California shouldn't hope for U.S. loan guarantees, lawmakers told

As the governor's plan for drastic budget cuts begins stirring revolt, state legislators are told that California might not be able to borrow more than $10 billion as it faces a $24-billion deficit.

By Eric Bailey and Patrick McGreevy

8:20 PM PDT, May 22, 2009

Reporting from Sacramento — As the full brunt of Gov. Arnold Schwarzenegger's mammoth budget-cut proposal began fortifying partisan battle lines and stirring revolt, California officials scrambled Friday to scrape together a plan to keep the state solvent after the White House informed them that federal backing for emergency short-term loans is unlikely.

State Treasurer Bill Lockyer testified before the Legislature that he had been informed by Washington not to expect the loan guarantees. The state's senior U.S. senator, Dianne Feinstein, later echoed the sentiment. The state is now at the mercy of Wall Street for a multibillion-dollar loan necessary to get through the year. Lockyer had previously warned that the state may not be able to obtain that much cash without federal help in this tight credit market. If the state can secure the money, it will probably come at steep interest rates, costing California as much as $1 billion, Lockyer said in an interview.

Controller John Chiang joined the treasurer to tell a 10-person joint legislative committee grappling with the $24-billion budget deficit that the state is facing its biggest-ever cash crisis and could be out of money come July. The fix, they said, must involve wiping out the deficit before the end of June.

"We can't have July Fourth fireworks going off in this building," Lockyer said.

With the governor considering a deficit-reduction plan that includes eliminating state health and welfare programs for the poor, advocates for low-income families were marshaling their forces for a series of public hearings before the legislative panel next week.

Health activists say a proposal to slash Medi-Cal funding and eliminate the state's Healthy Families program for the working poor would mean the end of coverage for 2 million Californians.

"These cuts would be the most profound rollback of coverage in the state's history," said Anthony Wright of Health Access California.

Among other possible spending cuts Schwarzenegger is expected to formally endorse in a presentation next Tuesday: dismantling the state's CalWorks welfare-to-work program, eliminating grants to lower-income college students, cutting state park funding and borrowing $2 billion from local municipalities.

Leaders from cities and counties dashed off a letter Friday to Schwarzenegger, urging him to abandon any raid on cash-strapped local governments. Meanwhile, the Los Angeles County Commission on HIV issued an alert objecting to possible elimination of a $96-million AIDS program that provides help to 35,000 patients.

And more than a dozen scientists, and groups including the American Lung Assn., wrote to lawmakers voicing "profound concern" over potential dismantling of the state office that evaluates the health risks of chemicals in products and the environment.

Aaron McLear, Schwarzenegger's spokesman, said such protests are expected given the gravity of the state's situation and the steep cuts that will be required.

"The governor fully understands that each one of these cuts affects real people," McLear said, adding that with a mammoth deficit "there is simply not an easy way to get out of that."

Late Friday, the administration also detailed its plans for eliminating about 11,000 government jobs, including up to 6,500 vacant positions that will not be filled. Of the 4,650 layoffs, more than three-quarters are at the state Department of Corrections and Rehabilitation.

Republicans in the Capitol embraced the idea of a starkly downsized state government, but Democrats refocused on possible new revenue sources, including a levy on soft drink sales and taxing oil companies for each barrel of crude pumped in California.

Assemblywoman Noreen Evans (D-Santa Rosa) said just the tax on oil drilling -- California is the only oil-producing state in the nation that doesn't have such a fee -- could offset some of the cuts by pouring $750 million into state coffers.

"I don't want single mothers with children begging on the streets. I don't want schools closing. I don't want a state where only the wealthy can go to college," said Evans, chairwoman of the joint legislative panel. "That's what we're really debating right now: Which California do we really want?"

Across the aisle, state Sen. Bob Dutton (R-Rancho Cucamonga) said California has dragged its feet too long in making cuts and that Democrats need to stop talking about tax increases.

"Some of them are still in denial," Dutton said. "You aren't going to tax or fee your way into prosperity."

As lawmakers and Schwarzenegger struggle with the deficit, they also must work to keep enough cash on hand to pay the bills.

Tax revenues in California ebb and flow with the seasons, and the state has traditionally taken out short-term loans to help with cash flow. But the Wall Street meltdown and California's rock-bottom credit rating have combined to make such borrowing far more difficult -- and far more expensive.

On Friday, Feinstein declared that congressional backing for loan guarantees is a long shot.

"The state is going to have to make some very painful cuts," Feinstein said.

During his presentation in Sacramento, Lockyer said he spoke privately with federal officials who suggested that loan backing was highly unlikely.

With the state probably going it alone, Lockyer and Chiang urged legislators to quickly find deficit solutions focused primarily on spending cuts.

"My suggestion is you don't delay the pain," said Lockyer, a Democrat and former state Senate leader. "It's going to be awful, but just get it done. It's going to be worse if it doesn't get done."

Resolving the budget deficit, he said, is the best way for California to ensure the best reception in the credit markets. He said the state should at most borrow $10 billion in short-term loans to help ease cash-flow difficulties during the 2009-10 fiscal year.

Chiang said the costs of borrowing, particularly without federal backing, will soar. The credit markets "will assume the worst of California," he said.

State officials have previously estimated that the cost of borrowing could skyrocket to $1 billion or more during the coming year.

Chiang said such news, on top of the grim job of slashing a huge deficit, had him feeling like one of the Four Horsemen of the Apocalypse -- "except we had to sell the horses."

eric.bailey@latimes.com

patrick.mcgreevy@latimes.com