Thursday, May 14, 2009

California asks for TARP Money

MarketWatch reports California formally asks Geithner for TARP assistance

In a letter, Lockyer asked Geithner for TARP assistance for California and "other financially strapped states and local governments which face a severe cash flow crunch."

"If we cannot obtain our usual short-term cash-flow borrowings, there could be devastating impacts on the ability of the State or other governments to provide essential services to their citizens," Lockyer wrote.

In particular, Lockyer cited fire and police protection, education and social services.

In addition, Lockyer warned in the letter that California's cash flow problems may lead to trouble accessing the long-term bond market, which could "eventually even halt our infrastructure construction programs."

Lockyer estimated that California's cash flow shortfall in fiscal 2009-2010 will be more than $13 billion.

But weakness in the credit markets will cause difficulties in short-term borrowing to make up that difference, Lockyer wrote, necessitating the use of TARP money to help make funds more easily available through banks.

Under a plan outlined by Lockyer in his letter, if a government is unable to repay loans made using TARP funds, the Treasury would use TARP money to "purchase the non-performing assets."

Under that scenario, the state or local government would then directly repay the Treasury under the terms it had with the bank, according to Lockyer's plan.

Lockyer has stated previously that he believes the Obama administration has the authority to use TARP to guarantee state-government borrowing.

Mike Shedlock points out:

Note that the proposed $16 billion in tax hikes was supposed to plug the budget but it is already another $8 billion in the hole. And judging from what Lockyer said, it appears the gap is up to $13 billion, assuming California passes those hikes.

I am betting California does not pas those propositions. Moreover I encourage California to not pass those propositions or they will be taxing themselves to death.

Assuming the hikes do not pass, California will be $29 billion in the hole, and counting, with the important phrase being "and counting".

California is going $2 billion more in the hole every month like clockwork and I see no reason for that to stop now.

Are unions out of their minds in this environment to object to a wage freeze? On the surface it would appear so. However, unions may be emboldened by the Obama Administration's willingness to bend over backwards for union demands.

From The Wall Street Journal Demoting California: Unions hold the state's stimulus hostage.

One of the biggest stories in politics earlier this year was about California's budget teetering on the edge of a $42-billion deficit abyss. It only staved off insolvency when its legislature ended three months of gridlock to pass a budget with steep tax hikes and spending cuts. Guess what the Obama Administration is doing? It is telling Governor Arnold Schwarzenegger that it will revoke nearly $7 billion in federal stimulus money unless the state restores legislated wage cuts for unionized health-care workers.

Obama Administration to federalism: Drop dead.

In its budget deal, California agreed to $74 million in wage cuts for unionized home health-care workers. The Service Employees International Union huffed to the higher power in Washington, which duly agreed to hold California's stimulus hostage.

Governor Schwarzenegger has sent a letter asking the feds to reconsider, noting the cuts were taken in response to "an unprecedented fiscal crisis." Even now the state faces an estimated cash-flow problem of some $17 billion by July.

Restoring the union money will require a two-thirds vote of the Legislature, a task in California somewhat akin to moving the Sierra Nevadas. Still, it's worth noting where the Obama team ranks the political authority of a legislative enactment by the state of California versus the political clout of a union.