U.S. keeps California waiting on plea for debt backstop

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The Obama administration seems in no rush to decide on California’s request for a federal guarantee on billions in short-term borrowing the state must undertake this summer.

Then again, nobody in Sacramento was expecting an affirmative answer before Tuesday’s special election. Given the prospect for the stopgap budget measures on the ballot to go down in flames, there would be no point in aiding the ‘no’ vote by telling voters that federal help was on the way.

As reported last week, California Treasurer Bill Lockyer has formally asked the U.S. Treasury to provide a backstop for potentially tens of billions of dollars of short-term notes the state plans to sell beginning in July. (See Lockyer’s letter to Treasury Secretary Timothy F. Geithner here.)

Without such a guarantee, the state fears it will have to pay exorbitant tax-free interest rates on the debt -- say, 5% instead of 1% or 2% -- blowing an even bigger hole in the budget.

Lockyer’s spokesman said today that the state was ‘continuing to have discussions with the administration and members of Congress’ about the backstop request.

A group of California cities and counties is asking for the same kind of guarantee on $335 million in short-term borrowing to occur in June, according to Paul McIntosh, executive director of the California State Assn. of Counties. The group tentatively includes Mendocino County, Redondo Beach and Chula Vista, according to the association’s letter to the White House.

Lockyer and McIntosh are pitching the guarantee as low risk for the Treasury -- but then, how else could they describe it? They say they expect to line up commercial banks to provide the usual backstop of such debt, but want the Treasury (for a fee) then to backstop the banks, to give more comfort to the investors who buy the notes.

One glaring problem California faces is that no other state is agitating so publicly for a federal debt guarantee, even though any such program approved by the Treasury almost certainly would be made available to other municipal borrowers. California is hardly alone in facing a serious budget crunch this year, but it’s crying the loudest.

Geithner told Bloomberg News today that the administration was in contact with California and other state and local governments facing budget issues.

‘I wouldn’t use the word ‘bailout’ or ‘federal,’’ Geithner said. ‘I would say we’re in close consultation with the people who are looking at ways to make sure these markets are working so that states and munis can meet their needs.’

Sounds like they haven’t made up their minds what to do.

-- Tom Petruno