DALLAS — For the first time in its history, Arizona is turning to outside lenders for up to $700 million to cover operating costs, Treasurer Dean Martin said yesterday.

The borrowing comes as legislators meet in special session in hopes of reducing the state’s estimated $2 billion budget deficit.

The session that is expected to wrap up today focused yesterday on bills that would cut $460 million in spending.

“This state is on the verge of being insolvent,” said Senate Appropriations Committee chairman John Kavanagh, R-Fountain Hills. “The options are limited and may not be very good, but we’ve got a budget to fix.”

Addressing objections to cuts in public safety funds to counties, Kavanagh said: “We have a crisis and we must move forward or we’re going to start shutting doors. When we finish this, we’ll still have $1.2 billion or $1.3 billion that’s still out there. But at least this is a start.”

Kavanagh’s comments came as the committee voted to cut education spending by $144 million.

This week’s special session is the fourth this calendar year and the second in the fiscal year that began July 1. But legislative action will not solve structural problems that Martin said he has been warning state leaders about for three years.

“What they’re doing is not much,” Martin said. “From a cash position, this doesn’t even solve a quarter of the ­problem.”

The decision to seek outside loans came after Arizona exhausted its internal sources by borrowing the limit of $500 million. Those loans came from state agencies, which received IOUs in return.

The budget that was sent to Gov. Jan Brewer on July 1 was balanced, but she vetoed cuts in education and other critical services, leaving a deficit. Since then, the Republican governor and her party’s legislative leaders have been negotiating off and on about how to eliminate the shortfall.

The budget woes and new borrowing come as the state remains under a negative outlook from Standard & Poor’s and Moody’s Investors Service. Standard & Poor’s provides an issuer credit rating of AA, while Moody’s has the state at Aa3.

Under what amounts to a line-of-credit loan from Bank of America, variable rates are adjusted daily based on the state’s credit rating, Martin said. “We’ve been in regular communication” with the rating agencies, he said. “I don’t think this comes as a surprise to them.”

Arizona will pay a daily interest rate of 75 basis points or 50 basis points over the monthly London Interbank Offered Rate currently at about 25 basis points. A one-notch downgrade would result in a rate increase of 25 basis points, Martin said. The state will pay 25 basis points on the untapped portion of the credit facility.

Income on the warrants that the state sells to Bank of America will be taxable, according to the treasurer. 

“Right now, it’s kind of a quirk of the rates that taxable is cheaper than tax-exempt,” he said. “If that changes, we have the option to switch.”

Martin said he based the $700 million figure on the most he believed the state would need to borrow during this fiscal year ending June 30, 2010. But with a $3 billion shortfall taking shape for the next fiscal year, he said the credit facility would have to be renewed or rebid.

Although Arizona may have borrowed outside funds during the Great Depression, there are no records from that era, according to Martin.

The borrowing, he said, “is just another example of what happens when the state doesn’t balance the budget.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.