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CNBC EXCLUSIVE: CNBC TRANSCRIPT: CNBC'S MARIA BARTIROMO SPEAKS WITH BILL LOCKYER, CALIFORNIA STATE TREASURER, TODAY ON CNBC'S "CLOSING BELL WITH MARIA BARTIROMO"

BARTIROMO: MR. TREASURER, GOOD TO HAVE YOU ON THE PROGRAM. THANKS SO MUCH FOR SPENDING THE TIME.

LOCKYER: THANK YOU.

BARTIROMO: WHAT IS YOUR REACTION TO THIS LATEST DOWNGRADE BY FITCH TWO, NOTCHES FOR THE STATE?

LOCKYER: WELL, IT WASN'T A SURPRISE, BUT IT'S DISAPPOINTING OF COURSE, TO HAVE OUR CREDIT RATINGS SLIP SOME MORE. WE DON'T THINK THERE'S ANY SUBSTANTIAL RISK OF DEFAULT, BUT THAT'S NOT THE ONLY TEST THAT GOES INTO THEIR METHODOLOGY.

BARTIROMO: YOU DON'T THINK THERE'S A RISK OF DEFAULT, AND YET SO MANYPEOPLE TALK ABOUT THESE IOUs. THE STATE ISSUING THESE IOUs.THE REDEMPTIONS WILL BEGIN IN OCTOBER. WHAT ARE THE CHANCES CALIFORNIA WON'T HAVE THE MONEY TO PAY BACK ALL OF THESE IOUs?

LOCKYER: WELL, WE'RE CONFIDENT WE'LL BE ABLE TO PAY THE DEBT THAT AND OTHER DEBT AS IT COMES DUE.YOU KNOW, PART OF OUR PROBLEM IS WE ALWAYS HAVE A DRY SUMMER AND HAVE TO DO SHORT-TERM BORROWING IN ORDER TO PAY THE BILLS UNTIL DECEMBER AND NEXT APRIL.WITHOUT A BUDGET IN PLACE WE CAN'T DO THAT TRADITIONAL SHORT-TERM BORROWING. SO THAT'S WHY WE'RE STUCK WITH THESE IOUs THAT HAVE GONE OUT.

BARTIROMO: SO WHERE IN THE FOOD CHAIN ARE THE IOUs IN TERMS OF PRIORITIES HERE FOR THE STATE WHEN YOU LOOK AT STATE PAYMENTS,OBLIGATIONS, TO ACTUALLY KEEP THE CITY RUNNING AND THE STATE RUNNING?

LOCKYER: IN OUR STATE CONSTITUTION EDUCATION DISBURSEMENTS ARE NUMBER ONE. THERE ARE CONSTITUTIONAL GUARANTEES, OF COURSE, FOR DEBT AND CONTRACTS. AND THEN DEBT GENERALLY IS A VERY HIGH PRIORITY, ABOVE MOST OF THE OTHER PAYMENTS THAT HAVE TO BE MADE.

BARTIROMO: WHAT DO YOU THINK ARE THE BIGGEST ISSUES IN THE WAY HERE IN TERMS OF PROGRESSING? WHAT NEEDS TO BE DONE?

LOCKYER: WELL, WITH RESPECT TO OUR BUDGET, WE WERE CUTTING VERY, VERY SUBSTANTIAL AMOUNTS OUT OF EVERY MAJOR PROGRAM.NOT UNUSUALLY FOR THE STATE OF CALIFORNIA, AND IT'S TRUE AROUND THE COUNTRY, OUR BUDGET IS ESSENTIALLY HEALTH CARE, PRISONS, AND EDUCATION. IT'S VERY HARD TO CUT PROGRAMS LIKE THAT 15% OR 20%. AND SO THE ARGUMENT HAS GONE ON ABOUT WHETHER THERE OUGHT TO BE A TAX INCREASE OR PART OF THE HOLE SHOULD BE FILLED WITH A TAX INCREASE OR NOT. AND PHILOSOPHICAL DISAGREEMENTS WITH HOW MUCH OF THE SAFETY NET CAN BE SHREDDED.

BARTIROMO: BUT OF COURSE YOU'RE NOT GOING TO BE ABLE TO GET ALL THE MONEY YOU NEED JUST THROUGH TAX INCREASES.

