The report suggested conflicts ahead between taxpayers struggling to keep their own households afloat and elected officials charged with balancing budgets, making their payrolls and protecting their credit ratings.

“Taxpayers, worried about their own financial condition, are more resistant than ever to increasing property or other local taxes,” the report observed.

The report’s publication coincided with the downgrading by Moody’s of the credit of the State of Illinois to the A level from double-A. Moody’s said Illinois was having difficulty managing its cash, and in recent weeks had been trying to push its scheduled pension contributions into the future. The state pension fund is already seriously underfunded.

The Federal Reserve chairman, Ben S. Bernanke, warned that local governments had probably lost their ability to lower their borrowing costs by linking their bonds to derivatives. Such bond packages had become popular in the last few years because they appeared to offer cities both the lower borrowing costs of variable-rate bonds and the predictability of fixed-rate bonds. But the structures broke down during last year’s market turmoil, leaving some municipalities staggering under more debt than they can afford.

Mr. Bernanke said he was aware that some governments with low credit ratings were completely shut out of the short-term financial markets, while others were stuck with a type of derivative called interest-rate swaps that no longer made sense for them.

Mr. Bernanke offered his remarks in a letter to members of Congress who had asked the Fed to create a facility to breathe new life into segments of the municipal bond market that were still paralyzed. But Mr. Bernanke said municipal debt had “unique characteristics” that made it “unlikely” that the Fed could be of much help.

He suggested that instead, Congress could consider setting up some other form of assistance for municipalities unable to restructure or refinance their debt, like a federal bond reinsurance program.