reopening Clayton on the Park this week for luxury independent senior living.

They have transformed the nine-year-old property from a luxury boutique hotel and apartments into Clayton on the Park, a Sunrise Senior Living Residence, with 208 designer apartments and top amenities.

A grand-opening celebration is scheduled for Saturday so the public can tour the converted building at Bonhomme Avenue and Brentwood Boulevard.

Sunrise spent $12.5 million to gut and remodel the first three floors, including the area where the old Finale nightclub was located, and to refurbish all the residences. Residents of the 23-story high-rise will have a clear view of downtown Clayton’s business towers or of Shaw Park’s public pool and gardens.
Sunrise expects to attract residents who want a top-flight building that’s in many ways like a luxury hotel, but who also want special support services.

"This is for vibrant seniors who want to continue their lifestyle and opportunity in a maintenance-free, worry-free environment," said Stacy Tew-Lovasz, who is executive director.

Rents will be begin at $2,800 a month for a studio and go up to $9,200 for the six three-bedroom, two-bathroom units. That includes housekeeping, laundry, utilities and "an incredible array of programs and services," including a concierge, said Tew-Lovasz bad credit payday loans. The building has 24-hour security and special emergency-response systems in each apartment.

Those who knew the building as a hotel will see a new art studio with floor-to-ceiling windows, a theater, a remodeled business center, a spa, a brain-fitness gym, new dining rooms, a wine bar and new art and colors around the building.

Tew-Lovasz said that "in keeping with Clayton’s focus on the arts, we have original art that includes two Chihuly pieces."

Wendy Timm, chief financial officer of Conrad Properties, said the Clayton-based company had enjoyed success in the original Clayton on the Park, with its 213 luxury apartments and boutique hotel suites. But, she said, the proposal from Sunrise was too good to pass up.

"We had a high-performing asset with Clayton on the Park," Timm said. "Sunrise approached us with a compelling opportunity to convert and operate as independent living luxury senior apartments as an operating joint venture."

Under the joint venture, Conrad Properties and its chairman, Bob Saur, manage and maintain the majority ownership of the building, Timm said. Sunrise is the manager of the senior living operation and has an ownership interest in the property, she said.

"In the real estate business, it’s always about timing," Timm said. "It was good timing and compell

As U.K. Prime Minister Gordon Brown tries to put down a mutiny, 15,000 Labour Party activists and lawmakers gather in Manchester tomorrow with their eyes on potential successors.

Calls by more than a dozen Labour lawmakers this week for a vote to replace Brown have put Cabinet newcomers David Miliband and Ed Balls on the spot as they jostle with Jack Straw, Alan Johnson and other leadership elders for backing should Brown be forced out.

“These relatively young ministers are well regarded by their colleagues, though the public find it quite hard to pick out any of them from the pack,'' said Andrew Cooper, chief executive officer of pollster Populus Ltd. “They need to start changing that now because time will rapidly catch up with them.''

At the five-day annual conference, the ministers will walk a tightrope. They have to display loyalty to Brown, 57, while signaling readiness to take his job as David Cameron's Conservative Party enjoys its highest popularity ratings since Margaret Thatcher's third term 20 years ago.

Ministers who stray from their assigned policy areas to articulate a wider vision in speeches and back-room wrangling may be seen as challenging Brown.

“There are huge dangers,'' said Andrew Hawkins of pollster ComRes. “We know what happens to the person who wields the knife.''

Heseltine's Lesson

In 1990 after Conservative minister Michael Heseltine orchestrated Thatcher's exit, he was portrayed as a hatchet man in the press, and the Conservatives picked John Major to replace her.

Rising unemployment, collapsing home prices and this month's worldwide market turmoil have complicated things for successor hopefuls. Brown helped broker the takeover of HBOS Plc by Lloyds TSB Plc to avert the collapse of Britain's largest mortgage lender in the wake of Lehman Brothers Holdings Inc.'s bankruptcy.

“The government appears to be imploding just when bold leadership is needed,'' said Ben Read, senior economist at the Centre for Economics and Business Research in London. “Any talk of replacing the prime minister will be taken very badly.''

