SAN FRANCISCO—California, the nation’s wealthiest state, and one of the world’s largest economies, on Friday warned the U.S. Treasury that it may seek a $7 billion emergency rescue in short-term loans as a response to the underlying credit crisis which has blocked the state’s access to routine financing.
Although the $700 billion bailout was approved by Congress and President George Bush on Friday, California officials warned that if the market for bonds doesn’t improve, the state will be unable to secure financing for bond offerings and for routine cash flow used to make critical payments to schools, local governments, and law enforcement.
California and other states and local governments across the nation are facing financial ruin because they can’t issue bonds to pay for essential services including roads and schools. Most U.S. states routinely depend on short-term financing to keep operating at the start of each fiscal year, until sales tax receipts and income tax revenues begin pouring in later in the year.
“California is not out of the woods yet,” said Gov. Arnold Schwarzenegger at a news conference in San Diego, shortly after the federal bailout plan was passed. In the current credit environment, he said, securing short-term financing “will be difficult,” and in a few weeks the state could run out of cash to pay for basic needs.
Alarmed, the California State Treasurer Bill Lockyer warned that California’s cash revenues will dissipate completely by the end of the month, and the state’s 5,000 cities, counties, and school districts will face job layoffs and payments for law enforcement agencies, teachers, nursing homes and an array of other services and government entities could soon be suspended.
California is one of several state governments nationwide severely affected by the global credit crunch that shattered the bond market, according to financial analysts. The degree of help sought by the most populous state in the nation from the federal government can only compare to one other such rescue in 1975 when the federal government lent New York City money to avoid bankruptcy, financial experts say.
“Absent a clear resolution to this financial crisis,” Gov. Schwarzenegger wrote in a letter sent to the Secretary of the Treasury, Henry Paulson, last week. “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.”
“While some states may be able to absorb a delay or obtain high-interest financing through private banks, California is so large that our short-term cash flow needs exceed the entire budget of some states. We expect to issue $7 billion in Revenue Anticipation Notes for short term cash flow purposes in a matter of days,” said Gov. Schwarzenegger.
The underlying credit crisis and the lack of financing is becoming a major issue for other states, not only for California, according to states officials and outside experts. Plans by several states to borrow recently have been dampened by the credit freeze. New Mexico and Louisiana were forced to postpone multi-million bond sales. Massachusetts recently fell short of the hundreds of millions in borrowing the state sought, and Maine is considering canceling road projects that were planned to be funded by bonds.
As more than a dozen states work to fill the widening gaps of several billion dollars that have emerged this fall, financial experts warned that the problem may grow even worse. Officials in California said that the bailout may inject enough liquidity into credit markets and restore confidence to allow the state to borrow the money it requires.
"There are big challenges ahead of us," said Gov. Schwarzenegger.
