California looks to Congress to guarantee its borrowing

McClatchy NewspapersMay 12, 2009 

WASHINGTON — California's cash crunch appears ready to land on the steps of the U.S. Capitol.

In coming weeks, Congress is expected to debate whether to take the unprecedented step of guaranteeing the state's emergency borrowing on a short-term basis.

Proponents say they're not asking Washington for a bailout, merely trying to lower the state's borrowing costs by having the federal government back its loans. Critics say, however, that it would be a drastic mistake that would jeopardize the federal government's AAA credit rating, noting that California ranks as the worst credit risk among the 50 states.

"That's never been done, and I think it's never been done for good reason," said Rep. Dan Lungren, R-Calif. He said the federal government couldn't afford to back bonds for every state, adding: "If California does it, other states are going to be standing in line, with New York right behind them."

Supporters say they aren't asking for any financial aid from the federal government.

Rep. Doris Matsui, D-Calif., is working on a bill with Democratic Rep. Barney Frank of Massachusetts, the chairman of the House Financial Services Committee, and expects to introduce it as soon as possible, her spokeswoman, Alexis Marks, said Tuesday.

"California faces a tremendous budget deficit and cash flow crisis, which requires immediate attention," Matsui said. "There is no panacea for addressing California's budget issues at the federal level. However, it's time for the federal government to step in and temporarily guarantee bonds until the economy improves."

Others say the risk is too large. If the request is approved, Orange County, Calif., Treasurer Chriss Street said, the federal government "will inevitably become the lender of last resort for all government entities in California and across the United States."

Lungren predicted that the request will face an uphill fight in Congress and said it raised serious questions of accountability.

"How does the state put its house in order if they can fall back on the federal government to fill the gap?" he asked.

The issue is coming to a head as Californians prepare to vote next Tuesday on three special propositions that will determine the size of the state's budget gap. One would allow the state to borrow money from future lottery revenues, and the other two would shift funds from programs for children's health and the mentally ill to the general operating budget.

If they fail, as polls predict, the state will face a $21 billion hole; if they pass, the gap will be $15 billion. Either way, the state may need as much as $23 billion to pay its bills, beginning July 1.

Members of Congress already were wrestling with how far to go to help cash-strapped states and local units of government.

In February, Congress passed a $787 billion economic-stimulus bill that's expected to send nearly $50 billion to California. Most of that money is targeted to specific programs such as road projects and education, however, and can't be used to fill the state's budget shortfall.

Two California U.S. House Democrats, Reps. Anna Eshoo and Jackie Speier, want Congress to provide federal aid to governmental entities that lost money when financial giant Lehman Brothers went bankrupt last year. They want to pass a bill that would force the federal government to use money from the $700 billion Troubled Asset Relief Program to reimburse taxpayer losses.

Frank is sympathetic, noting that San Mateo County, just south of San Francisco, lost $155 million when Lehman shut down. He said the county would have lost nothing if it had invested with American International Group because the Bush administration decided to bail out AIG investors while doing nothing for Lehman investors.

"There is no principle of any sort that can justify that result," Frank said, "and our job is to try and see if it can be dealt with."

Offering any kind of help to states, counties and cities just months after Congress passed its huge stimulus bill could be a tough sell, however.

"I believe the American people are in a state of bailout fatigue," said Rep. Spencer Bachus of Alabama, the top-ranked Republican on Frank's committee. He said it was a mistake for the federal government to help AIG investors and that it would be another mistake to bail out Lehman Brothers investors.

Republican Rep. Jeb Hensarling of Texas said the U.S. debt load already was soaring and noted that American investors have lost more than $11 trillion since the stock market peaked. He said that "bailouts beget bailouts, which beget more bailouts" and that Congress couldn't bail out everyone.

"Who hasn't lost and who isn't hurting in this economy?" Hensarling asked.

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McClatchy Newspapers 2009

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