Hilliard Budget and Finance Director Michelle Kelly-Underwood kept an eye on the stock market late Monday afternoon and didn't like what she was seeing.

Hilliard Budget and Finance Director Michelle Kelly-Underwood kept an eye on the stock market late Monday afternoon and didn't like what she was seeing.

By Monday's closing bell, the New York State Exchange had plunged a record 777.68 points in the wake of Congress' failure to pass a financial rescue package.

A week earlier, Kelly-Underwood said she was confident the market would recover. On Monday afternoon, she said she was more concerned than ever.

"I was a little more optimistic a week ago," she said. "I was looking for a little bit of relief on interest rates for the last quarter. I was thinking the market would tick up a little bit on what we have invested in money market funds and some treasuries. Now, people are fleeing to those instruments for safety, which naturally drives down the yield."

Kelly-Underwood said that means the city's investment earnings will take a hit.

"I may be in a bigger bind on investment earnings than I thought I would be," she said. "I was looking at $300,000 in the hole. Now it looks like it's going to be more like $400,000 or $500,000 on the investment earnings side of things based on what I budgeted and what I'm going to get in."

Kelly-Underwood said the city's recent $11.3-million note sale turned out to be perfectly timed.

"I'd love to say I saw this coming and got our note sale done early because of it, but that's just not the case," she said. "We had the ability to sell in August and that's what we did. Our note was coming due Oct. 1 so we had to have $2.3-million to pay that note. We also had some other new money needs that we wanted to finance. We're going to have a few new things coming up next year, so I didn't want to do long-term this year. It worked out incredibly well for us because we got a yield of 1.75 percent on our note, which was very good."

Had that August note sale not taken place, Kelly-Underwood said the city could have found itself in a much different situation.

"I just talked to our investment banker last week and she was telling me that there were some cities that were in our situation right now, where they were looking to issue a note, to what they call rolling in a note, and she said they got no buyers. So, they're in a position of trying to come up with a couple of million dollars."

Kelly-Underwood said the city's finances are secure for the next year.

"We're OK for next year," she said. "This note will come due in August. I'm hoping that we've got everybody's financial house in order by then. We've got a year to sort though this."

Kelly-Underwood said the city's strong income tax revenues will offset the loss of investment income to some degree, but the shortfall will still be significant.

"When you look at our general fund revenue, we were looking at hopefully getting $700,000 in investment earnings," she said. "When you don't have that, that's hard to make up. That's big."

Kelly-Underwood said the current Wall Street financial crisis could threaten Hilliard's recent success on the economic development front.

"If something doesn't happen, with some kind of a bailout, it threatens everything we have in the pipeline as far as economic development goes," she said. "We could probably still build the roads but those developers can't build their buildings because they can't get the credit. If it dries up there, it really doesn't matter what we do. Then it's just a downward spiral."

Kelly-Underwood said the economic downturn could become magnified if short-term credit dries up.

"Short-term credit, that's what this country is based on," she said. "There's a fear that, at least on the small business level first, that they are not going to be able to meet payroll. People are going to get laid off and I'm not going to be collecting income tax. I'm not going to be collecting withholding and that business isn't going to have a profit for us to collect net profit tax on. It's a cumulative effect. I'm very concerned about the credit side of it, especially from the private side of it."

As she prepares to finalize the city's 2009 budget, Kelly-Underwood said she is meeting with department heads to make sure they understand the gravity of the situation.

"I've told them, nothing extra," she said. "We can't afford it."

In her 25 years in public finance, Kelly-Underwood said she has never encountered a situation as potentially serious as the current economic crisis.

"I don't know," she said. "This is just uncharted territory for all of us. I don't know where we're going to end up. You expect this to all shake out eventually because it always does. How and when -- that's another story but eventually it will."