The State Loan Commission has approved a $700 million line of credit from Bank of America, marking the first external borrowing the state has done since the Great Depression.
State Treasurer Dean Martin said his office will finalize the agreement with Bank of America next week and will begin issuing treasurer’s warrants by the end of November. The line of credit will be needed by Dec. 1, when a $300-350 million payment to K-12 schools is due, Martin said.
The commission, which is comprised of the governor, state treasurer and Department of Administration director, approved the agreement 2-0. Gov. Jan Brewer is in Austin, Texas, for the Republican Governors Association’s annual conference and did not attend.
Under the agreement with Bank of America, the bank will essentially loan the state money through the purchase of warrants issued by the treasurer’s office. The state is borrowing at a variable rate of about .74 percent, which Martin said will cost the state about $3.1 million in interest payments. The Arizona Constitution requires the state to pay back the loans by the end of the fiscal year.
Martin said he expects the state to use the entire line of credit during the 2010 fiscal year, and expects the state to need a similar agreement in 2011 and possibly beyond. The problem, Martin said, is that because the state lacks cash reserves, there isn’t enough cash coming in to cover ongoing expenses.
“It’s a cash-flow problem,” Martin said after the meeting.
Martin said this will be the first time that treasurer’s warrants will be issued since the 1930s, when Arizona actually paid state employees with money from the warrants. Martin said there are no existing records that indicate how much the state had to borrow at the time.