Friday, October 03, 2008


 "The Los Angeles Unified School District Chief Financial Officer Megan Reilly said her concern is that the state may run out of cash at the end of October - as the governor and state treasurer have warned - and be unable to borrow money for short-term cash flow.

"That would cut funding for schools and force LAUSD to borrow money in the current frozen or expensive market to make payroll and other expenses."


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.

image  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.

imageCalifornia 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.

At that time, 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."



By Kerry Cavanaugh, Staff Writer | Daily News

October 3 - If the House rejects the $700 billion bailout plan today, California and local governments might have to postpone voter-approved road, school and other projects for lack of money.

Turmoil in the financial markets has made it difficult and expensive for government agencies to sell bonds that generate the cash needed to pay for large-scale construction projects.

In a letter to Congress, Gov. Arnold Schwarzenegger urged action on a bailout plan, warning that the state won't be able to fund highway, school, housing and water projects in the current financial climate.

"It's now very clear that the financial crisis on Wall Street is affecting California - its businesses, its citizens' daily lives and its state government's ability to obtain financing to pay for critical services," Schwarzenegger wrote.

California voters approved an unprecedented $42 billion in bonds in 2006 to pay for projects ranging from freeway upgrades to new schools to flood control levees. In addition, dozens of earlier bonds for parks, water projects and other public facilities still need to be sold. The state had been planning to sell an estimated $2billion in bonds in November.

Besides issuing bonds, the state also borrows short-term cash from Wall Street to meet normal operating needs before tax revenue starts flowing to state coffers.

But state Treasurer Bill Lockyer warned Thursday that state and local governments have been shut out of credit markets for the last 10 days.

"That means the state's cash reserves would be exhausted near the end of October," Lockyer said.

If that happens, it would be another blow to those who depend on state funding, only weeks after the end of a recordlong budget impasse that delayed state payments for 85 days.

In Los Angeles, government agencies hope that congressional approval of a bailout plan will stabilize shaky markets, encourage new lending and let them proceed with planned infrastructure projects.

With the tight credit markets, money for municipal bonds has dried up, said Edward De La Rosa, president of the investment banking firm De La Rosa & Co.

"A lot of people are waiting on the sidelines," he said.

The Los Angeles Department of Water and Power is planning to sell $550 million of bonds in November to upgrade its power system, including new power poles, circuits and transmission lines. Should the credit crunch continue, the utility would consider postponing the work.

"Our hope is that the market will regain its liquidity and will start to flow again by the time we issue our next set of revenue bonds," DWP General Manager H. David Nahai said. "But nobody has a crystal ball."

The Los Angeles Unified School District plans to sell bonds in November to pay for voter-approved school construction and maintenance projects, but Chief Financial Officer Megan Reilly said the district will delay if market conditions are poor.

Her bigger concern is that the state may run out of cash at the end of October - as the governor and state treasurer have warned - and be unable to borrow money for short-term cash flow.

That would cut funding for schools and force LAUSD to borrow money in the current frozen or expensive market to make payroll and other expenses.

"When we don't get cash from the state we have to cover it in market transactions, and that's not a good thing," Reilly said.

L.A. county officials said Thursday the county is well-positioned to withstand the financial crisis.

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