California Borrowing $5B As Hedge Against Possible U.S. Default

By JUDY LIN | July 26, 2011 | 2:15 PM EDT

SACRAMENTO, Calif. (AP) — California is scheduled to borrow about $5 billion from private investors as a hedge against a possible default by the federal government.

State Treasurer Bill Lockyer said Tuesday that he will ask a select group of banks, credit unions and investment funds for short-term loans so the state can avoid a potential cash shortage if the federal government fails to extend its debt ceiling.

If that happens, the government could shortchange states on health care and education funding.

Lockyer says he is taking the step as a precaution. It's unclear whether California would be able to borrow that much money if the credit markets are thrown into turmoil.

Democrats and Republicans are clashing over plans to slash spending and raise the debt ceiling ahead of an Aug. 2 deadline.