SACRAMENTO AND LOS ANGELES — First came the banks and insurance companies. Then the auto industry. Now, with California on the verge of financial collapse, state leaders are demanding an unprecedented federal rescue of their own.
They say they need the Obama administration to step in and back billions of dollars in emergency loans. If Washington fails to do so, the state could start running out of cash in July and then would have to stop paying huge amounts of its bills. That, in turn, could set off dangerous ripples throughout the economy, state officials say.
The argument is familiar. Just like AIG and General Motors, California says it is too big to fail.
"A fiscal meltdown by California . . . would surely destabilize the U.S., if not worldwide, financial markets," State Treasurer Bill Lockyer wrote in a May 13 appeal to U.S. Treasury Secretary Timothy Geithner.
Such federal assistance for a state has never been tried before, experts say. The last time the U.S. Treasury acted in any comparable way was during the financial crisis in New York City in the 1970s. And that assistance came with strings attached -- as the recent bailouts of the auto and financial industries have -- with the city government forced to cede some control of its finances.
"We're in uncharted waters," said Jason Dickerson, a budget expert at the state Legislative Analyst's Office. "We've never been here before."
What got the state to this point is a combination of plunging tax receipts brought on by the recession, the state's years-long inability to balance its budget and the continuing international credit crunch.
The state needs to borrow every summer because most of its income-tax receipts flow in during the winter and spring. But this year, the need is bigger than ever: Even if lawmakers balance the budget, California will need $15 billion to $20 billion in short-term loans to make it through the year. It is unclear whether Wall Street will put up that much cash. California's credit rating is in the cellar and the state has never secured a short-term loan that large.
That is where the federal government comes in -- or so state officials hope.
Lockyer and Schwarzenegger say last fall's federal bailout legislation gave the Obama administration legal authority to back the state's loans. Now is the time to exercise that power, they say. Under their plan, the federal government would guarantee private lenders that they would be paid -- with taxpayer money from across the country -- if California defaults on its loans. The idea is to take the risk out of lending to California so the banks will put up the funds.
