New Jersey may sell its first issue of commercial paper as part of a billion dollar note sale scheduled to take place in late fall.

Officials in the administration of Gov. Christine Todd Whitman say the state will sell the notes through a competitive bid, but that a negotiated sale could be considered for the commercial paper component.

An executive order by former Gov. Jim Florio bans most negotiated debt sales. However, Whitman officials have advised increased use of negotiated debt.

Several states, including Pennsylvania and Massachusetts, use commercial paper sales for cash-flow borrowing. New York City, the municipal market's largest overall issuer for the past two years, is also likely to launch a commercial paper program.

The New Jersey transaction would mark the first commercial paper sale in state history. State officials say they do not know how much commercial paper the state would issue.

Elizabeth Pugh, director of public finance in the state treasurer's office, said she would not expect the entire short-term borrowing, including its commercial paper component, to exceed $1.3 billion.

The sale could take place in late November or early December, Pugh said. New Jersey is also planning a mid-November competitive issue of $50 million of general obligation bonds for a variety of infrastructure projects, she said.

Last year, New Jersey issued $1.3 billion of tax and revenue anticipation notes.

Commercial paper sales involve a continuous offering of variable-rate, unsecured notes with an average maturity of 30 days. In other words, the paper keeps being sold and rolled over.

Issuers can benefit from a commercial paper program as the yield curve on municipal money market securities slopes upward, as is the case today. The shorter the maturity, the lower the interest rate on the securities.

Some of New Jersey's $15 billion of general fund assets are invested in short-term securities. In adding commercial paper to the mix of short-term debt, state officials would be trying to provide a better interest rate match with some of the state's investments.

The state officials are grappling with how to sell the commercial paper. Asked if the commercial paper component would be sold via negotiation, Pugh said, "The treasurer will have to look into it."

Lisa Kruse, a spokeswoman for Treasurer Brian Clymer, said the state has yet to make a decision on how to sell the notes.

Florio banned most negotiated sales by state issuers in Executive Order 92, signed in May 1993. Florio signed the order following a federal investigation into several state negotiated bond issues. Some Wall Street sources now speculate that Whitman may rescind the order.

In September, an advisory panel appointed by Whitman recommended that the state loosen its restrictions on the use of negotiated sales. Officials in the Whitman Administration say the governor may issue an executive order to legally enforce some or most of the panel's suggestions.

Since 1992, New Jersey has sold short-term notes, payable before the fiscal year is out, to cover its cash-flow needs. The state sold $1.3 billion of notes during fiscal 1994, $1.6 billion in fiscal 1993, and $1.8 billion in 1992. New Jersey's fiscal year begins on July 1.

Pugh attributed each year's successively smaller borrowing to the state's improving budgetary and economic climate.

Bond raters agree. "We saw a progressive reduction in the amounts," said Steve Hochman, a vice president in the state ratings group at Moody's Investors Service. "The difficult cash situation they experienced in 1992 was easing."

In the past three years, Moody's has rated New Jersey's fixed-rate notes MIG-1, its highest rating. In 1992 and 1993, the rating agency also assigned its highest rating to variable-rate notes with a tender feature that were part of the cash borrowings.

Moody's has not yet received documents in advance of the fiscal 1995 note sale, Hochman said.

Standard & Poor's Corp. rated the fixed-rate tax and revenue note portion of the fiscal 1994 note sale SP-1-plus.

Hochman said New Jersey has sold cash-flow notes at roughly the same time of year as the upcoming borrowing, which would indicate that the state is not experiencing financial problems.

"When you look at the flow of revenues and expenditures, there are times of the year when revenues to date are not enough to cover expenditures to date," Hochman said.

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