California makes pitch to White House for debt guarantee

The Obama administration may have to decide whether helping California through its current budget crisis would be like feeding a desperate addict's habit without demanding rehab.

California Treasurer Bill Lockyer made his case to White House and Treasury officials on Monday for what would be an unprecedented federal guarantee of the state’s huge upcoming sale of short-term notes.

As every Californian knows by now, we’re broke. Lockyer will be forced to borrow what could be tens of billions of dollars beginning in July to bridge the gap between the state’s current cash needs and future (they hope) tax revenue.

Normally, these short-term municipal note sales are no big deal. But because of California’s deepening budget woes and its low credit rating, Lockyer says investors are likely to demand exorbitant rates on the notes if they’re sold without a third-party guarantee.

Major banks typically provide that guarantee, but Lockyer says they aren’t willing this time. That leaves Uncle Sam as his only hope.

How much would investors demand on the notes without a guarantee? Matt Fabian, senior analyst at research firm Municipal Market Advisors in Westport, Conn., figures California might have to pay annualized tax-free yields of about 5% to borrow for one to two years without a U.S. backstop.

With a guarantee the yields might be about 1%, Fabian said. Lockyer estimates the interest savings could be as much as $1 billion.

Tom Dresslar, Lockyer’s spokesman, says the treasurer spoke by phone with "high level" White House and Treasury officials, but Dresslar declined to name them without their approval. White House and Treasury spokesmen didn’t immediately respond to a request for comment.

Lockyer believes that the Obama administration could create a guarantee program by executive order.

Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services committee, backs California’s request. Although Frank is in the process of drafting legislation that could create a long-term federal reinsurance program for municipal bonds as a way to bring down borrowing costs of all muni issuers, 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 . . . about Treasury’s plan to do something short-term" for California.

Lockyer insists this wouldn't be a federal handout. The state would pay a fee to the Treasury for the guarantee, known as a standby purchase agreement. And Lockyer has been fond of saying that the state would never default on its debt short of "thermonuclear war," so he pitches the idea as risk-free for Uncle Sam.

He's doing his job in trying to lower the state's borrowing costs, of course. But there must be plenty of yield-hungry investors out there who are hoping the state will have to borrow without a federal backstop.

Investors who bought California's last short-term note offering, a $5-billion deal Lockyer completed in October, have been earning spectacular returns relative to the rock-bottom rates on other short-term securities, such as U.S. Treasury bills.

The seven-month California notes that are coming due May 20, for example, pay an annualized tax-free yield of 3.75%. The eight-month notes maturing June 22 pay 4.25%.

For such short-term money, those yields would have been attractive enough if they had been taxable. But they are exempt from both federal and state income tax. No wonder the state was flooded with orders for the notes, allowing Lockyer to boost what had been planned as a $4 billion offering to $5 billion.

But investors' gain was taxpayers' pain. And seven months later, the addict is just in worse shape.

-- Tom Petruno

Photo: California Treasurer Bill Lockyer

Comments

[R.M. Edaps]

Wake up California.........your liberal, self-indulgent mind set has allowed your once hallmark state to be overrun by illegals, deserted by responsible businesses, and generally flounder in bankruptcy. You cannot take care of yourselves and will soon be wards of the Dear Leader's socialist USA unless you change drastically and quickly.

[JS]

While I think the smart course is to 'cut off the addict', you're damned if you do, damned if you don't.

The reality is that this budget hole is going to get filled with borrowing, and while Don Obama is handing out favors for kissing his ring, why not? California delivered a decisive win for Obama, this is one way the state as a whole would benefit, instead of a particular group or industry.

Consider us the AIG of states - too big to fail, and a lot of smaller states depend on us for their own economic survival. Where would Nevada be without all the weekend gamblers from LA?

Take the benefit if available - we've made bigger mistakes before, and got less for our troubles.

[Chuck the Man]

This is a short cited method to deal with the cash flow problem caused by having a workforce at a greater level than necessary. I would suggest just supporting the must funds at a lower level. These would be CHP; forest firefighters, determining if states (such as Texas) will take our prisoners at a lower cost than we are currently paying. If we have to retain our prisoners, I would suggest building a humongous prison out in the middle of the dessert where, only the guards and administrators have privileges. If you do the crime and are convicted, you should not have privileges.

[James Monachino]

NO MONEY NO SERVICES - -

What do we do now. Problem:
* The revenue base has contracted and will be under stress for at least another couple of years.
* California has a bloated infrastructure that needs to realign.
* Cost and Service cuts in the billions will need to take place.

How do we do it. Of course deep down we all know the answer. Through a combination of:
* Re-adjusting a generous state pension program.
* Resizing the California State Work force to budget sustainable levels.
* Slow or stop the growth (temporarily) taking place in entitlement programs.
* Focus on job creation with some carrots for the entrepreneur & business.
* Consider the creation of a California State bank with Federal backed guarantees to stimulate business and commerce.

In the 1930's mass layoffs at the City, State, and Federal levels along with decreased government services were common. So it is no mystery where California is heading once the music stops.

James Monachino

[Roman A]

It's time to pay the Piper, and California is in denial. We need to put the State in Bankruptcy and allow the natural course to take place. I know, it's going to be painful, but we need to wake up and smell the coffee. This entire situation is basic Math. If you have 10 dollars and spend 20, how much do you have? Even my 2 year old can figure that out. I am seriously laughing at our lawmakers, who claim to hold degrees from these High Cost prestigious Universities, but have a problem balancing a math equation that a 10 year old can figure out. These lawmakers are all JOKES. I'd be embarrassed to have such a degree, and not even have the ability to balance a budget…what a Joke!

[pugtv]

Sweet. We Californians get to continue spending like drunk sailors. Pass the beer and let the party continue.

Backoff Bub! That's my credit card! You can't take that away!

California hearts Obama ... hic ... =)

[jdj]

Anybody want to list the services in their neighborhood they'd be willing to part with as part of their criticism?

Anybody want to suggest their kids class size get doubled? Anyone want to suggest their sick grandmother get less medical care? Anyone want the police or fire department staff cut in their city? Anyone who's lost their job want less unemployment insurance? Anyone want less border patrol agents?

[Larry]

California is the most ridiculous, whiny state in the union.

with nearly the highest business and personal income tax burden in the country, we still can't make ends meet. while states like florida get by with NO state income tax. Now, if california was able to provide signficantly better services, administration, and infrastructure, then I agree we should be taxed higher. But every californian knows that we're getting EXTREMELY little for our tax dollar. We have less police per capital. we also have smaller class sizes -- but our schools are just as horrendous. anyone look at the roads in Los Angeles lately?

the only solution is to drastically right-size every expenditure, including social services, and demand more for our dollar. having an open checkbook guarantees irresponsibility and no accountability.