Thread: Credit Crisis Pushing California to Brink of Collapse

State of California urges market fix before it runs out of cash

By John Woolfolk

Mercury News
Article Launched: 10/01/2008 06:09:58 PM PDT

California Treasurer Bill Lockyer warned Wednesday that the state could run out of money by the end of the month if the president and Congress cannot quickly agree on a federal bailout to rescue the ailing economy.

Lockyer's announcement underscored spreading anxiety among state and local officials as the market meltdown has frozen credit they rely on to borrow money, ruined financial giants and roiled investments.

Locally, the cratering economy is already projected to cost Peninsula schools invested in a failed Wall Street titan millions of dollars, is holding up San Jose redevelopment bonds and threatens to increase city and county borrowing costs while lowering interest earnings.

For the state, the most immediate concern is its inability to sell short-term borrowing notes needed to maintain cash flow in light of this year's historically late budget approval.

"That means the state's cash reserves would be exhausted near the end of October," Lockyer said. "Payments for teachers' salaries, nursing homes, law enforcement and every other state-funded service would stop or be significantly delayed."

While that may be a worst-case scenario, it comes on the heels of a cash-flow crisis caused by the state's inability to approve a budget for a record 85 days.

Gov. Arnold Schwarzenegger urged California's congressional delegation to adopt an economic stabilization plan to energize the credit market, which was being considered

Wednesday in the U.S. Senate. California will need to borrow $7 billion to meet its obligations for the current budget year, state Controller John Chiang said Wednesday.

"It is daunting that California, the eighth-largest economy in the world, cannot obtain financing in the normal course if its business to bridge our annual lag between expenditures and revenues," Schwarzenegger wrote.

Beyond that, the credit freeze is holding up billions of dollars nationally in state and local bond sales needed to pay for infrastructure projects.

"There's a rather large bottleneck nationally related to municipal bonds," San Jose Finance Director Scott Johnson said, citing a national tally Wednesday of about $10 billion. "Folks are waiting to issue bonds but are holding off."

Lockyer said without a federal bailout, "we will be unable to sell voter-approved bonds for highway construction, schools, housing or water projects."

In San Jose, the city redevelopment agency last week said it may postpone this month's planned sale of $119 million in bonds for weeks until credit markets improve.

City officials are counting on the sale of the bonds to pay for everything from a proposed $300 million expansion of the San Jose

McEnery Convention Center to the purchase of land to lure companies downtown, or for new community centers and neighborhood parks.

Even so, most local agencies are not facing the kind of cash-crunch that prompted Lockyer's announcement. In perhaps the worst immediate fallout locally, the bankruptcy two weeks ago of Lehman Brothers, the fourth-largest U.S. investment bank, wiped out $155 million of a $2.7 billion San Mateo County investment pool, which serves local school districts and other agencies.

That will cost three San Mateo County community colleges a combined $25 million. Sequoia High School District will lose $5.5 million, Redwood City Elementary $1.1 million, Ravenswood Elementary $681,000 and Las Lomitas Elementary $331,000. The small Menlo Park City School District stands to lose $3.5 million because it had recently sold a bond for school remodeling and deposited the proceeds with the county as required.

"You would have thought that the county invested pretty conservatively,'' said Sequoia board president Lorraine Rumley.

But San Mateo County Treasurer Lee Buffington said "there were no signs they were going to go bankrupt. ... There's not much we can do about it.''

In San Jose, city and county officials said they had no such investments in Lehman or other failed financial institutions that would result in immediate losses.

"We have a very conservative investment policy," Johnson said.

Instead, city and county officials worry a prolonged crisis will lower investment earnings and raise borrowing costs beyond the ranges they had anticipated, leaving less money for programs and projects.

Interest on variable-rate bonds has tripled in recent weeks due to the market uncertainty, Johnson said. If that continues, it will raise the city's debt-service costs, he said. The city also issues bonds on behalf of affordable-housing developers, and a lasting crisis would hold up projects, he said.

"If this is a prolonged issue, it could be a real concern," Johnson said. "But if it's just a short-term issue and the market rebounds, it shouldn't have an impact. So we're in a wait-and-see mode."

http://www.mercurynews.com/ci_10612018?source=rss

No Bail Out - States and the Federal Government have committed fraud on the American Citizens. Let them go broke; now looking back in History, New York should have suffered more when we bailed them out financial a few years ago. The pirates and greedy people of the world are in America getting richer and richer.