It was bound to happen, sooner or later. State governments are stressed to the maximum in the current Bush economy. So it should come as no surprise that Governor Schwarzenegger of California, our most populous state, is claiming California may need to seek $7 Billion Dollars in loans from the US Treasury if the economic climate doesn’t improve ASAP:
(Reuters) – California may need an emergency loan of up to $7 billion from the federal government within weeks, the Los Angeles Times on Friday quoted Gov. Arnold Schwarzenegger as saying in a letter to U.S. Treasury Secretary Henry Paulson.
In the letter dated October 2, Schwarzenegger called for the passage of the $700 billion financial industry bailout plan which the U.S. House of Representatives is expected to vote on Friday, the Times said.
“Absent a clear resolution to this financial crisis, 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,” Schwarzenegger wrote in the letter, according to the paper. […]
In the letter, Schwarzenegger noted California’s plans to issue $7 billion in revenue anticipation notes in the coming days to fund short-tern cash needs — now put in doubt by the crisis in the credit markets.
On Wednesday, California Treasurer Bill Lockyer said the most populous U.S. state’s cash reserves may be exhausted near the end of October, and various state-funded services are at risk of grinding to a halt.
He said the planned notes sale was at risk from the uncertainty gripping financial markets and the U.S. government’s lack of response to it.
Gosh, who could have foreseen that a credit crunch would mean no one would want to buy bonds issued by individual states? If this is happening to California, rest assured it soon will be a problem for your state, also. California has always been a leading indicator in cultural trends for America, and now it looks to be a leading indicator for financial and economic trends, too.
Why? Well California has the largest economy of any state in the country. As our state economies weaken, the tax revenues upon which our state and local governments rely, such as sales taxes and local property taxes, have declined precipitously. And when the credit markets are frozen, as they are now, no one wants to take the risk of an American state pulling an Epic Fail and refusing to pay off on its debts.
So Schwarzenneger is announcing his own version of “too big to fail” in his letter to Paulson. “Fix the financial markets” he’s telling Washington, “or the next bailout you will be faced with is states like California that can’t refinance their debt.” California may be the first state to face this stark reality, but rest assured, it won’t be the last.
As more and more businesses are forced to close their doors, or lay off employees, because they no longer have access to the credit necessary to run their operations, tax revenues will continue to plunge, and more and more state and local governments will be faced with some very unsavory options. They may have to cut essential services (think fewer police and fire fighters), close schools and libraries, abandon needed repairs to crumbling infrastructure such as roads and bridges, cut outlays for Medicaid and social services, lay off government employees, and so forth, in order to cut expenses. Because at a time when their tax revenues are declining, if they can’t obtain money from the bond markets, they won’t be able to pay off their current debts, much less the expenses necessary to provide those services that you and I have come to rely upon. And that, my friends, is not a happy future to contemplate.
