Friday, October 03, 2008

California, Short of Cash, May Ask U.S. for Loan

New York Times - With the credit crisis cutting off access to short-term financing, California officials said the state may be forced to ask the United States government to lend it $7 billion, warning that the state could run out of money in a few weeks without it.

Gov. Arnold Schwarzenegger in a letter Thursday night to Treasury Secretary Henry M. Paulson Jr. said that with credit markets essentially frozen, the state, like a slew of others and local governments nationwide, had no access to the short-term financing that normally support day-to-day operations.

“California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal treasury for short-term financing,” Mr. Schwarzenegger said in the letter, which was first reported by The Los Angeles Times.

Treasury officials said they were reviewing the letter.

As the nation’s most populous state, California’s precarious finances underscore the depths of the financial crisis. The emergency handout, the equivalent of $192 for each resident, would rival the federal government’s bailout of New York City in 1975 as it teetered on bankruptcy.

At a news conference Friday morning in San Diego, Mr. Schwarzenegger congratulated Congress on approving the $700 billion bailout for the financial system, but warned that the state still could face financial turmoil. “California is not out of the woods yet,” he said.

The state, he added, would pursue short-term financing through the credit markets, but “it is hard to get that loan.”

“If we can’t get that loan through the normal course, we will go through the federal government and we already set that in motion,” he said.

Asked what would happen if the markets or the government did not come through, Mr. Schwarzenegger replied, “This is no such thing in my vocabulary as ‘what if not.’ We will.”

Bill Lockyer, the state treasurer, had warned on Wednesday that as Congress debated the rescue plan, the state had been locked out of credit markets for the past 10 days. “The credit market is frozen because financial institutions are afraid to commit capital amid enormous uncertainty,” he said.

Mr. Lockyer also said the state’s cash reserves would drain completely near the end of the month, jeopardizing payment for teachers’ salaries, nursing homes, law enforcement and an array of other state-financed services. California’s 5,000 cities, counties and school districts, he added, would face the same fate.

In an interview today, Mr. Lockyer said the state gets routine short-term loans in the fall to cover its bases until state coffers refill in the spring from tax revenue and other sources. But the shuttered credit market has upended the budgeting, he said, adding that even if the credit markets loosen, it could cost more to borrow. He noted that in the weeks leading up to the crisis borrowing terms had increased substantially.

Still, he said he believed the recovery plan would provide some relief and predicted that would be more likely than the government loan.

“No one likes looking over the precipice, but I think we’re o.k.,” he said.

Late in September, California adopted a $143 billion budget, 85 days overdue, after a protracted fight between Mr. Schwarzenegger, a Republican, and the legislature over how to close a $15 billion gap.

The budget included some cuts in services. It also relied on accounting maneuvers and assumptions like voter approval to borrow $5 billion against future lottery revenue and to expand the state’s rainy day fund to 12.5 percent of general fund expenditures, from 5 percent.