LOCKYER: OH, NO. NO, IN FACT, WE PROBABLY WON'T HAVE ANY SIGNIFICANT TAX INCREASE.THAT SEEMS TO BE WHERE WE'RE HEADED POLITICALLY. BUT IT IS A CONTINUING ARGUMENT.WE'RE ONE OF THREE STATES THAT REQUIRES A 2/3 VOTE TO ADOPT A BUDGET AND SPEND MONEY AND RAISE THE TAX. SO IT REQUIRES A POLITICAL CONSENSUS THAT DOESN'T EXIST HERE NOW AND IS VERY DIFFICULT TO GET TO.

BARTIROMO: WELL, YOU HAVE DISCUSSED THE POSSIBILITY OF YOU'RE CONSIDERING A RUN FOR GOVERNOR. WHAT WOULD YOU HAVE DONE DIFFERENTLY AS GOVERNOR THAN GOVERNOR SCHWARZENEGGER?

LOCKYER: OH, YOU KNOW, FIRST OF ALL, I'M NOT SURE I'M A CANDIDATE FORANYTHING.BUT IF THERE WAS A FUNDAMENTAL ERROR, I THINK, IT WAS PROBABLY OVERPROMISING -- THIS IS NOT JUST DUE TO THIS GOVERNOR. THE LAST TIME WE HAD AN OLD-FASHIONED BALANCED BUDGET INCALIFORNIA WAS 12 YEARS AGO. AND SINCE THEN THERE'S BEEN INTERNAL AND EXTERNAL BORROWING AND FISCAL GIMMICKS AND SO ON.I THINK THOSE ARE ALL A BAD IDEA. I GUESS I'M CONSERVATIVELY TRADITIONAL ABOUT WANTING AN OLD-FASHIONED BUDGET WHERE REVENUES AND EXPENDITURES MATCHED UP. WE'RE GOING TO HAVE, EVEN AFTER THE CUTS CONTEMPLATED, WE'RE GOING TO STILL HAVE A CONTINUING STRUCTURAL BUDGET DEFICIT OF SOME MAGNITUDE THAT HAS JUST GOT TO GET FILLED.

BARTIROMO: SO WE KNOW THAT YOU WON'T BE ABLE TO GET THE REVENUE NEEDED JUST BY TAX INCREASES.AND YOU'RE SAYING, LOOK, YOU DON'T EVEN THINK WE'RE GOING TO SEE A TAX INCREASE.LET'S TALK ABOUT THE SPENDING.WHAT CAN BE DONE SPECIFICALLY TO LOWER SOME OF THE PROMISES OR LOWER THE PENSION BENEFITS PACKAGES TO STATE WORKERS? IS THAT ON THE TABLE?

LOCKYER: IT'S AN ACTIVE DISCUSSION. THERE ARE PROBABLY AT LEAST SOME SEGMENTS OF PUBLIC EMPLOYEE BENEFITS, PENSION BENEFITS AND HEALTH CARE GUARANTEES THAT ARE UNSUSTAINABLE LONG-TERM. IT DOESN'T PRODUCE IMMEDIATE COST SAVINGS WHEN WE'RE FACED WITH A BUDGET PROBLEM LIKE WE CURRENTLY HAVE, BUT IT DOES NEED TO GET ADDRESSED, AND IT'SAN ACTIVE DISCUSSION.I DON'T KNOW ANYBODY THAT'S FOR FRAUD.SO WHEN THE GOVERNOR SAYS LET'S DEAL WITH FRAUD, I THINK THAT'S A UNIVERSALLY AGREED UPON EFFORT. ACTUALLY, WHEN I WAS ATTORNEY GENERAL, I RAN AND GOT AWARDS FOR HAVING THE MOST AGGRESSIVE ANTI-FRAUD PROGRAM IN THE COUNTRY OUT OF THE ATTORNEY GENERAL'S OFFICE, CRACKING DOWN ON MEDI-CAL FRAUD.THAT KIND OF THING SHOULD CONTINUE.

BARTIROMO: WELL, WHAT ELSE CAN CONTINUE, THOUGH, TO ACTUALLY PUT A DENT IN THIS? I MEAN, LET'S SPEAK REALISTICALLY.YOU ARE FACING A MASSIVE CRISIS. HOW IS THIS GOING TO PLAY OUT?

