California State Treasurer, Bill Lockyer, said on Thursday that JPMorgan Chase & Co. (JPM) purchased $1.5 billion of California’s short-term, “interim” revenue anticipation notes according to a lending agreement with the state. The amount will provide the state with money to pay for some of its recently issued IOUs.

To conserve declining cash during its recent budget crisis, the state had issued the IOUs at an interest rate of 3.75%. Per the contract, California will pay 3% interest to JPMorgan on those notes.

The loan is expected to help bolster the California government’s financial position as it prepares for a multi-billion dollar sale of short-term debt next month to raise money for its cash-flow needs.

Through Aug 25, California has issued 414,000 of the IOUs with a total value of $2.3 billion. The state is scheduled to redeem the IOUs beginning Sept 4, 2009.

In another piece of good news for the state, Fitch Ratings on Wednesday removed California’s General Obligation (GO) debt from alert for a possible downgrade. The rating agency has taken such action as a result of the recent actions of the state government to tackle its cash crisis. The agency affirmed California’s GO rating of BBB, or two notches above “junk” status, and said the ratings outlook is stable.

However, according to the agency, the government of California still faces serious challenges as recession mauls the state’s economy and hacks revenues.

Last month, some of the largest U.S. banks Incorporatedluding Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and JPMorgan were unwilling to cash the state’s IOUs despite request from the State Treasurer. However, $2 billion in outstanding IOUs are earning a tax-free annualized yield of 3.75%, which would have accumulated to the banks if they had continued to cash them for customers and then held them to maturity.

JPMorgan was one of the first banks to exit the federal government’s Troubled Asset Relief Program (TARP), and has been restructuring its balance sheet to capitalize on its strength of capital. The loan to California comes from a different pool of funds that the company has used to buy notes worth billions issued by states facing cash crunch Incorporatedluding Illinois and New Jersey.

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