BILL NUMBER: SB 1106 CHAPTERED 08/11/04 CHAPTER 215 FILED WITH SECRETARY OF STATE AUGUST 11, 2004 APPROVED BY GOVERNOR AUGUST 11, 2004 PASSED THE SENATE JULY 29, 2004 PASSED THE ASSEMBLY JULY 28, 2004 AMENDED IN ASSEMBLY JULY 27, 2004 AMENDED IN ASSEMBLY JUNE 29, 2004 INTRODUCED BY Committee on Budget and Fiscal Review JANUARY 12, 2004 An act to amend Sections 16920 and 16929 of, and to add Chapter 8 (commencing with Section 16940) to Part 3 of Division 4 of Title 2 of, the Government Code, relating to public pension obligations, making an appropriation therefor, and declaring the urgency thereof, to take effect immediately. LEGISLATIVE COUNSEL'S DIGEST SB 1106, Committee on Budget and Fiscal Review. Public pension obligations: bond financing. Under existing law, the state is required to make specified employer contributions to the Public Employees' Retirement Fund on behalf of state employee members of the Public Employees' Retirement System. Existing law establishes the Pension Obligation Bond Committee, which is authorized to issue bonds and take other specific actions under the California Pension Obligation Financing Act. This bill would enact the California Pension Restructuring Bond Act of 2004, that would authorize the issuance, during any 2 fiscal years after June 30, 2004, of up to $2 billion of bonds and the creation of ancillary obligations, as defined, for the purpose of funding or refunding the state's obligations to the Public Employees' Retirement Fund. The bill would authorize the issuance of the bonds only after the Department of Finance determines that those obligations are anticipated to be reduced as a result of changes to the Public Employees' Retirement Law, as specified. The bill would continuously appropriate from the General Fund, without regard to fiscal year, the amount necessary to pay the principal and interest on the bonds and other obligations incurred in connection with the bonds, subject to certain limits. The bill would authorize the Pension Obligation Bond Committee to bring an action to determine the validity of the bonds issued pursuant to the act. The bill would also authorize the Department of Finance to pay, on behalf of the committee, from funds previously appropriated to the department, specified attorneys' fees and costs in connection with the prior validation action under the California Pension Obligation Financing Act, thereby making an appropriation. The bill would declare that it is to take effect immediately as an urgency statute. Appropriation: yes. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. It is the intent of the Legislature and the Governor that a purpose of selling pension obligation bonds pursuant to this act is to avoid tax increases and further reductions in critical state programs for the 2004-05 fiscal year. SEC. 2. Section 16920 of the Government Code is amended to read: 16920. (a) Solely for the purpose of the issuance and sale of the bonds and ancillary obligations authorized by this chapter and by Chapter 8 (commencing with Section 16940), the Pension Obligation Bond Committee is hereby created. The committee consists of the Governor or his or her designee, the Director of Finance, the Controller, the Treasurer, the Secretary of Business, Transportation and Housing, the Director of General Services, and the Director of Transportation. Notwithstanding Section 7.5 or other provisions of law, any member may designate a deputy to act as the member in his or her place and stead for all purposes, as though the member were personally present. The Legislature hereby finds and declares that each member of the committee has previously acted as a member of a similar finance committee, and has duties in relation to the payment of pension obligations relating to employees under supervision of the member. (b) A majority of the committee shall constitute a quorum of the committee and may act for the committee. The Director of Finance shall serve as chairperson of the committee. (c) No member, officer, or agent of the committee is subject to personal liability on any bonds or ancillary obligations or other obligations issued or entered into under this chapter or Chapter 8 (commencing with Section 16940) or for any acts or omissions of members, officers, or agents in carrying out the powers and duties conferred by this chapter or Chapter 8 (commencing with Section 16940). SEC. 3. Section 16929 of the Government Code is amended to read: 16929. There is hereby created in the State Treasury the Pension Obligation Bond Fund. The net proceeds of bonds issued and sold pursuant to this chapter and bonds issued and sold pursuant to Chapter 8 (commencing with Section 16940) shall be deposited in the Pension Obligation Bond Fund. Notwithstanding Section 13340, the Pension Obligation Bond Fund is hereby continuously appropriated for the purposes specified in this chapter and Chapter 8 (commencing with Section 16940). SEC. 4. Chapter 8 (commencing with Section 16940) is added to Part 3 of Division 4 of Title 2 of the Government Code, to read: CHAPTER 8. THE CALIFORNIA PENSION RESTRUCTURING BOND ACT OF 2004 Article 1. General Provisions 16940. This chapter shall be known and may be cited as the California Pension Restructuring Bond Act of 2004. 16941. It is the intent of the Legislature, in enacting this chapter, to provide for an efficient, equitable, and economical means of satisfying certain pension obligations of the state. Bonds shall be issued pursuant to this chapter only when the Director of Finance determines that the state's pension obligations are anticipated to be reduced as a result of changes in the Public Employees' Retirement Law that reduce contributions to the Public Employees' Retirement System, and it is in the best interest of the state to issue bonds pursuant to this chapter to accelerate a portion of the state's anticipated lower pension obligations. 