California May Need $7 Billion Bailout

As Dave Schuler has been predicting for a while now, the financial crisis is starting to hit state governments.

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.

Lending money to the states would seem like a no-brainer, regardless of one’s views of bailing out/rescuing the big banks.

Please follow and like us:
FILED UNDER: General, , , , , ,
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. I’m dubious about the claim that California was ‘locked out of the bond market’. Was it that credit was completely unavailable, as the article seems to suggest, or was it, as I suspect, merely that California would have had to pay a higher interest rate than they might have preferred?

  2. DC Loser says:

    Didn’t the Governator announce a couple of months ago that in the budge crisis he was going to unilaterally lower state employees’ salary to the minimum wage?

  3. Patrick T. McGuire says:

    Lending money to the states would seem like a no-brainer, regardless of one’s views of bailing out/rescuing the big banks.

    Unless it’s to states like California.

  4. Brett says:

    This solution has been floating around in Democratic circles for a while – state and local governments almost always suffer revenue declines in poor economic times, and are frequently forced to cut municipal services right at the time when they are the most necessary.

    They really ought to couple it with some tax reform in California, though – the reason the state is in its current crisis is because of the crippling effect of Proposition 13 on doing anything to raise tax revenue, while California voters are completely unwilling to give up services that requires that funding. Because of that, California has been forced to borrow more and more money over the years, holding it down during good economic times (when income tax revenue is high), and suffering in bad.

  5. Dave Schuler says:

    Just as with corporations there are two distinct issues. The first is short-term cash flow. When interest rates are low and credit readily available using short-term loans enables an organization to operate with considerably less capitalization than would otherwise be necessary. Under those conditions it’s a smart strategy. Conditions are changing faster than business practices.

    The second is long-term solvency. There are businesses that are troubled by the higher cost or, in some cases complete lack of availability of short-term credit that are otherwise solvent.

    But there are some organizations for which higher interest rates on short-term credit is disastrous. They simply can’t afford to pay more. Their business model is failing.

    That’s the situation with California. Tax hikes won’t fix the state’s problems. It’s got to cut state payrolls. And there’s no political will to do that.

  6. davod says:

    This is BS. California was going bankrupt well before the latest problems. California’s credit problems could well be because of its spending.

  7. Sam says:

    No brainer? Hardly. Let California cut their own damn budget. Check out the rate of growth in their budget compared with other states. Colorado has TABOR – the budget can’t increase faster than the rate of growth adjusted for inflation without approval by the voters. California should try it. New York, btw, will be next.

  8. John425 says:

    One more time: “Government has to live within OUR means!”

  9. Well, I guess it’s a no-brainer if you have no brain. It is precisely this mentality that no one has to live within their means and that Big Daddy will always have the means to bail anybody out that is the problem. You want more of something? Subsidize it. Do you really think California and others will do the right thing next time if we will just see them over the hump this time?

  10. Steve Verdon says:

    They really ought to couple it with some tax reform in California, though – the reason the state is in its current crisis is because of the crippling effect of Proposition 13 on doing anything to raise tax revenue, while California voters are completely unwilling to give up services that requires that funding. Because of that, California has been forced to borrow more and more money over the years, holding it down during good economic times (when income tax revenue is high), and suffering in bad.

    Written by someone who doesn’t live in CA. During real estate booms if Prop. 13 were removed, many families would have to sell their homes due to the property tax.

    The budget problems are caused by moronic politicians who like to spend lots of money on dubious programs. Further, CA has relied more and more on tax revenues that are volatile and linked to the business cycle and during fat years spend everything and then have to scramble in the lean years.

    But there are some organizations for which higher interest rates on short-term credit is disastrous. They simply can’t afford to pay more. Their business model is failing.

    That’s the situation with California. Tax hikes won’t fix the state’s problems. It’s got to cut state payrolls. And there’s no political will to do that.

    Right. For example the union for the prison guards is notorious for getting sweetheart deals and having lots of political muscle. For example it isn’t uncommon for the prison guards to negotiate contracts where they get pay increases at around 2x the rate of inflation.

  11. Brett says:

    Written by someone who doesn’t live in CA. During real estate booms if Prop. 13 were removed, many families would have to sell their homes due to the property tax.

    I was referring to the requirement of a two-thirds’ majority to raise taxes by the State Legislature (as well as the requirement for a two-thirds’ majority to actually pass a budget), but there is that, too. Of course, perhaps if you hadn’t been so willing to prevent any property tax, you might actually have some decent muncipal services and a good public education system. You also might not have so much sprawl into fire-danger areas in SoCal.

    The budget problems are caused by moronic politicians who like to spend lots of money on dubious programs. Further, CA has relied more and more on tax revenues that are volatile and linked to the business cycle and during fat years spend everything and then have to scramble in the lean years.

    Yes, they’ve been highly reliant on income tax to cover their budgetary needs. You have no one to blame but yourselves for that, though; you wouldn’t be so dependent on that for revenue if you hadn’t completely crippled property tax (incidently, the main source of revenue for local and county governments, which means that they get to rely on hand-outs from the state for solvency).