Cabinet members are under pressure from lawmakers who are concerned that they'll lose their seats in the next election, which must be called by 2010, unless Brown is replaced. Brown this week fired three lawmakers from government posts after they called for a leadership vote.

Miliband's Article

Striking the right tone will be trickiest for Foreign Secretary Miliband, 43, because he wrote in the Guardian newspaper July 30 that the Labour Party must offer “real change.'' The piece, which didn't mention Brown, was interpreted by lawmakers as an attempt to test the waters for a leadership bid same day payday loans.

“Miliband has got to be very careful,'' said Wyn Grant, a professor of politics at Warwick University. “Anyone who wants to be prime minister will have to appear very loyal at the conference and not rock the boat.''

The son of an academic who started his career in a research institute, Miliband obtained his degree at Oxford University. He served as an adviser to Tony Blair when he was prime minister and Miliband joined his Cabinet in 2006. Brown appointed him to his current position last year, making him Britain's youngest foreign secretary since the 1970s.

Miliband has said he doesn't favor a leadership contest, though he didn't rule out running if there is one. A premiership bid by Miliband would expose divisions between Labour's old guard — including the unions that provide most of its funding and are pushing to raise taxes on the wealthy — and its intellectuals, who want to keep Britain attractive for investors.

`Fresh Face'

“Why should we elect a young fresh face when we have already got one in Cameron with policies that are not dissimilar,'' said Derek Simpson, joint general secretary of Unite, Britain's largest union, Sept. 7.

Balls, 41, another potential successor, last year became schools secretary. He also went to Oxford and wrote for the Financial Times' opinion pages before going into politics. On Sept. 1, he said ousting Brown would be “crazy, destructive and divisive.''

A divided party could turn to Health Secretary Johnson, 58, or to Justice Secretary Straw, 62, who has been active in Labour politics since the 1970s.

“Straw is seen as a safe pair of hands,'' said Mark Wichham-Jones, a Bristol University professor and author of a book on the Labour Party. “Johnson is an old union man.''

The potential successors barely register on the public's radar. Among the 2,144 voters surveyed by YouGov Plc this month, Straw was seen as the best next leader, with 14 percent support. Miliband got 12 percent.

“A large minority of people have a vague sense of the name David Miliband,'' Cooper said. “Do they have an informed view of what he's like? No, let alone the more remote figures.''

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NEW YORK — Morgan Stanley and Wachovia Corp. are in talks about a possible combination as the investment bank tries to come up with ways to survive the ongoing credit crisis, according to media reports.

John Mack, Morgan Stanley’s chief executive, received a call from Wachovia about a potential deal, according to The New York Times and Wall Street Journal. Both newspapers cited people familiar with the discussions. The talks are described as preliminary. Spokesmen for Morgan Stanley and Wachovia declined to comment.

Wachovia’s retail securities brokerage unit is based in St. Louis.

Other banks also have expressed interest in Morgan Stanley, according to the reports.

Shares of Morgan Stanley and fellow investment bank Goldman Sachs plunged Wednesday, a sign that investors fear they can’t survive in their present form as the last two major independent investment banks.

Executives of both companies insisted a day earlier, when they were reporting profits for the most recent quarter, that they do have the financial wherewithal to go it alone.

But analysts said the question increasingly is whether continued market turmoil could force them to acquire or be acquired by commercial banks, whose deposit-taking operation would provide a stable source of funding. The upheaval in the U.S. financial system has driven Merrill Lynch & Co. and Bear Stearns Cos. into emergency sales, and Lehman Brothers Holdings Inc. into bankruptcy.

Those in favor of such combinations believe that the sale of Merrill Lynch and collapse of Lehman Brothers might force the remaining investment banks to pursue some kind of transaction to stabilize results. The steady funding base of deposits held by commercial banks would go a long way in assuage investors concerned about volatility.

Anxious investors on Wednesday bid up the price of protecting against a default of debt issued by the two investment banks. The spike in credit default swaps has fanned fear on Wall Street that the investment banking model is in jeopardy of extinction.

