California Treasurer Bill Lockyer on Wednesday formally requested federal help to backstop a wave of short-term borrowing the cash-strapped state will need to undertake this summer.
In a letter to U.S. Treasury Secretary Timothy F. Geithner, Lockyer asked the government to in effect guarantee the state's debt against default, so that investors would be willing to provide the financing at reasonable interest rates.
A Treasury spokesman in Washington said the department had no immediate comment on Lockyer's request.
California will be forced to borrow at least $13 billion, and possibly much more, beginning in July to bridge the gap between the state's current cash needs and future tax revenue.
In normal economic times these short-term municipal note sales are routine. But because of California's deepening budget woes and its low credit rating, Lockyer said investors are likely to demand exorbitant interest rates on the notes if they're sold without a third-party guarantee.
Major banks typically provide that guarantee, but Lockyer said they aren't willing this time to do so on their own.
"The enormous size of the required funding together with the state's current credit condition and the continued weakness of the municipal finance market . . . make it highly unlikely that the state can access the short-term market for its borrowing based on its own credit," Lockyer told Geithner.
As the state's cash shortage has worsened in the recession, Lockyer has for months been lobbying for some kind of federal backstop on new debt issuance, which he has said should be extended to all state and local governments to help pare their borrowing costs.
Lockyer has an ally in Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services committee.
Although Frank is in the process of drafting legislation that could create a long-term federal reinsurance program for municipal bonds, it isn't clear what can get through Congress, or how quickly.
Frank told Bloomberg News on Tuesday that he was "working with the administration now . . . to do something short-term" for California.
Lockyer said he believed that the Treasury could create a debt-backstop plan under terms of the financial-system bailout bills passed by Congress in 2008 and this year.
Under his proposal, major banks would provide their customary guarantees of the state's short-term debt, and the Treasury then would agree to stand behind the banks: If the state couldn't repay the debt on time the Treasury would agree to buy the debt, becoming a creditor to the state.
Although critics say U.S. help for California would discourage the state from solving its structural budget problems, Lockyer has insisted that his plan wouldn't be a federal handout. The state would pay a fee to the Treasury for the temporary backstop, he said.
"There is only a small chance that the Treasury will ever be called upon to purchase defaulted municipal [notes] and even if it does, its risk of eventual nonpayment is virtually nil because municipalities must repay their debts eventually," Lockyer told Geithner.