New Jersey on July 1 plans to tap a $2.25 billion line of credit from JPMorgan to help meet cash-flow needs at the start of fiscal 2012.
The floating-rate bank loan will cost the state 45 basis points plus the SIFMA rate, according to Andrew Pratt, spokesman for New Jersey’s Treasury Department.
Officials have yet to determine how much of the $2.25 billion they will borrow initially, as the Legislature is working on passing the fiscal 2012 budget this week. Pratt said the loan will probably cover a nearly $500 million pension contribution payment and help pay property tax rebates.
“This gives us the money right away, starting July 1, so that whatever passes this Thursday and gets signed into law — as far as a budget — that we’ll have the cash flow we need,” Pratt said in a telephone interview.
The state anticipates selling tax and revenue anticipation notes by the end of 2011. Proceeds will pay down the JPMorgan loan.
The state’s limited cash flow is one reason why Moody’s Investors Service on April 27 cut New Jersey’s general obligation rating to Aa3 from Aa2. Its weakened financial position, anticipated slow recovery from the recession, and failure to implement a plan to rebuild fund balances prompted the downgrade.
Moody’s analyst Baye Larsen said the agency has already included in New Jersey’s Aa3 rating its use of a bank loan to help meet spending costs.
“The downgrade in April considered the reduced liquidity that the state has seen over the last few years,” Larsen said in a telephone interview. “So the lower liquidity levels is a significant component of their credit profile right now, but this bridge loan in and of itself is just part of that lower liquidity that we’ve already incorporated into the rating.”
The bank loan with JPMorgan was first reported in the Wall Street Journal.
Standard & Poor’s on Feb. 9 dropped New Jersey’s GO rating to AA minus from AA, citing the state’s unfunded pension liability and high debt levels. Fitch Ratings rates the Garden State AA.
New Jersey had about $34 billion of net tax-supported debt outstanding, as of December 2010, according to Moody’s. The unfunded retirement obligation for the state and its municipalities is $54 billion and unfunded other post-employment benefit costs total $71.4 billion.
The state last week passed retirement benefit reforms that increase employee contributions to their pension and health care benefits. Those changes could save the state $120 billion in pension savings for the state and local governments over the next 30 years.
An initiative to increase taxes for residents making $1 million or more passed Senate and General Assembly committees on Monday. The Democratic-controlled Legislature plans to vote on the measure this week.
