NEW YORK — In a move highlighting the severe fiscal stress facing many states, New Jersey officials have been negotiating a temporary bank loan, which could be as large as $2.25 billion, to plug a cash shortfall, according to people familiar with the matter.
The loan would cover bills the state will need to pay as its new fiscal year begins July 1. Normally, states have some cash available as they finish one fiscal year and begin the next, while gearing up for a bond offering based on the new budget.
New Jersey is considering taking the unusual move of tapping a so-called bridge loan from a major commercial bank to tide it over the first few weeks of the coming year, while it would prepare for the customary late-summer bond offering.
Terms of the loan, also known as a credit line, haven't been finalized and negotiations could fall apart, according to the people familiar with the matter. A spokesman for the New Jersey Treasury declined comment.
It can take up to two months to prepare the necessary documentation for a bond offering once a budget is set for the coming fiscal year, while the state's cash crunch is likely to occur in the next few weeks, one of the people said. Bank loans often require less documentation than a municipal bond does, and can be finalized in less time.
New Jersey put in place a $2 billion credit line in 2009, but didn't need to use the loan because of a surge in back taxes that arrived in the nick of time, state officials said. This year, officials don't expect a last-minute reprieve, the person said.
The state would aim to repay the bridge loan with proceeds from the bonds it expects to issue later this summer, known as tax-and-revenue anticipation notes. Those bonds are expected to be paid off through tax receipts.
After a rocky start of the year, the municipal bond market has stabilized. Analysts say New Jersey will likely find ready access to the market when it needs to.
State officials are negotiating with JPMorgan Chase & Co. over terms for the bridge loan, following a spirited competition for the state's business, several people familiar with the selection process said. A bank spokesman declined to comment.
One person familiar with some proposed terms of the possible loan said the interest rate is relatively low, but it could shoot as high as 9% if the state didn't pay back the bank in six months.
Large banks have been quietly ramping up their lending to states, schools and other municipal borrowers in recent months. Banks see the government entities as solid bets for repayment while they're still tight-fisted with most homeowners and small businesses.
Federal Reserve data shows commercial banks increased their municipal loans and securities by $18.5 billion in this year's first three months, making them the largest buyers of municipal assets at a time when money-market funds and mutual funds were dumping holdings. In the year-earlier quarter, commercial banks had reduced their municipal exposure by $1.2 billion.
