ALBANY — As the Wall Street credit crunch spreads its tentacles throughout the worlds of personal and corporate finance, two more potential victims have emerged — municipal government and school districts.

In a research brief released Thursday, the state comptroller's Division of Local Government and School Accountability said that without access to credit markets, local entities throughout New York could face difficulty in gaining the credit to fund their short-term operations.

"If the credit crunch continues, the market risks to local governments that rely on short-term borrowing will also continue," the report said. "In a worst case scenario, a local government could be shut out of the market altogether. Those that have market access will likely pay higher interest rates — increasing repayment costs for taxpayers and squeezing already tight budgets."

Municipalities and other local entities often finance their day-to-day operations by issuing a variety of short-term debt instruments — bonds and notes, which are sold to investors. In 2007, approximately $5.1 billion in such debt was issued by various local entities throughout the state, outside of New York City. About half of this amount was issued by school districts, with counties accounting for 19 percent, towns 14 percent, cities 10 percent, villages 6 percent and fire districts 1 percent, according to the report.

In September, as the Wall Street crisis took shape, the market for municipal bonds experienced a decline in demand, resulting in a 40-percent year-over-year nationwide decline in bond issues and the postponement of $11 billion worth of bonds and notes. Bond insurance also has been harder to obtain, the report said.

"As a result of the credit crisis, some local governments have had difficulty attracting buyers for their debt, particularly those issuers with low or no credit ratings," the report said. "Many local governments that do find buyers may be faced with higher interest costs.

"When revenues sensitive to economic conditions (e.g., sales taxes) decline, cash flow is impacted and borrowing needs typically increase," the report continued. "Without the ability to borrow, local governments could be faced with a situation where they are potentially unable to meet payroll or other operating expenses."

Local officials are advised to proactively monitor and manage their cash-flow and capital needs.

"Until the current credit crisis abates, local governments and school districts should anticipate that access to the market will be more constrained and that issuing short-term debt could be more costly," the report said. "To the extent possible, municipalities and school districts should review their cash flow needs and develop contingency plans in the event that market conditions delay a note sale."

Such contingencies include "exploring competitive, negotiated or private placement sale options, temporarily borrowing from other funds where legally permissible, or restructuring expenditure patterns for cash flow relief," the report said.

The report is available online.