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The California State Treasurers office announced late Tuesday that JP Morgan Chase is supplying a $1.5 billion loan that will allow it to end its IOU program come September 4, when the state’s new cash-flow borrowing plan kicks in.

The exact details of the loan were not disclosed, but reports have said JP Morgan Chase offered a loan of up to $4 billion.  The move has already propelled Standard & Poor’s to remove California’s state bonds from CreditWatch, a move that positively impacts the sentiment on $67.2 billion in state debt. 

The loan is basically acting as an interim money source in place of revenue anticipation notes, which the state plans to use in its $10.5 billion cash-flow borrowing program to be launched early September. California’s state controller determined $10.5 billion is the amount that needs to be raised in order to cover cash flow needs for 2009-10, based on tests of the state’s Department of Finance projections.

“This plan is a crucial step toward restoring some fiscal order to California,” said California State Treasurer Bill Lockyer in a statement released by his office. “Its successful implementation will rid us of the financial hardship and stigma caused by IOUs, and ensure the State has enough cash to provide crucial public services for the rest of the fiscal year. I look forward to getting this job done and securing the best possible deal for taxpayers.”

The first step in the state’s plan will come August 21 when its state pooled money investment board will meet to set September 4 as the day California will pay off IOUs and cease issuing them.  That represents one month acceleration in schedule as October 2 was the original target.

California’s State Treasurer’s office will then proceed to sell $10.5 billion of revenue anticipation notes sometime in mid-September to pay off the JP Morgan Chase loan and satisfy its forecasted cash flow needs through 2010.

The revenue anticipation notes will be sold through the state’s Buy California Bonds program in order to make the transaction know to individual investors who may purchase them through broker-dealers.

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