An unsurprising, but still sobering, bit of late afternoon news on the state of California's finances: Treasurer Bill Lockyer has formally asked the feds to back up the state's massive borrowing needs over the next few months -- essentially a guarantee that the United States Treasury will step in should the state or any local governments default.
In a letter today to Treasury Secretary Timothy Geithner, Lockyer asked for the feds to use powers under the Troubled Asset Relief Program (TARP) to be what amounts to a financial backstop, assuring jittery banks that someone would bail them out were California to default on any of the short-term loans it needs this year to resolve cash flow problems. And as the Legislative Analyst's Office reported just last week, the state's likely to need a lot, especially if some of the budget-related ballot measures are rejected next week by voters.
So here's an attempted laymen's explanation of what Lockyer is proposing:
The state needs to borrow money from Wall Street investors. But given the state's lousy fiscal reputation and the size of the loan needed, investors will demand what are called "credit enhancements," which essentially means guarantees from banks to pay off the state's balance to investors if the worst happens. But in this jittery credit climate, banks might not agree to give the state these credit enhancements... unless, that is, the feds tell the banks that they will step in and pay off the tab should California really go belly up.
"The current credit crisis," says Lockyer in his letter, "makes it highly unlikely that the state can induce the banks to provide the required credit support... without further protection for the banks."
To nudge the banks into helping California, Lockyer proposes that the Treasury Department agree to use TARP funds to cover the banks' losses on the deal... but "only in the event of [a state government] default," says Lockyer.
A spokesman for Lockyer says the value of the "credit enhancements" is enormous to California taxpayers: without them, a $15 billion short-term loan could cost the state as much as an additional $1 billion in interest. The backing of the deal by banks makes the total cost to the state more doable.
Bottom line: today's announcement makes it clear that the state's cash flow crunch couldn't have come at a much worse time... and that while default is very unlikely, California nonetheless needs the feds to effectively say, 'Don't worrry, I've got your back.'