WASHINGTON The Bush administration will respond soon to a letter from California Gov. Arnold Schwarzenegger that said his state could need the federal government to buy $7 billion in notes because of a frozen municipal debt market, a White House official said on Tuesday.
"There was a letter from Governor Schwarzenegger to the administration asking for a $7 billion loan and that is being discussed," White House economic adviser Edward Lazear said in a speech to the National Association of Business Economists.
"I obviously can't reveal what's going to be said in the letter back to the governor, but that will happen ... probably today or tomorrow. So we'll have some information for you there," Lazear said, in response to a question.
Schwarzenegger told Treasury Secretary Henry Paulson in a letter last Thursday that California could need the federal government to buy $7 billion of state revenue anticipation notes stalled by a weak credit market.
California, the biggest issuer of U.S. municipal debt and the most populous U.S. state, needs to sell the notes to tide itself over before it collects fees and other income. Without short-term cash, the state may need to cut spending on services, including law enforcement.
On Friday, Schwarzenegger said a $700 billion federal financial bailout bill passed into law that day should help calm markets, but California was still not "out of the woods".
"If we can't get that loan through the normal course, we will go to the federal government and ask for help and we have already set that in motion," Schwarzenegger said.
CONTINGENCY PLANS AND UNCLE SAM
The California state Treasurer's office is preparing to take the $7 billion in revenue anticipation notes to market next week, but it is also weighing other options, including bank loans and taxable issues to raise cash in addition to approaching the U.S. government to buy the debt.
"Obviously, given the circumstances, we were hoping for a quick response. It looks like we're going to get one," said Tom Dresslar, spokesman for California Treasurer Bill Lockyer.
California's Department of Finance said it, too, was awaiting word from the federal government.
"No formal communication has been received yet ... but we'll see where the day takes us," said H.D. Palmer, a spokesman for the department.
Whether California ultimately will need the federal loans depends on how quickly the bailout package is able to unfreeze credit markets, Palmer said.
"We believe the rescue package will have a beneficial effect in getting the credit window to open. But two questions remain: When will the credit window open? And under what conditions? Because of that contingency, that is why the governor took the prudent step of sending that letter to Secretary Paulson," Palmer said.
The U.S. government could buy California's notes if a consensus emerges in Washington for deficit financing to assist cash-strapped state and local governments, said James Hawley of the Elfenworks Center for the Study of Fiduciary Capitalism at Saint Mary's College of California in Moraga, California.
Otherwise, state and local governments may be forced to cut payrolls, which would make unemployment worse, or hike taxes, which would pull money out of consumers' pockets. Either option is risky amid a frail economy, said Hawley, the center's co-director.
"It's a very dangerous situation, given everything else that's going on," Hawley said.