Friday, October 3, 2008

Another face of the national financial crisis: states' liquidity at risk

It's revealed in today's Los Angeles Times that Gov. Schwarzenegger has sent a letter to the federal government warning that California may need access to as much as $7 billion in emergency aid in the wake of the current credit crisis.

Our state, like others, relies on short-term bond funds to back fill its coffers while waiting for anticipated tax revenues. Businesses do the same thing with lines of credit. In his letter to Treasury Secretary Paulson, Schwarzenegger fretted about what a tightening credit market would mean to California, as well as other states:
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."


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.
We need the funds by October 28. We'll see what happens.

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