The cash-strapped California Republican Party is facing deeply divisive political and financial problems in this critical election year - beginning with a $3 million loan from a furious contributor who was supposed to have been repaid on Friday.

    The troubles of the GOP in the nation's most populous state - which backers of Sen. John McCain insist could be competitive in the fall presidential election - come at a crucial time. The California party convention is Feb. 22 in San Francisco, and conservatives and moderates will debate the platform and whether independent voters should be allowed to cast ballots in state GOP primaries.

    But the most urgent concern for many Republicans is the appalling financial condition of the state party, which is now overdue on repaying a $3 million loan provided in 2005 by Larry Dodge, chief executive of the American Stirling Co. Although the party's finances have fluctuated in the past, such a large debt - combined with the robust fundraising of Democrats nationwide - has many California Republicans extremely concerned.

    Some GOP officials say the loan is not the state party's responsibility, but is a matter for Republican Gov. Arnold Schwarzenegger to resolve.

    "The understanding of the California Republican Party was that the loan would be repaid today - and if it isn't, that's concerning," Jon Fleischman, vice chair of the Southern California GOP, told The Chronicle on Friday.

    "The governor made a commitment to resolve the debt. It was incurred re-electing him - and he stood before our convention and said he would take care of resolving it," Fleischman said. "If we're still dealing with the debt from Gov. Schwarzenegger's last campaign, it makes it difficult for us to move forward on the McCain campaign."

    The controversy over the private debt broke after Dodge expressed increasingly sharp criticism about the management of the state party, led by chairman Ron Nehring. Dodge, in a Jan. 31 letter obtained by The Chronicle, warned Nehring and Republican Party officials that they must immediately address key challenges - including establishing a state finance chair and instituting more professional management and ethics standards.

    "The registration gap (with Democrats) is widening, contributions are drying up, key posts have been left open for a year, staff is being laid off and there is a never-ending string of reports which is causing long-term damage to the image of the party," Dodge wrote in the letter. "Immediate comprehensive action is required. The stakes are too high, the problems too deep, to do otherwise."

    The current balance sheet shows that the California Republican Party is operating in the red - with $3.2 million in cash and $3.4 million in unpaid bills. The party's federal accounts, which are used for congressional campaigns, list $460,000 in debts.

    Mike Spence, a member of the state GOP's executive committee and chair of the Initiatives Committee, argued Friday that, although Nehring voted in favor of the $3 million loan, it was largely at the urging of Schwarzenegger and past state party chair Duf Sundheim.

    "The party shouldn't have voted for it ... (but) the governor and Duf told people it would be taken care of," Spence said. "The debt is something left over from the governor's campaign.... It got a 20-point victory for him and not a lot for anybody else. It all went to him, there were promises made (and not kept), and that's not a new thing with our government."

    But an adviser to Schwarzenegger, Adam Mendelsohn, said the governor is not responsible for settling the loan.

    "This is an issue between the California Republican Party and Larry Dodge in terms of finalizing and resolving the debt," he said.

    Nehring did not return repeated calls for comment.

    Sources inside the party said Schwarzenegger negotiated successfully with Dodge months ago to forgive the state party's debt, and Dodge indicated he would be willing to make substantial additional contributions - if changes were made to party operations.

    Dodge held a dinner with Nehring in July and offered to assist the state GOP chairman in getting a finance chairman, operations committee person and a Team California chairman to oversee major donations for the party, sources said. But in return, Dodge asked the party for accountability in developing a detailed business and political plan to address issues such as voter registration, getting voters to the polls - all matters that would demonstrate how the party would be competitive in the 2008 presidential election year, sources said.

    Dodge heard nothing back from Nehring regarding his concerns until the beginning of this year, GOP sources said.

    Even as the loan came due on Friday, the situation appeared to be unresolved - and observers said Nehring still has not offered a business or political plan. "It's an epic feat of incompetence," one GOP source said.

    The financial troubles aren't the only ones facing the state GOP. Dodge, in his letter to the party, warned that not allowing independent or "decline to state" voters - who now comprise 1 in 5 California voters - to cast ballots in state primaries is "having an adverse effect on our chances of remaining in the White House."

    California political analysts and pollsters say studies show that independent voters who have cast ballots in past open primaries tend to stick with the same parties in a general election - a trend that may bode well for Democrats, who this year allowed independents to weigh in on their presidential primary in California.

    Mendelsohn also said Schwarzenegger has made clear his views that he considers it "a mistake, both from a message and a political point of view, to eliminate the fastest growing segment (independents) of the electorate" from voting in state party primaries.

    But Spence said conservatives believe otherwise - and will make their views known at next week's convention.

    "I think California Republicans support having Republicans choose Republican nominees," he said. "There's been no evidence that allowing (independents) to vote in the primaries has benefited us in a general election."

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