As Debt Ceiling Isn’t Raised, ‘Headache’ For Cities, States Begins Friday

NEW YORK — As the federal government approaches its legal debt ceiling and scrambles to avoid default, the first losers will be cities and states.

Starting Friday, the U.S. Treasury will stop issuing special securities that help state and local governments pay for their debt, Treasury Secretary Tim Geithner announced in a letter to Congress this week. This freeze, the first in a series of “extraordinary measures” undertaken by the Treasury to avoid a federal default, could pose difficulties for local governments nationwide, making it more complicated for strapped localities to manage their already weak finances.

“I could see it being a real problem for those guys, on top of all the headaches they have already,” said David Johnson, a partner at the Chicago-based ACM Partners, a boutique financial firm that advises struggling municipalities.

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