Arnold to Hank: Can You Spare $7B?

California is the latest state to be feeling economic shockwaves from the financial crisis on Wall Street in the form of budget deficits, dwindling finances and plummeting pension funds.

Gov. Arnold Schwarzenegger said that the state may need an emergency loan of up to $7 billion from the federal government within weeks just to maintain day-to-day operations in a letter e-mailed to U.S. Treasury Secretary Henry "Hank" Paulson.

Without the loan, the governor warned that the state "may be unable to obtain the necessary level of financing to maintain government operations." In ominous language, Schwarzenegger added that many states and local governments have been unable to get financing for "routine cash flow used to make critical payments to schools, local governments and law enforcement."

Schwarzenegger, whose staff followed up the letter with a call to Paulson, also expressed his strong support for the $700 billion financial industry bailout plan that the U.S. House of Representatives passed today.

The emergency loan, which would be the largest ever given to the state, would mark only the second time that the federal government has pulled off such a rescue operation, according to finance experts. In 1975, the government lent money to New York City, which was teetering on the edge of bankruptcy.

"California does need to borrow a lot of money in a short amount of time," says Mark Baldessare, president of the Public Policy Institute of California. "I would think it's unprecedented. California is not in danger of going bankrupt, but the problem is the cash flow."

Schwarzenegger's office and the Treasury Department did not return calls for comment.

As the credit market shut down at midday Monday, Massachusetts was unable to borrow the final portion of a $400 million loan from Wall Street investors to make quarterly aid payments to cities and towns and had to dip into its own funds to make up the $170 million shortfall.

Pension funds in New Jersey also took a hit, with state Treasurer R. David Rousseau saying that the state's Division of Investment lost more than half of the $200 million it invested in June with the now-bankrupt Lehman Brothers. In addition, Gov. Jon Corzine said that his administration is reviewing 5 percent across-the-board cuts, which could add up to $500 million, at every state department and agency.

And Connecticut Gov. Jodi Rell announced $35 million in budget cuts today, the second round of such cutbacks, to reduce a projected state budget deficit of more than $300 million. In Virginia, Gov. Timothy M. Kaine is examining spending cuts of 5, 10 and 15 percent to every state agency, including the state police. And in California, a budget that took months to hammer out is already $1 billion in the red.

"We knew it was going to be tough, but this goes way beyond what we thought," Scott Pattison, executive director of the National Association of State Budget Officers, told ABCNews.com.

"Things were already looking grim, and the financial crisis on Wall Street is just making things worse. We're already seeing across-the-board budget cuts, and everyone is bracing for a really difficult two-year period."

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