The Massachusetts industrial Finance Authority has chosen four senior managers to oversee the sale of over $700 million of bonds scheduled to be sold next month, the authority announced last week.
The loan will be used to end the bankrupt Massachusetts state unemployment insurance system's borrowing from the federal government.
Since last fall, Massachusetts has been borrowing as much as $5 million per day from the federal government, according to Dominic Slowey, press representative of the Massachusetts Office of Finance and Administration.
"In a normal situation, the unemployment insurance fund is a self-sufficient entity." Mr. Slowey said. "But because of this deep recession it has become necessary to borrow to pay for these benefits."
Mr. Slowey said that in normal circumstances the benefits paid to the unemployed are a direct result of companies donating to a state fund and the unemployed drawing off that fund.
Joseph Blair, executive director of the authority, said the borrowing will place no burden on the state's taxpayers as the debt is secured by forthcoming corporate payments into the unemployment insurance fund.
"Of course, there are no guarantees that there will be no further borrowings." Mr. Blair said. "But if the state did not use the authority, it would have had to borrow, from the federal government."
The U.S. Labor Department also issues fines because federal law requires all state unemployment funds to be free from debt by Sept. 30 of each year.
According to a representative of the unemployment fund, borrowing began on Sept. 30, 1991. and dally borrowing ran from at least $3.8 million per day to a little over $5 million per day.
The representative said the total deficit in the fund is currently over $400 million, and with interest charges and future unemployment benefits expected to be required, the $700 million with cover the total.
The bonds must be sold before Sept. 30 or the state would have to pay an additional $25 million fine.
James B.G. Hearty, senior vice president at Lehman Brothers and a senior manager of the deal, said that paying the money off before Sept. 30 also allows the state not to pay interest.
"It's like a grace period from interest, that has to be cleared up by that date," said Mr. Hearty, who is a former member of the board of the Massachusetts Industrial Finance Authority.
One factor preventing future borrowings of this size is the increase in the amount that corporations are responsible for paying into the fund to cover benefits.
Mr. Slowey said the approved law was the state legislature's second effort to bridge the gap.
"Originally, the state legislators wanted to raise the assessment almost 100% in spots," Mr. Slowey said. "Finally, we settled on a 64% increase."
He added that the new law and the borrowing through the authority will "do the trick."
An article appearing in last week's Boston Globe reported that several "state house sources" and investment bankers grumbled that the selection of the senior managers was both politically and personally motivated.
The six co-senior managers for the offering will be Lazard Freres & Co.; Lehman Brothers; Bear, Stearns & Co.; Kemper Securities; Merrill Lynch & Co.; and Reinoso & Co.
The article maintained that Mr. Blair's past relationships with Mr. Hearty and Mark Ferber, general partner at Lazard Freres and previously the authority's financial adviser, influenced his choices.
"The real reason we chose this group emanates from their experience in marketing unemployment-fund financings in other states," Mr. Blair said.
Mr. Blair added that several minority- and women-owned firms will play a part in underwriting the deal. Mr. Blair said he expects the deal to be priced in mid-September.