California warns it may need $7B loan

LOS ANGELES — California, the nation's most populous state and one of the world's largest economies, has told the Treasury Department it may need a $7 billion emergency loan from the federal government because it is running out of cash and has not been able to borrow more.

State officials said they hoped the $700 billion federal bailout of the financial system approved by the House on Friday would help open the door to credit markets that have balked at providing the short-term financing California and other states and local governments routinely rely on to keep operating.

Gov. Arnold Schwarzenegger, a Republican, said Friday that the state "is not out of the woods yet" and in a few weeks could run out of cash to pay for basic services.

Schwarzenegger sent a letter late Thursday to Treasury Secretary Henry Paulson, warning that the state might be forced to seek the emergency loan.

The credit problem underlying the nation's financial crisis is coming into glaring focus, state officials and outside analysts said, for California and for several other states and local governments.

Creditors, shaken by the economic turmoil, are not providing the financing that governments, normally safe bets, routinely rely on to stay afloat until tax revenue is collected.

In his letter, Schwarzenegger said, "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."

Treasury officials said they were reviewing the letter.

If California follows through on a $7 billion request, the loan, the equivalent of $192 for each resident, could surpass the federal government's bailout of New York City in 1975 as it teetered on bankruptcy. After initially balking, the federal government eventually provided $2.5 billion in federal loan guarantees that helped the city recover.

Asked what would happen if the markets or the government did not come through, Schwarzenegger replied, "This is no such thing in my vocabulary as, 'what if not.' We will."

Schwarzenegger plans to meet next week with legislative leaders to strategize.

Bill Lockyer, the state treasurer, warned Wednesday that the state had been locked out of credit markets for the past 10 days. "The credit market is frozen because financial institutions are afraid to commit capital amid enormous uncertainty," he said.

Lockyer said the state's cash reserves would drain completely near the end of the month, jeopardizing payment for teachers' salaries, nursing homes, law enforcement and an array of other state-financed services. California's 5,000 cities, counties and school districts, he added, would face the same fate.

On Friday, Lockyer said the state routinely receives 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 system, he said, adding that even if the credit markets loosen, it could cost more to borrow. He noted that in the weeks leading up to the crisis, borrowing terms had increased substantially.

He said he thought it was likely the recovery plan passed Friday would provide some relief. "No one likes looking over the precipice, but I think we're OK," Lockyer said.