16942. The Legislature hereby finds and declares that the state's obligation to pay its pension obligations to the Public Employees' Retirement System in the amounts established by the Board of Administration of the Public Employees' Retirement System, cannot be deferred by the state; that the state's pension obligations are due and payable at predetermined times; and that the Controller is required to pay those pension obligations when they are due. The Legislature further finds that the state's pension obligations cannot be included in an accumulated state budget deficit, as defined in Section 1.3 of Article XVI of the California Constitution. Further, the Legislature finds that its pension obligations are imposed by law, and not subject to Section 1 of Article XVI of the California Constitution and that the bonds authorized to be issued under this chapter have the same character under the Constitution as the pension obligations funded or refunded. 16943. Unless the context otherwise requires, the following definitions shall govern the construction of this chapter: (a) "Ancillary obligation" means the obligation of the state under any credit enhancement or liquidity agreement, including any of the following: (1) An obligation in the form of bond insurance, a letter of credit, standby bond purchase agreement, reimbursement agreement, liquidity facility, or other similar arrangement. (2) An obligation under any remarketing agreement, auction agent agreement, broker-dealer agreement, or other agreement relating to the marketing of the bonds, interest rate or other type of swap or hedging contract. (3) An obligation under any investment agreement, forward purchase agreement, or similar structured investment contract, entered into by the committee in connection with any bonds issued under this chapter. (b) "Bonds" means any bonds, notes, bond anticipation notes, interim certificates, debentures, or other obligations or forms of indebtedness issued pursuant to this chapter. (c) "Committee" means the Pension Obligation Bond Committee established pursuant to Section 16920. (d) "Pension obligations" means the obligations of the state or any state agency to the retirement system imposed by the retirement laws in the amounts determined by the board of administration of the retirement system. (e) "Program" means the program established by this chapter under which the committee shall issue bonds for the purpose of funding or refunding pension obligations. (f) "Retirement laws" means Section 17 of Article XVI of the California Constitution and the Public Employees' Retirement Law (Part 3 (commencing with Section 20000) of Division 5) and any other laws providing for payment to be made by the state or any state agency to the retirement system to provide retirement benefits to employees of the state or any other individuals for which the state has an obligation to pay all or a portion of the contributions to the retirement system to ensure the payment of retirement benefits to those individuals. (g) "Retirement system" means the Public Employees' Retirement System established pursuant to the Public Employees' Retirement Law (Part 3 (commencing with Section 20000) of Division 5). Article 2. Issuance of Bonds to Finance the Program 16945. The committee is authorized and empowered, for and in the name and on behalf of the state, to do all of the following: (a) Upon the request of the Director of Finance, and following receipt of the determination of the Director of Finance pursuant to Section 16941, issue taxable or tax-exempt bonds for the purpose of funding or refunding pension obligations, paying related costs and ancillary obligations, or refunding any bonds previously issued pursuant to this chapter. (b) Execute debentures or other instruments evidencing the pension obligations. (c) Enter into ancillary obligations and other contracts deemed necessary by the committee in connection with any bonds issued under this chapter. (d) Establish the terms and conditions for the program undertaken pursuant to this chapter. (e) Employ or contract for legal, consulting, underwriting, or other services in connection with the program as may be necessary in the judgment of the committee, as approved by the Treasurer, as agent for sale of the bonds, for the successful financing of the program and the issuance and sale of bonds. (f) In addition to the powers specifically granted in this chapter, do all things necessary or convenient, including delegation of necessary duties to the Director of Finance, as chairperson, and to the Treasurer, as agent for sale of the bonds, to carry out the purposes of this chapter. 16946. Every issue of bonds, and any ancillary obligation entered into with respect to those bonds, shall be a debt and liability of the state payable from the General Fund of the state or, in the case of bond anticipation notes, payable from the proceeds of bonds to be issued pursuant to this chapter. 16947. (a) The cumulative amount of outstanding bonds issued pursuant to this chapter may not exceed the lesser of (1) the sum of two billion dollars ($2,000,000,000); or (2) the amount which, when added to all anticipated interest and related costs of the bonds, does not exceed the anticipated reduction of the state's pension obligations as a result of changes in the retirement law that reduce contributions to the retirement system, as determined by the Director of Finance. (b) Notwithstanding subdivision (a), the cumulative amount of bonds issued pursuant to this chapter in any one fiscal year may not exceed the total unpaid amount of the state's pension obligations for that fiscal year. (c) Bonds may be issued pursuant to this chapter in any two fiscal years after June 30, 2004, but may not be issued in any more than two fiscal years. 