October 4, 2008 California, Short of Cash, May Ask U.S. for Loan By RANDAL C. ARCHIBOLD LOS ANGELES â With the credit crisis cutting off access to short-term financing, California officials said they may be forced to ask the United States government to lend it $7 billion, warning that the state could run out of money in a few weeks without it. Gov. Arnold Schwarzenegger in a letter Thursday night to Treasury Secretary Henry M. Paulson Jr. said that with credit markets essentially frozen, the state, like a slew of others and local governments nationwide, had no access to short-term financing that normally support day-to-day operations. âCalifornia 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,â Mr. Schwarzenegger said in the letter, which was first reported by The Los Angeles Times. As the nationâs most populous state, Californiaâs precarious finances underscore the depths of the financial crisis. The emergency handout, the equivalent of $192 for each resident, would rival the federal governmentâs bailout of New York City in 1975 as it teetered on bankruptcy. Treasury officials said they were reviewing the letter. Bill Lockyer, the state treasurer, had warned on Wednesday that with Congress debating a national recovery plan, the state had been locked out of credit markets for the past 10 days. âThe credit market is frozen because financial institutions are afraid to commit capital amid enormous uncertainty,â he said then. In an interview Friday morning, Mr. Lockyer cast the emergency loan as a measure of last resort in the event the recovery plan is defeated or does not compel credit financiers to begin lending money again. âWe want to make sure we exhaust every avenue,â he said. Typically, he said, the state gets routine short-term loans in the fall to cover its bases until state coffers refill in the spring from tax revenue and other sources. But the shuttered credit market has upended the budgeting. And Mr. Lockyer said that even if the credit markets loosen, it could cost more to borrow, noting that in the weeks leading up to the crisis borrowing terms had increased substantially. Still, he said he believed the recovery plan would provide some relief and predicted that would be more likely than the government loan. In his Wednesday statement, Mr. Lockyer said the stateâs cash reserves would drain completely near the end of the month, jeopardizing payment for teachersâ salaries, nursing homes, law enforcement and an array of other state-financed services. Californiaâs 5,000 cities, counties and school districts, he added, would face the same fate. Mr. Schwarzenegger, a Republican, on Wednesday had already sent a letter to Congress urging passage of $700 billion plan to rescue the sinking economy. In his letter to the Treasury Department, he reiterated his support of the rescue package, which was passed by the Senate and is under consideration by the House. âThe federal rescue package is not a bailout of Wall Street tycoons â it is a lifeboat for millions of Americans whose life savings, businesses, retirement plans and jobs are at stake,â he wrote. Late in September, California adopted a $143 billion budget, 85 days overdue, after a protracted fight between Mr. Schwarzenegger and the legislature over how to close a $15 billion gap. The budget included some cuts in services. It also relied on accounting maneuvers and assumptions like voter approval to borrow $5 billion against future lottery revenue and to expand the stateâs rainy day fund to 12.5 percent of general fund expenditures, from 5 percent.