Tight credit puts state in a corner
With credit markets all but paralyzed and state and local governments unable to borrow money, California officials joined calls Thursday for quick approval of a financial bailout plan working its way through Congress.
The warnings were stark, including suggestions that operating funds to pay state workers, teachers or even healthcare workers could dry up in the weeks ahead.
“It is daunting that California, the eighth-largest economy in the world, cannot obtain financing in the normal course of its business to bridge our annual lag between expenditures and revenues,” Gov. Arnold Schwarzenegger wrote in a letter to the state’s congressional delegation in Washington.
California is swiftly running out of time to float $7 billion worth of short-term debt needed to pay workers and bills as early as next month, state Treasurer Bill Lockyer warned in his own letter.
“This isn’t just a gridlock in Washington problem or a Wall Street financial problem, there are real-life impacts on local school districts, on providing healthcare for the aged and on and on,” he said.
The threat of a prolonged cash crunch has leaders of the main state workers union alarmed, said Jim Zamora, a spokesman for the Service Employees International Union Local 1000, which represents 95,000 people. “We hope it does not come to the point where it threatens members’ jobs,” he said.
The borrowing is needed to keep the state’s cash flowing between last week’s signing of an 85-day-late state budget and the arrival next spring of the bulk of proceeds from the state income tax.
California usually has little trouble getting a competitive interest rate on its short-term borrowing. The securities, known as Revenue Anticipation Notes, are tax-free for investors and backed by the full faith and credit of the state.
But this year the process is expected to be much tougher, said Controller John Chiang. Getting the full $7 billion -- enough to meet all obligations through June 30, 2009 -- will be challenging, especially given the short window of time between now and the final days of October, when California is estimated to run out of cash, Chiang said.
In the meantime, local governments, school districts and public agencies are shying away from selling bonds because of a lack of buyers or demands that they pay extremely high interest rates.
Among the would-be borrowers are school districts in Irvine, Fort Bragg on California’s North Coast and Bridgeport in the eastern Sierra Nevada foothills.
Final approval by Congress of President Bush’s rescue plan “is critical to the well being of every community in California and across the nation” and is needed “to restore confidence in our financial system,” Schwarzenegger said.
But even if Congress approves the $700-billion plan this week, Lockyer could not predict whether a deal would actually make it easier to borrow money.
“All we know is that we can’t do it today, we couldn’t do it yesterday, and we couldn’t do it for the last week and a half,” he said.
According to a trade publication, the Bond Buyer, at least five public agencies in California are having trouble finding buyers for their municipal debt, known as munis.
“There’s no access for any muni of any type,” said Ken Giebel, marketing director for the California Housing Finance Agency.
He said that similar housing funds in Florida, Texas and Virginia sought buyers for their notes recently but pulled them back in the face of interest rates that were three times higher than usual.
“We were really uncomfortable with all that was going on,” said Giebel, whose agency listed a $50-million debt offering on Sept. 11. “That’s why we pulled it.”
The Irvine Unified School District made a similar decision to hold off on a solicitation to sell $81 million in notes to refinance existing debt, said spokesman Ian Hanigan. The district wants to wait until the market turns more favorable, he said.
Local governments are in a more dire situation than the state, which “at least has the ability to raise taxes,” said Matt Fong, a former state treasurer and an investment strategy consultant.
What happens in the next week will be key, he said. “If Lockyer is sending out a warning that California paper is going to have a challenge, then local munis, which don’t have the luxury of having an independent tax base, are definitely going to be in a world of hurt.”
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BEGIN TEXT OF INFOBOX
Voices pro and con
Bailout or no bailout? Economists, money managers and others weigh in on the needs and merits of the proposed $700-billion rescue package for the financial system.
The government must act
“I think there are cheaper ways to address this, but we have to do something. If we don’t, we risk going into a deep recession. We just have to ask ourselves how much we are willing to pay and whether that cost outweighs the costs of the economy slowing down and people losing their jobs.”
-- Paola Sapienza, economics professor, Kellogg School of Management, Chicago
“At a certain point, companies aren’t going to be able to meet payroll, and that will definitely affect regular people. Right now we’re still under 7% unemployment. During the recession in the 1980s, unemployment reached 10%, and the difference between those two numbers is huge. If we hit that number again, people will be feeling it.”
-- Steve Brobeck, executive director, Consumer Federation of America, Washington
“Banks will fail either way, but more will fail if the bailout isn’t done. It’s a small piece of the banking industry that’s bad, but it’s having a big ripple effect. Saying we don’t have to do anything kind of envisions this perfect world where one segment of the economy is separate. Things are so interrelated now that you can’t think that way. We’re a bank without any bad loans and plenty of capital, but we also have customers who are feeling the effects of what’s going on in the economy.”
-- Tad Lowrey, president, CapitalSource Bank, Brea
What’s the rush?
“Who is going to lay off people other than Wall Street? The farmers aren’t going to lay off themselves. The engineering firms need more engineers. The accounting firms need more people. I have seven jobs right now that I need to hire.”
-- John Kornitzer, president, Kornitzer Capital Management, Shawnee Mission, Kan.
“There are plenty of people buying real estate, and houses are selling. I don’t know what they’re talking about when they’re talking about a credit crunch. I own a lot of real estate, so I am constantly bombarded by lenders who want me to buy more property and borrow more money. The last thing we need is for the government to step in and screw things up.”
-- Kurt DeMeire, chief executive, County Records Research, Huntington Beach
“If Bank of America and the other big banks are not going to give loans to people, then that’s good news for small banks. Come to us and we’ll give you a loan. We’d love to give a company like McDonald’s money if they can’t get what they want from the big banks.”
-- William Dunkelberg, chairman, Liberty Bell Bank, Cherry Hill, N.J.
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-- William Heisel
