Wyatt Buchanan, Chronicle Sacramento Bureau
Wednesday, July 27, 2011

Sacramento — Seeking to avert the fallout if Congress fails to raise the country’s borrowing limit, California Treasurer Bill Lockyer on Tuesday took out $5.4 billion in short-term loans to cover the state’s bills in case money stops flowing from Washington, D.C.

California is the first state in the nation to take this step, and Lockyer said he is still hopeful that leaders in the federal government will come to an agreement before the United States is plunged into “a financial and economic abyss.”

“California had to obtain this interim financing to protect the state from the immediate, drastic consequences of a failure by Washington to resolve the debt ceiling impasse by the Aug. 2 deadline,” Lockyer said.

If that deadline is missed, the federal government is likely to prioritize debt payments above other obligations – such as money owed to the states – to avoid a default, financial experts said.

That could mean the loss of federal funding for transportation, health programs including Medi-Cal and other services, Lockyer said.

A country divided

In San Francisco, Gov. Jerry Brown said he assumes “the people in Washington can rise above their proclivities and work for the betterment of the country.” But, he said, “The bigger story is division in the United States,” which is becoming “a country facing the dismal prospect of being unable to govern itself because of a deep and continuing division between the two parties.”

Brown compared the current deadlock in Washington, D.C., to the recent budget negotiations in Sacramento, where the Democratic governor was ultimately unable to reach a compromise with Republicans on a spending plan.

California in years past has found itself in a situation similar to the federal government’s dilemma, as the failure to pass a timely state budget forced the controller to prioritize payments, which resulted in debts on borrowing being paid but IOUs being issued for some of the state’s other obligations, such as tax refunds and vendor contracts.

“It’s just ironic, to put it mildly, that California finally gets its fiscal stuff together, passes an honest budget on time and we’re still faced with this potential harm because of gridlock in D.C.,” said Tom Dresslar, spokesman for Lockyer.

Federal officials have yet to indicate which payments would be affected, but California’s Department of Finance has been in contact with the U.S. Treasury to determine what the specific impacts may be, said Gil Duran, spokesman for Brown.

Market turmoil

Lockyer had planned to go to the markets in late August to borrow the money necessary for the state’s cash flow, an annual need. But a failure to raise the national debt ceiling could throw the markets into turmoil, and Lockyer wanted to avoid borrowing in that environment.

The $5.4 billion is being borrowed from Goldman Sachs, Wells Fargo, Citigroup and other private financial institutions. The money must be paid back by November, though state financial officials say they are hopeful the repayment will occur before then.

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