Schwarzenegger Says Federal Loan to State an Option

By Michael B. Marois

Oct. 3 (Bloomberg) -- Passage of a $700 billion financial- market rescue plan doesn't mean California won't need to ask the federal government for an emergency loan to pay bills, Governor Arnold Schwarzenegger said.

Schwarzenegger, a 61-year-old Republican, has called a meeting of top legislative leaders Oct. 8 to discuss the state's looming cash shortage, brought on by the global credit crisis that dried up the supply of money for loans.

The governor wrote a letter to U.S. Secretary Henry Paulson last night, saying turmoil in the credit markets has impeded the state's access to short-term financing commonly used by states and local governments to pay bills until tax revenue arrives later in the year. California and other U.S. states may need emergency federal loans if the credit crisis doesn't ease soon, Schwarzenegger said.

California, the most populous U.S. state, will run out of money by the end of this month and needs $7 billion in funding.

President George W. Bush today signed the legislation passed minutes earlier by the House of Representatives that is supposed to restart lending by authorizing the government to buy troubled assets from financial institutions reeling from record home foreclosures.

``On the way from the airport to here, I heard the great news that the House has voted for the $700 billion bill, which is extremely important not only for the state of California but the whole nation,'' Schwarzenegger told reporters in San Diego. ``Right now, because liquidity has dried up, it's very difficult to get a loan. So if we can't get it through the normal course, we will go to the federal government for help and we have already set that in motion.''

Salaries Threatened

Without the short-term funding, California may be forced to halt or significantly delay payments for teachers' salaries, nursing homes, law enforcement and ``every other state-funded service,'' said Treasurer Bill Lockyer, a Democrat.

``The fed has long had authority to provide liquidity to the municipal market,'' Lockyer said during an interview on Bloomberg Radio. ``The (rescue bill) actually has a little bit more explicit authority to do that. If we can't rely on traditional markets, maybe that's where we will go. It's an alternative if nothing else works.''

Bank of America Corp. and Goldman Sachs Group Inc. have already been selected to manage the note sale, now scheduled for the week of Oct. 13. One option Lockyer said he is considering is to borrow the money from Wall Street in chucks rather than seeking all $7 billion at once.

Pension Plan Investment

One California lawmaker said the state should consider borrowing the money from its public employee pension system, the largest such pension fund in the U.S., with $214 billion in assets.

Senator Dean Florez, a Democrat, said the California Public Employees' Retirement System could buy all the state's cash flow notes, earning more in interest than the system would by investing that same amount of money in U.S. Treasury notes.

``Many financial institutions have moved a great deal of their liquid assets into low-interest Treasury notes as a safety strategy. Rather than keeping these assets at the federal level, it would make more sense if these assets were used to purchase the short-term California debt especially with the state facing the current unprecedented cash shortage,'' Florez said in a letter to Lockyer, a member of the pension fund's governing board.

Letters of Credit

Tom Dressler, spokesman for Lockyer, said the treasurer plans to ask Calpers and its sister fund, the California State Teachers' Retirement System, about purchasing some of the notes or providing letters of credit. The teacher's fund is the second biggest in the nation.

The pension fund already invests in state and local governments by selling letters of credit to bond issuers. In June, Calpers doubled to $10 billion its credit enhancement program, seeking to take advantage in the rise in the cost of letters of credit, another byproduct of the credit crisis. The fund in June voted to withdraw a prohibition against backing no more than $250 million of any one bond issue.

California finance officials had wanted to obtain the cash from the credit market in late August or early September. The sale was delayed as lawmakers and Schwarzenegger fought through a record-long budget stalemate that left the state without an enacted spending plan until Sept. 23.

The state borrowed $7 billion through short-term notes last October, $3 billion in 2006 and $6 billion in fiscal 2005. It has borrowed $4.7 billion annually on average in the short-term market since 1990.

California, the biggest borrower in the municipal-bond market, has $51 billion in general-obligation debt outstanding The state is rated A+ by Fitch Ratings and Standard & Poor's, fifth-highest rankings, and a comparable A1 by Moody's Investors Service.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net.