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California May Need $7 Billion Federal Loan

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California May Need $7 Billion Federal Loan


California May Need $7 Billion Federal Loan

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The State of California is running out of cash, and Governor Arnold Schwarzenegger has sent a letter to Treasury Secretary Henry Paulson warning him that the state might need a $7 billion loan. That's being reported in this morning's Los Angeles Times and the co-author of that article is Evan Halper, a staff writer at the LA Times. He joins us now from Sacramento. Good morning.

Mr. EVAN HALPER (Staff Writer, L.A. Times): Good morning.

MONTAGNE: Give us some details on what the situation is. It sounds pretty urgent if a loan of this magnitude is being requested.

Mr. HALPER: It's pretty routine for the state to need to borrow this kind of money just to even out its cash flow. Just to keep routine government operations going, it'll need the $7 billion to sustain itself until the flood of cash receipts comes in later in the year, some from sales at Christmas season and income taxes in the spring. And the state can't get into the credit markets right now like other state and local governments because of the credit crunch.

MONTAGNE: You're saying it's normal for the state to need the money or a loan but what's different is, it's going to the federal government.

Mr. HALPER: Exactly. The state has never before been frozen out of the markets like this, you know, at this time when it needs this kind of money just to keep operations going. And what the governor is saying to Secretary Paulson is, if we can't access the market so we can't get this cash, we will run out of money, we won't be able to pay for things like schools, law enforcement, employee salaries. And we're going to be turning to you for help doing that, and borrowing the money from you, because we won't be able to get it from the markets.

MONTAGNE: Can you put this in perspective, though? Do you know of the state ever going to the federal government for this kind of a loan, $7 billion?

Mr. HALPER: We've never heard of such a thing. The only situation that seems to come close is when New York City got help from the federal government to avoid bankruptcy in the 1970s.

MONTAGNE: Which was a pretty dramatic moment in the history of not only New York, but really in American history.

Mr. HALPER: Right.

MONTAGNE: Now, you and I are having this conversation on the day that the House of Representatives is expected to vote again on that - what's being known as the Wall Street bailout package. Is the belief that if this bailout package goes through, that will fix things?

Mr. HALPER: That's the hope, and I believe that's the reason that the governor sent this letter probably to put pressure on Congress to pass this bailout package. But you know, nothing's certain. This is such a strange time with the credit markets that even with this bailout package, nobody knows for sure how the market's going to react. And it's possible that the state is still unable to access the $7 billion once the bailout passes - if it does.

MONTAGNE: What is the likelihood that the Treasury Secretary will make such a loan? I mean, you might, in the language we've been hearing lately - is California too big to fail?

Mr. HALPER: You know, that's the big question here. It's unprecedented. We weren't able to get a hold of anyone from Washington late last night when this news broke that the governor was sending this letter. And you know, it's unclear how Washington will respond if California winds up needing this money. But it's only going to be a matter of weeks before the state will not have the money in its coffers to pay, for example, for schools. There's a $3 billion payment owed schools in late October and if California's unable to access the $7 billion, either through the credit markets or through the Treasury, the state will be unable to make that payment to schools come the end of the month.

MONTAGNE: Thank you very much for joining us.

Mr. HALPER: Thank you for having me.

MONTAGNE: Evan Halper is a staff writer with the Los Angeles Times.

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