California Locked out of Access to Bond Market, Needs 6 billion from the Feds

[stephendare]

http://www.latimes.com/business/la-fi-calif3-2008oct03,0,5726760.story

Schwarzenegger to U.S.: State may need $7-billion loan
In a letter obtained by The Times, the governor warns that tight credit has dried up funds California routinely relies on and it may have to seek emergency aid within weeks.
By Marc Lifsher and Evan Halper, Los Angeles Times Staff Writers
October 3, 2008
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.

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.

Said Matt David, Schwarzenegger's communications director: "California faces the potential of a perfect storm created by the financial crisis' effect on liquidity, lower-than-anticipated revenues currently coming into the state, and our late budget. 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 asked not to be identified, citing the sensitive talks with Washington.

Quick passage of the rescue bill by the House of Representatives today 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 California Treasurer Bill Lockyer, who has been working with Schwarzenegger to keep the state solvent.

Asking the federal government for a loan "is one option on the table," said Tom Dresslar, a spokesman for Lockyer. The treasurer, he added, is working with outside financial advisors on a possible emergency plan to sell short-term debt notes to the U.S. government. Lockyer believes that such a plan is both feasible and legal, Dresslar said.

"I don't think we have ever gone to the feds," said Fred Silva, senior fiscal policy advisor with California Forward, a state budget think tank.

Silva said the closest California came may have been in the days after the 1994 Northridge earthquake, when at the request of the state, Washington sped up payment of federal funds that the state was owed.

State officials now fear they face a potential cash crisis worse than California confronted in 2003, in the final days of Schwarzenegger's predecessor, Gov. Gray Davis.

The precipitous decline of state revenue in the middle of a budget year forced officials to pay a syndicate of banks a premium of hundreds of millions of dollars for what amounted to an expensive "payday loan."

Even that option, administration officials say, would not be available during the current credit drought. They say if Congress does not approve a bailout plan -- and maybe even if it does -- there will be no lenders available to provide the state with the money it needs, regardless of the premium the state is willing to pay.

"We need to go as wide as possible to try to find buyers at reasonable rates," said Robert Fayer, an attorney advising the state on its planned $7-billion bond sale.

"Whether it could ultimately be the federal government, I have no idea. It is a fairly radical concept."

[RiversideGator]

This is another good reason why some federal action is needed to unclog the credit markets.  However, perhaps the State of California could heed to advice of the Governor and come up with a sensible budget and they would not need to borrow so much money in the first place.

[Ocklawaha]

You really didn't think you were going to swim in that lake did you? It's a LONG, LONG, way to water...

California's troubles are not always about being a liberal mecca. The state is as big as the entire East Coast of the USA from DC south, and as wide as Florida is long. That's a lot of ground, but sadly, most of the population is in 4 locations and a good deal of the rest is either completely hostile, or is in agriculture or alpine mountain preserves. The mountains create HUGE barriers to commerce and construction and these are not mere hills, towering higher then any others in the lower 48. LA was once a sheep trading post in a desert, San Francisco, a flea infested peninsular, wet and cold that guards the bay and was thus settled as gold started flowing from the distant mountains. A recent trip to TIOGA PASS in June, and I got photos of snow drifts 3x taller then our Astro Van. JUNE! The road closed about the time we got to Monterrey due to fresh snow and slides. Some of the most breathtaking scenery in the world is in those high rare-air mountains. But they are also the only place in the entire state where fresh water is found! So to give you an example of scale on California projects, the Hetch Hetchy aqueduct, which was built in the 1920's to provide San Francisco with a stable water source from snow melt on the Tuolumne River, is in need of overhaul. The dam is old, the aqueduct too small, it runs for hundreds of miles across arid farm fields, climbs the coast range, crosses the tail of the bay and goes to the Golden Gate. The price to repair just this one project...hardly a luxury item, is a cool $2.5 BILLION.



Teddy Roosevelt thought this would be the National Park, as the Hetch Hetchy valley starts ABOVE the mountain domes of Yosemite. Sorry Teddy they completely buried it.


Now you have it!


Now you don't!

Then you have the element that we all hate, the group that will stand in front of the dozier's and defy any more construction in the Hetch Hetchy Valley of the Tuolumne. Those historians that have seen the color stereo images of "another Yosemite" one carelessly buried in water. Those people remind me of some sort of monster, they remind me of ME! I LOVE TUOLUMNE MEADOWS! So the dam is damned if they do and the dam is damned if they don't.


Paradise Lost, the Hetch Hetchy Dam and some friendly art!

Expensive you bet, just take $2.5 Billion and add the legal fees.

OCKLAWAHA

[alta]

California is beautiful state and if ranked as a country is I believe the fifth biggest economy in the world.  They are burdened by extremely high taxes which results in investment shifting to other states.  They also have out of control spending.  The U.S. government should not be giving them any bailout money.  The recent conservation movement there has resulted in reduced gas tax revenue.  The proposal is to raise taxes to make up for the difference which will most likely result in fewer businesses relocating or expanding there.     

[Ocklawaha]

Your so right Alta, I'm considered a California Veteran, so I get special bennies for having a place there. But they sure a heck don't pay for it. Not to many would want it anyway, as it is about twice as barren as the first photo I put up. My point was just on the issue of water California could break our bank. 2.5 BILLION was just to repair the Hetch Hetchy, which I wish would collapse into rubble anyway. Then you have the Colorado River, Sacramento, Owens and California aqua systems. Each longer then Florida. Sacramento is the only large city in the State on a drinkable water source. So even if it were not for taxes or crazy spending, it's going to get expensive.... REAL expensive.

OCKLAWAHA

[jaxnative]

Considering the already expensive costs of bringing water to some of these area's, where the majority are located along the coast, would desalinization facilities still be cost prohibitive?

[whitey]

Considering the already expensive costs of bringing water to some of these area's, where the majority are located along the coast, would desalinization facilities still be cost prohibitive?

The plants themselves would not be cost prohibitive, but the land acquisition costs would probably be quite high.  10's of contiguous acres near the ocean in California per plant = not cheap

Add in the legal challenges that undoubtedly would be brought by NIMBYS, environmentalists, etc and its probably not a feasable alternative.

[BridgeTroll]

Hetch Hetchy supplies electricity(clean) to San Francisco in addition to water to many bay area counties.  Tearing down the dam and draining the lake would deprive those people of water and electricity.