California might need to borrow $7 billion

Sacramento, Calif. — California Gov. Arnold Schwarzenegger, alarmed by the ongoing national financial crisis, warned U.S. 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 it 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 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 services quickly could 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 half way into a $400 million offering and the state of 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 Thursday evening letter 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 message 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.

It’s customary for California to borrow billions of dollars at the start of the fiscal year to fill its coffers until the usual flood of sales tax receipts comes in after Christmas and income tax receipts arrive in the spring.

“California is so large that our short-cash flow needs exceed the entire budget of some states,” Schwarzenegger wrote.

The cash needs to be in the state’s bank account by Oct. 28 to be available to fund a scheduled $3 billion payment to more than 1,000 school districts.

“California faces the potential of a perfect storm created by the financial crisis’ impact on liquidity, lower-than-anticipated revenues currently coming into the state, and our late budget,” said Matt David, Schwarzenegger’s communications director. “The governor is taking steps to prepare for this scenario to ensure that the state can make critical payments.”

But those payments won’t be forthcoming if the state can’t do routine borrowing. For now, “The window is shut, and if it stays shut, we are in deep trouble,” said an administration official, who did not want to be identified because of the sensitive talks with Washington, D.C.

Quick passage by the House of Representatives on Friday and a signature by President Bush could inject more money into the international financial system and allow California to borrow at a reasonable interest rate, the official said.

But, there are no guarantees that the economic recovery plan before Congress will succeed, said state Treasurer Bill Lockyer, who has been working with Schwarzenegger to keep the state solvent.