Federal debt-purchasing program may exclude states

Although the New York Federal Reserve Bank hasn't ruled out helping agencies sell tax-free bonds, Lockyer said the Commercial Paper Funding Facility set up this week by the government to help corporations hobbled by the credit crunch was unlikely to provide any assistance to municipal bond issuers.

"I'm saying, gee, you need to adjust the scope of the program so it includes municipal commercial paper," Lockyer said. "We have a problem, and we don't know how you can care about business and not care about state and local government."

California needs help, and quickly, Lockyer said. Next week, California plans to offer $4 billion worth of short-term revenue anticipation notes for sale.

If the IOUs don't sell, the state could run out of money to pay for many routine expenses by month's end.

To underscore the importance of the upcoming sale, Gov. Arnold Schwarzenegger will appear in advertisements set to air on Los Angeles and San Francisco news-radio stations beginning Thursday. The governor is urging individual Californians to invest in their state by buying the notes during a retail sales period Tuesday and Wednesday.

The notes will be available for purchase by commercial and institutional investors Oct. 16, and sales are scheduled to close Oct. 23.

Lockyer and Schwarzenegger say the state needs to borrow as much as $7 billion to cover routine expenses and smooth out cash flows until tax receipts arrive in strength early next year. The $7 billion might not be enough if revenues continue to fall below estimates.

On Wednesday, the Schwarzenegger administration reported the 2008-09 budget the governor signed just two weeks ago already was $3 billion in the hole.

Schwarzengger says he plans to meet with legislative leaders on a weekly basis to "make sure we have the money to pay back" any loans.

Andrew Williams, a spokesman for the New York Fed, declined to discuss the state requests in any detail. The bank, he said, is "consulting with bond dealers and issuers on the parameters of the program, and a lot of the details are to be finalized."