California May Need Treasury To Finance Short-Term Debt

San Francisco, CA (AHN) - California Gov. Arnold Schwarzenegger has warned California may need emergency funding from the U.S. Treasury as the state is unable to sell $7 billion of debt due to the credit crisis.

The California State Treasury planned to sell $7 billion in revenue anticipation notes to cover their cash and liquidity needs until expected revenues come in. However, State Treasurer Bill Lockyer said the municipal market is frozen.

Governor Schwarzenegger sent a letter to Treasury Secretary Henry Paulson on Thursday stating that California was running out of money because their standard borrowing channels had shutdown.

"The economic fallout from this national credit crisis continues to drain state tax coffers, making it even more difficult to weather the continuation of frozen credit markets for any length of time," Schwarzenegger said in the letter, according to the Los Angeles Times.

This would not be the first time the Treasury made an emergency loan to a municipality. In 1975 a loan was made to New York City for $2.3 billion in order to avoid the city going bankrupt.

The approval of the $700 billion bank rescue plan earlier Friday may help loosen up the credit markets, possibly enabling California to sell the debt. Recent reports showed municipal yields beginning to retreat after the rescue plan was signed by Bush.