Geithner: U.S. loan guarantees will require OK from Congress

WASHINGTON — Treasury Secretary Timothy Geithner said Thursday that it will require an act of Congress to have the federal government guarantee emergency loans for California, complicating the state's efforts to find a way to pay its bills.

Geithner told a House panel that federal law would not allow the Obama administration to act on its own. That's a blow to backers who had hoped to get quick approval from the Treasury Department, bypassing a fight in Congress.

With a poor credit rating and a deficit of more than $21 billion, California won Geithner's sympathy, but he said the state's budget woes are not unique.

"They are acute in California, but many states across the country are facing very similar challenges both in terms of level of unemployment, substantial increase in borrowing needs, incredibly difficult choices ahead," Geithner said.

With even the state's congressional delegation divided, proponents will face some heavy lifting if the issue goes to a vote in Congress. Opponents fear it would create a precedent and set the stage for other states to go to Capitol Hill with their hands out.

"It's hard for me to quite imagine my colleague from Wisconsin or one of my friends from Kansas ... to say, 'Sure, we'll back your bonds, and we'll pay part of the price, indeed, because we know, we're absolutely certain you're going to reduce your spending patterns and thereby get your economy in order,'" said Republican Rep. Jerry Lewis of California, a member of the House Appropriations Subcommittee on Financial Services and General Government.

Supporters of the loan guarantees said they believed the bank bailout approved by Congress last fall gave the Treasury Department the authority to help states. But Geithner said the law only allowed the department to aid financial institutions.

Geithner's interpretation of the law is more bad news for Republican Gov. Arnold Schwarzenegger and legislative leaders, who must craft a plan to balance the state's budget. On Tuesday, voters rejected a partial budget solution that would have reduced the deficit to $15 billion, prompting the governor to say that drastic cuts are in the offing.

At the White House, presidential spokesman Robert Gibbs told reporters that the Obama administration and Congress included "significant aid" to states -- California is set to receive nearly $50 billion for various programs -- in its economic stimulus program to help them with their budget struggles. But he declined to answer a question on whether legislation would be necessary to help the state.

"Obviously, California is probably first and foremost in a list of those states struggling with those challenges," Gibbs said. "We're continuing to watch the situation, but I think it would be premature to get into a discussion of what you're asking about."

Gibbs added: "I do think, obviously, that the state has to make some very tough fiscal decisions. They understand the laws with which they operate under and the budgetary constraints that they have. They're going to have to make a lot of difficult choices."

With or without the emergency loan guarantees, California still will need to proceed with its budget cuts. The loan guarantees -- estimated at from $15 billion to $20 billion -- are aimed at helping the state pay its bills, beginning on July 1.

Supporters of the loan guarantees, including Democratic Sen. Barbara Boxer, had been awaiting a ruling from the Treasury Department before deciding what to do next.

Zachary Coile, Boxer's spokesman, said Boxer is working with the administration "to find a pragmatic solution for California." He said the state's budget crisis will worsen if the state doesn't get the loan guarantees and is forced to pay higher interest rates of 6 percent to 9 percent.

In the House, Democratic Rep. Doris Matsui of Sacramento is a strong backer of the temporary loan guarantees. Alexis Marks, her spokeswoman, said Matsui is continuing to work on the issue with Democratic Rep. Barney Frank of Massachusetts, the chairman of the House Financial Services Committee.

Democratic House Speaker Nancy Pelosi of San Francisco has not publicly endorsed the idea of loan guarantees, but she met with Schwarzenegger on Tuesday to discuss the state's financial crisis. She's exploring many options on how to best help California, her spokesman said.