California asks Fed for $7B loan

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ATLANTA (CNN) -- California may need a $7 billion emergency loan from the Federal government for day-to-day operations and to pay teachers' salaries, nursing homes, law enforcement and every other State-funded service this month, Gov. Arnold Schwarzenegger warned in a letter sent Thursday to the U.S. Treasury secretary.

The California governor's letter, published in Friday's Los Angeles Times, was written on the eve of an expected vote in the U.S. House on the Federal bailout of the financial system.

"The federal rescue package is not a bailout of Wall Street tycoons - it is a lifeboat for millions of Americans whose life savings, businesses, retirement plans and jobs are at stake," Schwarzenegger said.

California State Treasurer Bill Lockyer issued a statement a day earlier saying because of the national financial crisis, California "has been locked out of credit markets for the past 10 days."

"Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing," Schwarzenegger wrote.

California's governor warned that a number of states are facing the same cash flow crunch this month, but his state is "so large that our short-term cash flow needs exceed the entire budget of some states."

Schwarzenegger said his state would attempt to sell "$7 billion in Revenue Anticipation Notes for short term cash flow purposes in a matter of days."

Lockyer said that unless the national economic crisis subsides and California can secure private short-term loans "the State's cash reserves would be exhausted near the end of October."

"Payments for teachers' salaries, nursing homes, law enforcement and every other State-funded service would stop or be significantly delayed," Lockyer said. "And California's 5,000 cities, counties, school districts and special districts would face the same fate."

The Federal bailout, which passed the Senate Wednesday night, would permit the Treasury to buy up $700 billion of bad assets - most of which are backed by mortgages - from banks in an effort to clean up their balance sheets so that they can resume lending.

The credit crunch, a decline in state tax collections and a delay in adoption of a state budget have combined to aggravate California's cash flow troubles.

"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.