The state of New Jersey is negotiating a credit line for up to $2.5 billion to cover a shortfall in the state budget, according to Andy Pratt, a Treasury spokesman.
New Jersey is set to issue bonds over the summer, but the state is facing a cash shortage in the next few weeks and is considering an alternative financing arrangement to tide it over, the spokesman said.
Pratt called the situation a "routine cash management issue" and said the tactic had been used before.
"We borrow every year because cash flow doesn't come in from tax revenue" on the same schedule that spending requires, Pratt told NBC news.
Repayments on the loan would be made following the bond auction in the summer.
The state arranged a similar $2 billion bridge loan in 2009, but did not use the facility. Under Municipal Securities Rulemaking Board guidelines, issuers should disclose any bank loans they take out if they intend to sell more debt.
The $3 trillion US municipal bond market has begun to heat up in recent months, but loans and direct purchases of securities by banks are increasingly being used by local governments to refinance their debt.
Moody's Investor Services has estimated that $13 billion has been raised through direct loans or private placements in the past year and a half.
In some cases, the interest rates are so low that the states are saving money by using direct loans.
Two of the early costs New Jersey faces before the revenue comes in will be a $571 million pension payment and property tax rebates, the amount of which is still unknown, according to Pratt.
He said the state is still in negotiations with the apparent low bidder, JP Morgan Chase on the final details of the short term loan.
-Reported by WNBC's Brian Thompson