LOCKYER: WELL, WE'RE GOING TO HAVE SUBSTANTIAL CUTS. AND ONE OF THE DEBATES IS TO WHAT EXTENT ARE THEY ESSENTIALLY ACROSS THE BOARD CUTS, HOW MUCH DO THEY RIPPLE DOWN TO LOCAL GOVERNMENT AND SCHOOL DISTRICTS,WHAT'S THE IMPACT ON OUR MARKETS WHEN THERE'S A SUBSTANTIAL SHRINKAGE OF GOVERNMENT SPENDING? SO ALL OF THOSE THINGS ARE STILL UNKNOWNS. BUT WHAT WE KNOW IS THERE'S GOING TO BE VERY SIGNIFICANT CUTS. YOU KNOW, THEY ARGUE THEY'RE SORT OF BETWEEN -- THEY'RE 2 OR 3 BILLION DOLLARS APART. THAT'S NOT A NUMBER THAT GROWN-UPS CAN'T RESOLVE.

BARTIROMO: HOW MUCH OF THIS $26 BILLION IS EITHER A CASH CUSHION OR ANTICIPATED GROWTH FROM CURRENT SPENDING?

LOCKYER: ACTUALLY, WE -- IT'S A SHRINKAGE IN THE LAST DECADE CALIFORNIA STATE BUDGET GROWTH HAS BEEN 29%.DURING THE TIME WHEN CPI AND POPULATION HAVE GROWN 53%. SO WE'RE THE SECOND THINNEST STATE GOVERNMENT IN THE UNITED STATES. AND IT'S GOING TO GET THINNER.

BARTIROMO: LET ME ASK YOU ABOUT THIS FUND BEING CREATED FOR MICHAEL JACKSON. I MEAN, A LOT OF PEOPLE ARE SAYING WHY ARE TAXPAYERS PUTTINGMONEY IN A FUND FOR MICHAEL JACKSON WHEN THE STATE IS IN SUCH CRITICAL UPSET?

LOCKYER: WELL, WHO KNOWS? TAXPAYERS AREN'T, BUT -- I MEAN, THEY HAVE A FAMILY TRUST, AS I UNDERSTAND, IF THAT'S WHAT YOU MEAN, MARIA, THAT'S PRIVATELY FUNDED. BUT WE -- WHAT THE ATTORNEY GENERAL IS DOING IN CALIFORNIA IS REVIEWING THE MEDICAL COMMUNITY PRESCRIPTIONS AND SO ON TO SEE IF THERE WAS ABUSE.

BARTIROMO: SO MR. TREASURER, YOU REALLY HAVE GOT TO GET MONEY COMING INTO THE STATE.WE KNOW THAT.AND YOU NEED TO CONVINCE INVESTORS THAT THIS IS A PLACE THEY WANT TO BE, DESPITE WHAT YOU'RE FACING RIGHT NOW. YOU WOULD NORMALLY BE ABLE TO COVER SHORT-TERM FINANCING NEEDS THROUGH WHAT ARE CALLED REVENUE ANTICIPATION NOTES.

LOCKYER: YES.

BARTIROMO: COULD YOU TELL US HOW THEY'RE WORKING AND HOW YOU'RE GOING TO CONVINCE INVESTORS THAT CALIFORNIA IS A PLACE TO INVEST?

LOCKYER: WELL, WHAT WE HAVE FOUND IS EVEN IN THESE DIFFICULT TIMES EARLIER THIS YEAR WE WERE ABLE TO MOVE $14 BILLION WORTH OF BONDS OF VARIOUS SORTS. THE NEW BUILD AMERICA BONDS IS PART OF THE STIMULUS.AND OTHER TRADITIONAL GENERAL OBLIGATION DEBT.WE FOUND VERY ROBUST RETAIL MARKETS FOR OUR BOND ISSUES.SO WE DON'T KNOW YET HOW THAT WILL BE WHEN WE GO BACK TO THE MARKET.WE DON'T DO IT UNTIL A STATE BUDGET IS IN PLACE.SO WE CAN SHOW INVESTORS THE GUARANTEES OF THEIR REPAYMENT.

BARTIROMO: MR. TREASURER, GOOD TO HAVE YOU ON THE PROGRAM.WE HOPE YOU'LL COME BACK AND TELL US MORE ABOUT THE PROCESS.AND OF COURSE WE'RE WISHING YOU THE BEST.

LOCKYER: THANK YOU.

BARTIROMO: BILL LOCKYER JOINING US, CALIFORNIA STATE TREASURER, IN THE MIDDLE OF A REAL CRISIS SITUATION IN CALIFORNIA.





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