California May Seek Federal Loan
Because of the meltdown in the financial markets, California will likely seek a $7 billion loan from the U.S. Treasury to meet its cash flow needs. On October 3, 2008, the Los Angeles Times reported that Governor Schwarzenegger sent an e-mail to Treasury Secretary Henry Paulson alerting him to the distinct possibility that California and other states may be forced to secure loans from the federal government because of the current freeze in the credit markets.
While it is customary for the state to seek short term cash to meet its cash flow needs, this is the first time that those needs may not be met by the private credit markets. There was concern earlier in the fiscal year—which began July 1, 2008—that the state would have to pay several hundred million dollars in higher borrowing costs if it had to seek a loan without a State Budget in place. It now appears that securing private sector short term financing will not be available at any price. The Los Angeles Times quotes an unnamed administration official as saying, “the [credit] window is shut, and if it stays shut, we are in deep trouble.”
Governor Schwarzenegger wrote again to U.S. Secretary of the Treasury Henry Paulson indicating that State Treasurer Bill Lockyer had officially begun the process of selling $4 billion in Revenue Anticipation Notes (RANs) rather than the full $7 billion that will ultimately be needed. If successful, a federal loan might not be needed.
There has been no reported response by the federal government to either of Schwarzenegger’s messages.
Prompting the need for cash is the upcoming October 28, 2008, apportionment of $3 billion to K-12 school districts and county office of education.
—Robert Miyashiro, Deborah Harmon, and Dave Heckler