SACRAMENTO (AP) – Gov. Arnold Schwarzenegger and California’s top finance officials reacted cautiously last week to congressional approval of the $700 billion Wall Street bailout package, warning that the nation’s tight credit market still presents considerable challenges for the state.

They have been worried that a frozen credit market will prevent the state from getting short-term loans to cover basic operating expenses, a step California takes each fall until the bulk of its tax revenue arrives in the spring. The state’s record-long budget impasse this year prevented the state from going to the bond market sooner.

Even with the bailout plan passing, Schwarzenegger predicted a difficult path ahead in the financial markets.

“California’s not out of the woods yet,” he said during a news conference in San Diego, noting that California soon will begin seeking loans on the open market. “It will be difficult. We will be going through challenges in the future.”

Schwarzenegger is determined to meet with the four legislative leaders to discuss the state’s fiscal situation, including next year’s projected deficit, said gubernatorial spokesman Aaron McLear.

While California seeks short-term loans every year, the situation is especially precarious this year because the nation’s credit market has seized up under the strains of the housing-related economic meltdown and because state lawmakers delayed passing a budget for nearly three months.

The bailout package passed Congress on Oct. 3 with support of 26 of the 34 Democrats in California’s House delegation—seven more “yes” votes than on Sept. 29, when the package fell to surprise defeat in the House.

Several of the Californians switching their votes said they had been called by state Treasurer Bill Lockyer, who warned that vital services could be shut down unless the credit markets begin functioning normally. The governor said he also lobbied members of the delegation.

Rep. Mike Thompson, D-St. Helena, said he heeded the warnings from Lockyer before switching his vote.

“Unemployment in California is higher than at any point in the last 12 years,” he said. “At the end of the day, I had to set aside my outrage at all of the flawed policies, greed and incompetence that got us to this point and do what was best for our district and our country.”

Ten of California’s 19 House Republicans voted “yes.” No California Republicans switched their votes, despite the warnings from Lockyer and Schwarzenegger.

Rep. Peter DeFazio, D-Ore., said the California Democrats who flipped from voting against the bailout earlier in the week to voting in favor on Oct. 3 succumbed to outside pressure.

“Every Californian was scared to within an inch of their life by their state treasurer,” he said. “It’s the herd mentality.”

On Oct. 2, Schwarzenegger sent a letter to Treasury Secretary Henry Paulson asking the federal government to protect California if the state is unable to secure financing for routine borrowing.

“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.

Paulson has said he hoped approval of the bailout package will infuse optimism into the banking sector and reinvigorate the credit market for both large and small borrowers.

Tom Dresslar, spokesman for the state treasurer’s office, said pursuing a federal loan is just one option if the credit markets do not respond as Paulson predicted. Unless it can secure those loans, California is expected to run out of cash Oct. 29, which would stop payments to schools, nursing homes and law enforcement.

“Like everyone else, we’re waiting for the market reaction. Hopefully, confidence and trust will be restored and hopefully the state will be able to meet its cash-flow needs and continue to provide uninterrupted crucial service for the people of the state,” Dresslar said. “But there’s no guarantees.”

Earlier this week, the controller’s office said California will need to borrow $7 billion to pay its expenses throughout the fiscal year, which ends June 30. The state plans to make a bond offering on Oct. 13 seeking short-term loans for an amount up to $7 billion.

Associated Press Writer Erica Werner in Washington, D.C., contributed to this story.