16948. (a) The resolution, certificate, or other instrument of the committee authorizing the issuance of the bonds may provide, or the committee may delegate to the Treasurer, as agent for sale of the bonds, responsibility to determine, any or all of the following for the bonds: (1) The form of the bonds, which may be issued as serial bonds, term bonds, or installment bonds, or any combination of those. (2) The date to be borne by any bonds. (3) The time of maturity of any bonds, which maturities may be before or after the term of the related pension obligation to be funded or refunded. (4) The interest, fixed or variable, to be borne by the bonds. (5) The time that the bonds shall be payable. (6) The denominations, form, and registration privileges of the bonds. (7) The manner of execution of the bonds. (8) The place the bonds are payable, which may include any paying agent within or outside of the state. (9) The terms of redemption of the bonds. (10) The establishment of funds and accounts to be held by a trustee to provide for payment or security for the bonds or ancillary obligations or related costs. (11) Any other terms and conditions deemed necessary by the committee. (b) Pursuant to Section 5702, the Treasurer shall serve as agent for the offer and sale of the bonds. The bonds may be sold at either a competitive or negotiated sale, at times and at prices, for consideration, and with all other terms and conditions as the Treasurer, in his or her capacity as agent for sale of the bonds, shall determine. (c) The Treasurer is authorized to invest or direct the investment of any amounts held in trust for payment of the bonds in any securities or obligations authorized pursuant to Chapter 3 (commencing with Section 16430) of Part 2, as amended from time to time. 16949. The proceeds of the bonds shall be applied to the funding or refunding of pension obligations, or refunding of bonds previously issued under this chapter, together with all costs of issuing the bonds and refunding pension obligations or prior bonds and the costs of any ancillary obligation. Notwithstanding Sections 20822 and 20824, or any other provision of law, the proceeds of the bonds may be applied to the prepayment of pension obligations. 16950. When proceeds of bonds issued pursuant to this chapter are used to pay the state's pension obligations to the retirement system for members whose compensation is paid from a fund other than the General Fund, the Controller shall, notwithstanding any other provision of law, transfer quarterly from the special fund or nongovernmental cost fund to the General Fund an amount equal to the quarterly pension obligations paid from bond proceeds with respect to those members, as certified by the Director of Finance and authorized in any appropriation item or in any category thereof. 16951. When proceeds of bonds issued pursuant to this chapter are used to pay the state's pension obligations to the retirement system for members whose compensation is paid from the General Fund, the Controller shall, notwithstanding any other provision of law, abate quarterly to the General Fund an amount equal to the quarterly pension obligations paid from bond proceeds with respect to those members, as certified by the Director of Finance and authorized in any General Fund appropriation item or in any category thereof. 16952. In the discretion of the committee, any bonds issued under this chapter may be secured by a trust agreement, indenture, or resolution between the state and any trustee, which may be the Treasurer or any trust company or bank having the powers of a trust company chartered under the laws of any state or the United States and designated by the Treasurer. The trust agreement, indenture, or resolution may contain provisions for protecting and enforcing the rights and remedies of the bond owners as may be reasonable and not in violation of law. Any trust agreement, indenture, or resolution may set forth the rights and remedies of the bond owners and of the trustee and may restrict the individual right of action by bond owners. In addition to the foregoing, any trust agreement, indenture, or resolution may contain other provisions as the committee may deem reasonable for the security of the bond owners, including, but not limited to, provisions specifying the date or dates on which debt service payments on the bonds shall be transferred to the trustee. Any trust accounts created by the trust agreement, indenture, or resolution may be held outside the State Treasury. 16953. The committee may provide for the issuance of bonds any portion of which is to be used for the purpose of refunding outstanding bonds issued to fund or refund pension obligations, including the payment of the principal thereof and interest and redemption premiums, if any. The proceeds of bonds issued to refund any outstanding bonds may be applied to the retirement of those outstanding bonds at maturity, or the redemption, on any redemption date, or purchase of those outstanding bonds prior to maturity, subject to the terms and conditions as the committee deems advisable. 