Capital Markets

Will California Make Payroll?

Governor Schwarzenegger tells Treasury that the state may need $7 billion in short-term financing.
Stephen TaubOctober 3, 2008

California Governor Arnold Schwarzenegger fired off a letter on Thursday to the U.S. Department of Treasury warning that the Golden State may need $7 billion in short-term financing. “Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, 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,” he wrote.

In the letter addressed to Treasury Secretary Henry Paulson, Schwarzenegger noted that the economic fallout from “this national credit crisis continues to drain state tax coffers, making it even more difficult to weather the continuation of frozen credit markets for any length of time.” A day before Schwarzenegger sent the letter, California State Treasurer Bill Lockyer announced that state and local governments had been closed out of the credit markets for 10 days.

The governor explained in his letter that the credit crisis has frozen investment and commerce, forcing businesses and families to stop purchasing goods and services. As a result, tens of thousands of jobs have been lost, and billions of dollars in state tax revenue have been forfeited.

California and several other state and local governments have been squeezed by the lack of liquidity in the credit markets, Schwarzenegger asserted. “Many states and local governments have been unable to secure financing for bond offerings and for routine cash flow used to make critical payments to schools, local governments and law enforcement,” he added.

Schwarzenegger stressed that while some states may be able to absorb a delay or obtain high-interest financing through private banks, California is so large that its short-term cash flow needs exceed the entire budget of some states. “We expect to issue $7 billion in so-called revenue anticipation notes for short term cash flow purposes in a matter of days,” he said.