State pins its hopes on credit easing
With the president’s signature Friday on a $700-billion financial rescue plan, California officials are looking for signs that they can soon sell bonds.
Alarmed state officials had warned Thursday that they might have to seek as much as $7 billion in short-term loans from the U.S. Treasury if the market for bonds doesn’t improve.
“California is not out of the woods yet,” Gov. Arnold Schwarzenegger said at a news conference in San Diego shortly after the plan passed the House of Representatives. In the current credit environment, he said, securing short-term financing “will be difficult.”
An easing of the credit crunch would allow the state to sell as much as $7 billion worth of short-term bonds to get cash to pay for day-to-day operations, including paying workers, funding schools and feeding prisoners, between the end of October and the spring.
But by late in the day, Wall Street gave few indications that borrowing money was getting any easier.
Yields on three-month Treasury bills fell as investors continued to hoard the safe securities. Interest rates on loans between banks rose, telegraphing that banks were reluctant to lend to one another. And the Dow Jones industrial average closed down 157 points, underscoring a lack of confidence among stock traders that a quick turnaround is about to happen.
In a letter Thursday to U.S. Treasury Secretary Henry M. Paulson, Schwarzenegger warned that the state might have to borrow from the federal government if it couldn’t get the money anywhere else.
Attention now turns to coming weeks as the state assesses whether market conditions will be ripe for a bond sale.
“As we sit here today, I don’t think there is a way to tell,” said Steve Heaney, a managing director at investment firm Stone & Youngberg in Los Angeles.
“We are in uncharted waters. . . . Will it happen beginning next week? We can only hope.”
Schwarzenegger has called an emergency meeting with the four top legislative leaders and the state treasurer for Wednesday in Sacramento.
Action in Washington, officials hope, “is going to open the credit window,” said H.D. Palmer, a spokesman for Schwarzenegger’s Department of Finance. “But the question is: When will it open? And under what conditions?”
If borrowing eases, the state can return to its routine, seasonal sale of revenue-anticipation notes, known as RANs, said state Treasurer Bill Lockyer. That would give California a cushion of cash to operate until tax revenues come in just before the end of the year and later in April.
Lockyer said he planned to test the market’s appetite for buying California debt during the week of Oct. 13. He’ll offer as much as $7 billion in notes in a sale managed by Banc of America and Goldman, Sachs & Co.
“Hopefully, the enactment of the economic recovery plan will end the paralysis in credit markets,” he said. “But there are no guarantees the legislation will produce the market conditions that will permit completion of a RAN deal at the best price for taxpayers.”
But if the sale isn’t successful, Schwarzenegger said, he was ready “to go to the federal government and ask for help.”
Financial experts said it was unclear whether the state would have any takers when it went to market in nine days.
Lewis Feldman, an attorney who has advised the state and local governments on billions of dollars of bond deals, warned that the easing of the credit market is “not going to happen as quickly as a fireman’s clothing change. It is going to take longer.”
Friday’s bailout package contains specific wording that authorizes the Treasury to consider “the need to ensure stability” for public agencies, such as counties and cities, that are faced with significant increases in borrowing costs.
That kind of assistance, it is hoped, will not be needed, said House Financial Services Committee Chairman Barney Frank (D-Mass.) early Friday. Frank said he opposed a loan to California because it could lead to other states asking for federal money.
And if the federal government doesn’t come through for California, if needed, Lockyer is prepared to ask the state’s two giant pension funds for help.
Lockyer spokesman Tom Dresslar said the treasurer was planning to talk to the California Public Employees’ Retirement System and the State Teachers’ Retirement System. He wants them to consider buying some of California’s debt or giving the state special guarantees to boost the creditworthiness of its securities.