John Mack, Morgan Stanley’s chief executive, struck back on Wednesday. He told employees in an e-mail that the No. 2 U.S. investment bank was "in the midst of a market controlled by fear and rumors."

"I know all of you are watching our stock price (Wednesday), and so am I," he said in the e-mail guaranteed cash advance. "After the strong earnings and $179 billion in liquidity we announced — which virtually every equity analyst highlighted in their notes this morning — there is no rational basis for the movements in our stock or credit default spreads."

Shares of investment banks have been sideswiped by a wave of short selling, which can cause big swings as investors bet that a stock’s price will fall so they can profit from it. Morgan Stanley shares fell as much as 44 percent Wednesday and closed down 26 percent, and Goldman shed more than 35 points before narrowing its loss to about 18 percent.

The Securities and Exchange Commission on Wednesday took measures to rein in aggressive forms of short-selling.

Roy Smith, a professor of finance at New York University’s Stern School of Business, believes the companies can survive on their own but remains concerned about the current environment in which they operate.

Morgan Stanley had hoped to stem investor panic about its financial health by releasing third-quarter results a day earlier than planned. On Tuesday, the company posted better-than-expected profits, and while Goldman Sachs’ profit slumped 70 percent, it did finish the quarter in the black.

Goldman Sachs Chief Financial Officer David Viniar and Morgan Stanley CFO Colm Kelleher both said their firms were able to navigate through the market dislocation and vowed to remain independent. The CFOs said their firms have enough cash on hand and no need to raise more.

Spokesmen for both investment banks declined to comment Wednesday about the plunge in their shares.

Glenn Schorr, an analyst with UBS, on Wednesday said the market reaction was "insanity." He said Goldman and Morgan Stanley aren’t running out of money and remain profitable.

"The world should really be concerned about this because if we continue to squeeze the financial system’s balance sheet and see fewer players in the business, the available credit to corporations and hedge funds will shrivel up and the cost of capital will continue to skyrocket across the board," he said.

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Secure Energy Inc., a St. Louis-based company developing a $550 million plant in Decatur, Ill., to convert coal to natural gas, has entered a long-term sales agreement with a unit of oil giant BP PLC.

Under the agreement, Secure Energy can sell gas to industrial customers in Decatur. BP Canada Energy Marketing Co. will purchase any unsold fuel — up to 67 million cubic feet of gas a day.

The agreement represents a milestone in the development of the Decatur plant, which is expected to be complete by the summer of 2011, said Lars Scott, a former Peabody Energy Corp. executive who co-founded Secure Energy several years ago.

Technologies to convert coal into other energy forms, such as natural gas or diesel, aren’t new, but they were cost-prohibitive in the era of cheap oil. Today, they’re getting another look because of higher petroleum prices.

The price of natural gas, which ranged between $1 and $2 per thousand cubic feet the 1990s, has averaged almost $10 per thousand cubic feet so far this year electronic check payday advance. The price also has been especially volatile, spiking above $13 in June only to fall below $8 this month. Despite the decline, the project remains viable, Scott said.

The plant will use about 1.4 million tons of high-sulfur Illinois coal a year to produce 20 billion cubic feet of natural gas — enough to heat 250,000 homes.

Secure Energy is in talks to find a coal supplier, Scott said. A previous agreement to purchase coal from International Coal Group Inc.’s Viper Mine in eastern Illinois expired.

The plant, to be built on a site purchased last year from Caterpillar Inc., will employ about 60 people, he said. Construction is expected to take 20 to 24 months.

Secure Energy received an air permit from the state in April 2007 and it has other major permits required to begin construction.

jtomich@post-dispatch.com | 314-340-8320

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Declining property-tax revenues, high energy prices and other financial headwinds will create greater economic hardships in 2009 for most cities across the U.S., a new report says.

City budget officials say they expect more layoffs for municipal workers, cutbacks in parks and recreation programs and library hours, and higher fees for everything from garbage pickup to building permits.

"Cities for a long while now have been on the upside of the curve, generally experiencing pretty good growth in revenues," said Chris Hoene, director of policy and research for the National League of Cities, which collected data from 319 municipalities in its annual survey. "Now we’re coming over the top of the curve and heading down the wrong side of it."