16954. The net proceeds of bonds issued and sold pursuant to this chapter shall be deposited in the Pension Obligation Bond Fund established pursuant to Section 16929. Article 3. Miscellaneous Provisions 16955. This chapter, being necessary for the health, welfare, and safety of the state and its residents, shall be liberally construed to effect its purposes. 16956. This chapter shall be deemed to provide a complete and alternative authorization to take the actions necessary to implement this chapter, and shall be regarded as supplemental and additional to the powers conferred by other laws. The issuance of the bonds and their terms, the application of proceeds to the funding or refunding of pension obligations or prior bonds, and the entering into of any ancillary obligation under this chapter need not comply with the requirements of any other law applicable to the issuance of bonds or ancillary obligations, including, but not limited to, the State General Obligation Bond Law (Chapter 4 (commencing with Section 16720)). The purposes authorized by this chapter may be effectuated and bonds are authorized to be issued for any purposes under this chapter notwithstanding that any other law may provide for those purposes or for the issuance of bonds for like purposes and without regard to the requirements, restrictions, limitations, or other provisions contained in any other law. 16957. Section 10295 of the Public Contract Code and Article 4 (commencing with Section 10335) of Chapter 2 of Part 2 of Division 2 of the Public Contract Code do not apply to agreements entered into by the committee, or any individual to whom the committee delegates contracting authority, in connection with the sale of bonds or other matters authorized under this chapter. 16958. Bonds issued pursuant to this chapter are a legal investment for any state special fund or trust fund, notwithstanding any provision of law limiting the investments that may be made by the fund. The bonds shall be legal investments in which all public officers and public bodies of the state, its political subdivisions, all municipalities and municipal subdivisions, all insurance companies and associations and other persons carrying on an insurance business, all banks, bankers, banking institutions, including savings and loan associations, building and loan associations, trust companies, savings banks and savings associations, investment companies, and other persons carrying on banking business, all administrators, guardians, executors, trustees, and other fiduciaries, and all persons authorized to invest in bonds or other obligations of the state, may properly and legally invest funds, including capital, in their control or belonging to them. The bonds may be used by any private financial institution, person, or association as security for public officers and bodies of the state or any agency or political subdivision of the state and all municipalities and public corporations for any purpose for which the deposit of bonds or other obligations of the state is authorized by law, including deposits to secure public funds. 16959. The committee may bring an action to determine the validity of any bonds to be issued, or any ancillary obligations and other contracts to be entered into, under this chapter pursuant to Chapter 9 (commencing with Section 860) of Title 10 of Part 2 of the Code of Civil Procedure. For the purposes of Section 860 of the Code of Civil Procedure, any action initiated pursuant to this section shall be brought in the Superior Court of the County of Sacramento. 16960. Notwithstanding Section 13340, there is hereby continuously appropriated, without regard to fiscal year, from the General Fund for the purposes of this chapter, an amount, subject to the limitations of this chapter, that equals the sum annually that is necessary to pay all obligations, including principal, interest, costs, expenses, rebate, legal, commitment, or other fees, and all other amounts incurred by the state under or in connection with bonds and any ancillary obligations payable entered into by the state. The amount hereby appropriated each fiscal year to pay principal on any bonds issued pursuant to this chapter and any ancillary obligations associated therewith may not exceed the outstanding principal amount of all bonds issued pursuant to this chapter. The amount appropriated each fiscal year to pay interest on any bonds issued pursuant to this chapter and any ancillary obligations associated therewith may not exceed 15 percent per annum of the outstanding amount of all bonds issued pursuant to this chapter. The amount hereby appropriated each year to pay costs, expenses, rebate, legal, commitment, or other fees and other amounts of any ancillary obligations may not exceed 5 percent per annum of the outstanding amount of all bonds issued pursuant to this chapter. Expenditures pursuant to this section shall reflect the efforts of the state to secure financing that results in the least cost to the state after considering both short-term and long-term financing costs. SEC. 5. The Department of Finance, on behalf of the Pension Obligation Bond Committee, may pay, from the items of appropriation in the Budget Act of 2003 that support the operations of the department, attorneys' fees and costs included in the agreement to dismiss the appeal in the matter of Pension Obligation Bond Committee, etc. v. Howard Jarvis Taxpayers Assn. (Case No. C045240). SEC. 6. This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the Constitution and shall go into immediate effect. The facts constituting the necessity are: In order to enact the statutory changes necessary to implement the Budget Act of 2004, it is necessary that this act take effect immediately.