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California may need $7 billion federal loan

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  • State short on cash because of tight credit market, governor says
  • Schwarzenegger: California's cash need is larger than some states' entire budgets
  • State could be out of money by end of October, treasurer says
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(CNN) -- California may need a $7 billion emergency loan from the federal government to pay for "teachers' salaries, nursing homes, law enforcement and every other state-funded service" this month, Gov. Arnold Schwarzenegger warns.

Schwarzenegger gave the warning in a letter sent Thursday to U.S. Treasury Secretary Henry Paulson.

The 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.

The governor warned that a number of states are facing the same cash flow crunch this month, but that 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 for the financial system is expected to return to the House for a vote Friday after it passed the Senate Wednesday night.

The legislation 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 they can resume lending.

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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.

All About CaliforniaU.S. State GovernmentFinancial Markets

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