Oct. 7 (Bloomberg) -- The Bush administration said it's in contact with state and local governments about their difficulties obtaining financing.

``We're talking to states and reviewing the issue,'' White House spokesman Tony Fratto said in Washington today.

Helping cities and states would expand the government's effort to unfreeze credit markets beyond private companies. California Governor Arnold Schwarzenegger asked the Treasury Department last week to help states whose bonds are being shunned by investors, leaving them short of funds to meet expenses while awaiting tax payments.

Massachusetts today postponed a $750 million offering for the second time in two weeks and asked federal officials for a short-term loan if it can't complete the sale.

More than $12 billion of municipal debt sales has been delayed since Lehman Brothers Holdings Inc. declared bankruptcy on Sept. 15, according to data compiled by Bloomberg. They include $500 million of bonds shelved by Louisiana this month as investors avoided all but the safest debt.

Municipal borrowers also have had to pay investors more. The Long Island Power Authority in New York offered $605 million of 25-year bonds today at yields as high as 6.25 percent, 2.25 percentage points more than 30-year U.S. bonds.

Jefferson County, Alabama

The collapse of the auction-rate municipal bond market, where interest rates are reset in the open market, has pushed Jefferson County, Alabama, toward bankruptcy as interest rates on some of its sewer bonds tripled to 10 percent.

``States are facing the same problem faced by millions of businesses across the country -- tightening credit markets,'' Nick Johnson, director of state budget and tax system reform at the Washington, D.C.-based Center on Budget and Policy Priorities, wrote in a report today. ``The Treasury or Federal Reserve may have to serve as the lender of last resort.''

Congress last week authorized the Treasury to buy $700 billion of bad debt from banks to unfreeze the markets. The Federal Reserve said today it would buy U.S. commercial paper to revive that market, where investor disinterest has deprived businesses of short-term funds.

``Any federal action that boosts investor confidence to jump-start the credit markets, we obviously support,'' Massachusetts treasurer Tim Cahill said.

State Deficits

For states and cities, the obstructed credit markets come as a slowing economy has reduced tax receipts and pushed more government budgets into deficits.

``Even if states get the short-term loans that they anticipate, that won't help them balance their budgets,'' Johnson wrote. ``Unlike the federal government, states can't borrow their way out of a budget shortfall.''

At least 15 states have new budget gaps, Johnson wrote, and 29 have cut spending, used reserves or raised revenue to balance budgets for this fiscal year. More reductions in services or higher taxes are likely in coming weeks, he said.

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Jerry Hart in Miami at jhart@bloomberg.net.

Last Updated: October 7, 2008 18:09 EDT