Federal officials unsure about California bailout

Treasury Secretary Timothy Geithner says he doesn't have the authority to provide federal aid to the state. Advisor David Axelrod fears helping California could prompt aid requests from other states.

By Peter Nicholas and Richard Simon

1:14 PM PDT, May 21, 2009

Reporting from Washington — Obama administration officials expressed concerns today about California's request for federal intervention in its budget crisis, and even the state's own Congressional delegation is split on the issue.

The state has asked the administration to provide loan guarantees for billions of dollars in emergency loans, saying it will soon run out of cash without help from Washington.

But today, Treasury Secretary Timothy F. Geithner expressed doubt that he had the authority, without new congressional legislation, to aid the state under the program set up by Congress to rescue financial institutions.

He told a Congressional committee that the primary burden rests with governors and mayors to bring their deficits down. But he added that in order to turn around the economy, "there are things that we've had to do I would never have contemplated doing."

It's a "difficult, complicated balance," he said. Geithner pledged to work with Congress to explore ways to help California. But some Congressional Republicans, including some from California, opposed any federal intervention role Wednesday, posing a political challenge to the Obama administration should it decide to step in.

In an interview today, David Axelrod, a senior advisor to President Obama, voiced concerns that if the federal government steps in and provides special assistance to California to help ease the financial crunch, it could open the door to other struggling states wanting federal help.

Asked if the Obama administration would support a bill authorizing federal loan guarantees to California, Axelrod said: "Look, we're going to examine what we can do. What we need to do, however, is to treat states fairly and that means uniformly. Whatever we do for one state, there will be other states who also will want to do that. And there's a limit to what the government can do."

Asked if federal intervention on California's behalf would set a dangerous precedent, Axelrod said "There's no doubt that there are states all over this country who have problems -- not problems the size of California -- but significant problems. And every governor in the country wants and needs assistance. . . . there's a limit to what we can do."

A Federal Reserve official said today that the central bank was reluctant to step in to help guarantee loans to California or other municipalities.

"We're quite concerned about the potential political implication for us being interposed in these situations," David W. Wilcox, deputy director of the Fed's division of research and statistics, told a House Financial Services Committee hearing on the municipal finance market.

Geithner was barely in his seat at another congressional hearing on an unrelated subject when Texas Congressman John A. Culberson, a Republican, asked: "Mr. Secretary, will you categorically rule out bailing out California or any other states with our tax dollars?"

The treasury secretary made no commitment one way or the other. But California Democrats were working to build a case for federal intervention, noting the state's importance to President Obama's efforts to turn around the economy.

"Allowing California to go belly up presents a great risk to our hoped-for continued economic recovery," Rep. Adam Schiff (D-Burbank) told Geithner. "California already demonstrated we had to put a halt to all the construction projects in the state. We don't want to do that again. It would run completely counter to what you're trying to do and we're trying to do with the stimulus."

A California-specific bill would test the state's political clout in Washington. California's 53-member delegation is the largest state contingent. Californians chair five House committees, more than any other state, and Nancy Pelosi of San Francisco is House speaker. But the delegation is fractured. And it was splitting, mainly along party lines, over federal intervention in California's budget crisis. The delegation includes a number of Republicans who dislike Gov. Arnold Schwarzenegger, a fellow Republican, and don't believe that Washington should bail out Sacramento for its own failures.

"Sounds like a good idea," Rep. Bob Filner (D-Chula Vista) said of the loan guarantee. "We're providing loan guarantees to everybody else."

But Rep. Jerry Lewis of Redlands, an influential Republican who is his party's most senior member of the House Appropriations Committee, said it was "hard for me to quite imagine my colleague from Wisconsin or one of my friends from Kansas" supporting federal intervention in California's budget crisis.

Republicans from other states also were weighing in.

"Congress does not need to put the American taxpayer on the hook for more losses," said Rep. Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said at a hearing on the municipal bond market.

He opposes federal intervention, even though a county in his home state is on the verge of bankruptcy due to its inability to repay $3.9 billion in sewer bond debt tied to interest rate swaps valued notionally at almost $6 billion

Schiff, however, said that the state's efforts could be aided as the problem spreads to other states.

Axelrod acknowledged that the budget crisis in California is grave. White House officials are in touch with state officials and monitoring events, he said.

"Obviously the situation in California is serious. There are crises of different proportions in different states, and California obviously is at the front of the list. We want to do everything we can to help, and we are."

Axelrod added that defeat of the five ballot measures in California has worsened conditions: "The president saw the governor the other day, and I'm sure they conversed about the problems facing the state -- which got worse on Tuesday."

Axelrod also said: "We're in touch with state and local leaders in California and from all over the country, and we're well aware of the situation and want to be as helpful as we can."

New estimates of revenue suggest California's budget deficit may be as much as $3 billion larger than the governor estimated.

In a 28-page report released this morning, Legislative Analyst Mac Taylor said the governor's proposal for $5.5 billion in short-term borrowing would only shift trouble to the future and set a "dangerous precedent."

Taylor's report also expresses doubts about the proposed $1-billion sale of a state-owned workers' compensation insurance program and a plan to save $750 million on the state's costly Medi-Cal program by potentially cutting healthcare reimbursements or slashing the number of eligible participants.

Meanwhile, Schwarzenegger said today that with revenue dropping back to levels last seen a decade ago, state spending and services have to be cut back to that level as well.

"It's very important to note that our revenues now are back to the 1999 level," Schwarzenegger told reporters after a prayer breakfast in Sacramento. "So we have to do drastic measures. We have to dial back to what was happening in 1999, what kind of programs were available and what kind of programs were not available, and where did we expand on spending, and then eliminate all those [added] programs in order to make ends meet."

Schwarzenegger was concerned that new revenue projections expected later may paint a grimmer picture, but he said voters made it clear in Tuesday's election that they didn't want more taxes or extensive borrowing.

Times staff writers Eric Bailey and Patrick McGreevy in Sacramento and Jim Puzzanghera in Washington contributed to this article.