The housing crisis has already damaged municipal coffers in 2008, especially in the West, with rising foreclosures and falling home prices resulting in decreased property-tax revenues.

Four out of five budget officials who responded to the survey of U.S. cities say next year is likely to be worse.

Small but fast-growing suburbs that used low tax rates to attract families are most vulnerable to budget constraints.

The three main sources of revenue for cities - income tax, property tax and sales tax - are all declining, the report warns. In the meantime, health care, public safety and fuel are getting more expensive.

Two of every three cities with more than 50,000 residents say it’s harder to meet basic city needs this year than last, the survey found. One in two budget officials responding to the survey say they have raised fees on city services during the past year.

The report follows a litany of gloomy financial news for the nation’s local and state governments in recent months.

The Center on Budget and Policy Priorities reported Sept. 8 that midyear shortfalls opened in the budgets of at least 13 states in the current budget year. At least 29 states and the District of Columbia faced or are facing combined budget shortfalls of $48 billion in the fiscal year that began July 1.

The Rockefeller Institute for Government said in July that adjusted state tax revenues remained in decline for the third quarter in a row and that sales tax collections were flat for the first time in six years.

Cities that rely mostly on property taxes are in for the toughest ride because the loss of revenue from a foreclosed house today won’t be felt in budgets for months.

Home prices for the 20-city Standard & Poor’s/Case-Schiller index peaked in July 2006, and some economists predict prices won’t recover until mid-2009 or later.

For cities already tightening their belts, the squeeze could get even stronger.

– In Columbus, the city is facing a $75 million budget hole and planning 100 job cuts, including about 40 layoffs. All spending over $1,000 is now under close review. Revenue from the city’s income tax grew by at least 4% a year for 40 years, including the recession of the 1990s cash advance. Since 2000, that revenue has topped 4% only once.

– In Palm Bay in central Florida, one of the country’s fastest-growing cities in recent years, officials have eliminated 32 jobs out of about 850, cut public-pleasing events like the annual Easter Egg hunt and are raising fees on the cost of renting ball fields and other park facilities.

– In Indianapolis, city officials ordered a 5% budget reduction this year and plan to continue it next year. A proposal to hire 100 additional police officers is on hold. Next year’s budget includes a proposed reduction of the city’s $1.5 million arts budget by a third and millions cut from the parks program.

"As we spend more and more on the public safety side, taking away from the investments in education and the developmental things, are we in fact creating bigger problems for ourselves down the line?" said Jackie Nytes, a city-county councilwoman.

Among the report’s other findings:

– Cities on average are facing a 2.8% budget deficit this year, forcing fee increases, reduced spending or use of rainy-day funds.

– The biggest spending pressures on cities are coming from increases in fuel costs; maintaining roads, bridges and water and sewer systems; keeping up police and fire services; and increases in employee costs, including wages and health care.

– Three of every four fiscal officers in Western states reported their budgets were worse this year. Conditions were most optimistic in the South, with one in every two budget officials responding to the survey saying conditions were worse in 2008.

In pothole-ridden Tacoma, Wash., officials planning a long-awaited street repair program were counting on $19 million during the current two-year budget cycle. But that figure is down to a projected $12 million as real estate tax revenue plunges, including a 50% drop from July 2007 to this past July.

One of the biggest problems for cities is that revenue from sales and property taxes are declining together for the first time in decades. As consumer confidence sags in the face of declining home values, people are less likely to make big-ticket purchases.

Fortunately, most cities have healthy rainy-day funds, filled as buffers in recent years as it became clear to local governments that state and federal funding was drying up.

Not every city is ready to raise fees or taxes.

In Riverside, Calif., in the state’s inland region, the budget was cut by $10 million from 2007 to this year as numerous departments saw reductions, including fewer hours and staff at libraries. Riverside, with a population of 294,000, saw 2,500 foreclosures last year and could have another 7,500 homes at risk.

"If you take the premise this is the worst economy in the inland area since World War II, it’s not good time to raise fees,"said Mayor Ron Loveridge. 

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