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States Warn Feds They May Ask for Cash, Too

Deficits and tight credit may force states to beg for Treasury dollars

By Harry Kimball, Newser Staff

Posted Oct 15, 2008 12:53 PM CDT

(Newser) – The credit crisis is threatening states with budget shortfalls, and they could be the next group seeking a federal bailout, the Christian Science Monitor reports. California, looking at a $7 billion deficit, has informed the Treasury that it could come calling. States take loans to cover lean times, in the form of short-term bonds, much like the commercial paper market.

If banks won’t offer states credit, there may be a rush on an already depleted Treasury. But things are looking up: Massachusetts sold $700 million in debt last week, and California is planning a $4 billion bond offering. An analyst was optimistic about a fed response. “States are the safest loans out there. How can General Motors get a loan, if the state of Massachusetts cannot?”

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California Gov. Arnold Schwarzenegger. (AP Photo)

Treasury Secretary Henry Paulson has received notice from many states, including California, which could need $7 billion. (AP Photo)

General Motors and others in the auto industry have received $25 billion in loans, and may get more. (AP Photo)

Gov. Arnold Schwarzenegger discusses a new public-private partnership to fund environmental preservation at Donner Lake, Calif., Wednesday, Oct. 8, 2008. (AP Photo/Rich Pedroncelli)

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If these states can't get their funds the usual way and start asking the federal government, there is no clear-cut way for Washington to respond. This could pit states against each other in very uncomfortable ways.
- Alan Rubin, financial analyst

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States Warn Feds They May Ask for Cash, Too