Risky business
California mortgage companies sparked the ill-fated boom in subprime lending earlier this decade, so it seems fitting in some cosmic, karma-wheel sense that credit markets now regard California’s government as a subprime borrower. In light of the burgeoning budget gap -- more than $24 billion for this fiscal year and the next, according to the Legislative Analyst’s Office -- and the Legislature’s chronic inability to close it, lenders are demanding a premium even for short-term loans to Sacramento. No matter that the state’s credit history is pristine or that its economy is one of the 10 largest in the world. Bond buyers aren’t about to ignore the risk that California poses today.
Unfortunately for those of us who live here, the state has to borrow money every summer to pay its bills. The ebb and flow of tax payments cause cash-flow problems that the state solves through short-term borrowing. This year, it will need to raise more than $9 billion. The state typically buys insurance against the debt to keep its interest payments low, but the state treasurer’s office says the credit crunch afflicting the larger economy has dried up the supply. As a result, the state may have to pay hundreds of millions of dollars more than usual to meet its cash-flow needs -- if it’s able to raise the money at all.
Warning of a devastating impact on public services, California Treasurer Bill Lockyer asked the federal government to insure California’s debt -- a guarantee that would minimize the state’s borrowing costs. Treasury Secretary Timothy F. Geithner told a congressional committee Thursday that he didn’t think he could tap the Wall Street rescue fund for such guarantees. But pleas from other state and local governments may prompt Congress or the Federal Reserve to act anyway.
Although the prospect of California running out of cash is chilling for anyone who lives in or does business with the state, Wall Street hasn’t stopped buying the state’s bonds -- at least not yet. That’s why the federal government shouldn’t try to shield California from the premium that the bond market extracts from risky borrowers, even though Sacramento isn’t responsible for the credit crunch and it’s not looking for help beyond its routine cash-flow troubles. Washington can’t help California with its short-term problems without appearing to be rescuing it from its long-term fiscal mess. And to do so right after California voters rejected measures to raise taxes and cap spending would tell taxpayers across the country not to confront their own states’ problems. The Legislature and Gov. Arnold Schwarzenegger need to enact a credible plan to close the budget gap, and the credit markets will respond. Until it gets its financial house in order, the state deserves to be treated like a subprime borrower.
