SACRAMENTO -- California Gov. Arnold Schwarzenegger, alarmed by the ongoing national financial crisis, warned Treasury Secretary Henry M. Paulson on Thursday that the state might need an emergency loan of as much as $7 billion from the federal government within weeks.
The warning comes as California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent.
The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch. If the state is unable to access the cash, administration officials say, payments to schools and other government entities could quickly be suspended and state employees could be laid off.
Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500-million bond sale, Massachusetts had to pull the plug halfway into a $400-million offering, and Maine is considering canceling road projects that were to be funded with bonds.
California finance experts say they know of no time in recent history when the state has sought an emergency loan of this magnitude from the federal government. The only other such rescue was in 1975, they said, when the federal government lent New York City money to avoid bankruptcy.
"Absent a clear resolution to this financial crisis," Schwarzenegger wrote in a letter Thursday evening e-mailed to Paulson, "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."
The letter, obtained by The Times, came on the eve of a vote by the House of Representatives on a $700-billion rescue package, but it was too soon to know how the package would affect the nation's paralyzed credit markets. The Senate approved the so-called rescue bill Wednesday night.
A top Schwarzenegger aide followed up the letter with a call to the Treasury secretary Thursday night. Treasury Department officials could not be reached for comment.
Now I will admit that the California state legislature, and the governor's office, have been a complete joke in constantly fighting over the state budget, which has consistently forced the budget to be passed on a late date. And as the legislature, and the governor, have been fighting over the budget, the state has been borrowing funds to make up for the financing as the budget fights continue again, and again, and again. This has been going on for years. But what is scary here is that the credit crunch, brought on by the subprime mortgage collapse, has forced California out of the credit market. According to the Sacramento Bee:
California's record 85-day budget standoff reduced the window for securing short-term borrowing depended upon by the state each year to fill gaps in revenue collection. The nation's financial crisis has exacerbated the problem.
Treasurer Bill Lockyer said the state's reserves will be exhausted this month absent a thawing of the nation's credit freeze.
California potentially could be forced next month to stop or delay payments for teachers' salaries, nursing homes, law enforcement, cities, counties, school districts and every other state-funded service, Lockyer said.
The state could be $1.5 billion in the red by Oct. 29 unless a short-term revenue source is found, said Hallye Jordan, spokeswoman for State Controller John Chiang.
The $7 billion in short-term financing, called revenue anticipation notes, is the amount needed by the state through June 30.
So the budget standoff has forced the state to fund its operations with these revenue anticipation notes, providing liquidity to the state until the holiday sales tax revenues, income tax and corporate tax revenues come into the state coffers. But with the Wall Street financial meltdown taking place, will the big Wall Street banks be willing to give money to California for these revenue anticipation notes, considering how much money these same Wall Street banks are losing due to the write downs because of the subprime mortgage collapse. And these same Wall Street banks are asking the federal government to buy up their own worthless subprime mortgage securities? What is more, these California revenue anticipation notes will have to be paid back by June 30th, 2009--when the state passes the next fiscal year budget. Of course, California will not pass the next state budget on time, and we will have another long delay as the state legislature and the governor, again, fight over the next budget. The system is completely broken, and we are seeing the effects of this breakdown as the financial markets collapse, and the U.S. economy weakens into a recession.
What a frickin' financial mess that we Californians are sitting in.
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