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Treasurer: Calif. May Borrow $5B If Feds Default

California's state treasurer said Wednesday that he's preparing contingency plans to borrow as much as $5 billion for the state in case the federal government misses its Aug. 2 deadline to raise the nation's debt ceiling.

The state was preparing to take out short-term loans to cover day-to-day state operating expenses if the federal government begins to run out of money to pay its bills, Treasurer Bill Lockyer told the Sacramento Press Club.

"We're hoping to do our borrowing before Aug. 2," he said.

Lockyer, a Democrat, said he's prepared to act in case talks between Republicans and Democrats in Washington, D.C., remain at an impasse. That could force the federal government to default on loan obligations and shortchange states on health care and education funding.

The state typically borrows money in late summer to pay operating expenses until most income tax receipts arrive in the spring. If the state borrows the money early, California would repay it using routine borrowing notes.

Moody's Investors Service threatened to lower the federal government's triple-A bond rating, citing a small but rising risk that the government will default on its debt. A downgrade would raise interest rates on U.S. treasury bonds, increasing the interest paid by U.S. taxpayers.

Lockyer warned that a federal downgrade would negatively affect state and local government borrowing costs because some states' rates are linked to Treasury rates.

"The ripple effects on state and local finance for the whole country are very substantial," Lockyer said. "Hopefully, they're going to reach some reasonable accord that won't cause federal defaults, but every state and local government in the country, certainly including California, will have additional difficulties in financing its investments and paying its bills if the federal default occurs."

California, which currently has the lowest credit rating among the 50 states at A-, is planning to issue short-term borrowing notes in late August.

The treasurer's office said the state would use proceeds from the note sale to pay off the contingency loan if needed.

It's not clear how much the additional loans could cost California taxpayers. Lockyer said he's hoping to secure a good interest rate because the state changed the way it calculates how much money it has in reserve.

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