BILL ANALYSIS AB 2651 Page 1 Date of Hearing: April 13, 2010 ASSEMBLY COMMITTEE ON VETERANS AFFAIRS Paul J. Cook, Chair AB 2651 (Knight) - As Introduced: February 19, 2010 SUBJECT : Veterans farm and home purchases. SUMMARY : The acts authorizing the various bonds issues for these purposes require the Controller to pay, from the General Fund, the principal and interest on the bonds when due, and to be reimbursed for those costs from the Veterans' Farm and Home Building Fund of 1943. Specifically, this bill would authorize the Controller to establish a zero-balance account within the General Fund and to transfer to that account, from the Veterans' Home Building Fund of 1943, those amounts necessary to pay from the General Fund the principal and interest on the bonds as it comes due. EXISTING LAW establishes the Veterans Farm and Home Purchases Act of 1974, the object of which is to enable veterans to acquire farms and homes: 1.Provisions of the Act are administered by the California Department of Veterans Affairs through the CalVet Home Loan Program. 2.Uses State of California Veterans General Obligation Bonds (referred to as QVMB in federal law) to finance loans to eligible veterans. The program purchases homes and farms for resale to the eligible veterans under a Contract of Sale. 3.Provides that the state will collect sufficient moneys in addition to all other revenues of the State to provide for payment of debt service on the bonds. (Military and Veterans Code 998.304 (a) and (b).) 4.States that onthe dates on which the State Controller issues warrants for the payment of the debt service on the Veterans Bonds, the Veterans Farm and Home Building Fund of 1943 (the "1943 Fund") must return to the General Fund the amount paid for such debt service. (Military and Veterans Code 998.304(c).) 5.Moneys from the 1943 Fund may only be used for financing the AB 2651 Page 2 Veterans Farm and Home Purchase Program, for its administration, for the temporary investment of surplus funds and for transfer to the general fund to pay debt service costs. (Veterans of Foreign Wars v. State of California, 36 Cal.App.3d 688) FISCAL EFFECT : Unknown. COMMENTS : The author state that this bill will save CalVet Home Loan Programs hundreds of millions of dollars. The difference in the interest rate paid for a Baa1 rated bond verses a AA- rated bond can be 1% or more. We obtained the MMD for General Obligation Bonds from the Bond Buyer to obtain the interest rates for Baa and AA rated bonds. The Baa bond was at an interest rate of 5.79% and the AA bond was at 4.33% for a difference in interest of 1.46%. This is an interest rate difference of 1.46%. Based on our remaining bond authority of approximately $1 billion outstanding for 30 years, we would save about $438 million dollars in interest payments. (1.46% x $ 1 billion x 30 years = $438 million savings) In addition, there could be additional savings if we are able to do refundings of our current outstanding $ 1.7 billion of bonds. The rating agencies have rated the California Department of Veterans Affairs' general obligation bonds at a lower rating than the California Department of Veterans Affairs' revenue bonds (subordinate credit) because of the requirement that the general fund must first pay the California Department of Veterans Affairs' general obligation bond debt service before the reimbursement is received from the 1943 Fund. The rating agencies feel that there is a chance that the State may not be able to make debt service payment on general obligation bonds, including California Department of Veterans Affairs' bonds, because on any given day the State's cash flows may not be sufficient to pay debt service on bonds after the payment to the schools. When the State Controller Office experiences a cash shortfall on a Veterans debt service payment day, State law (Government Code 17200) mandates that the State Controller Office should manage the State's cash resources so as to preserve available cash for the highest priority obligations of the General Fund, by issuing "registered warrants" even before all the cash resources of the AB 2651 Page 3 General Fund are exhausted. (See Government Code 17221.) The State Controller Office makes every effort to be sure that debt service on general obligation bonds, as the second-highest priority of the General Fund (after public education), would be paid. If the unencumbered cash resources were not sufficient to make general fund Payments, the State Controller Office has the ability to borrow from other special funds that have been identified as borrowable resources, which have balances that are not immediately needed. (Government Code 16310.) This bill establishes a bond debt service payment method that will improve the ratings provided by the credit rating agencies for Veterans General Obligation Bonds which would save hundreds of millions of dollars in interest payments for California veterans that participate in the home loan program. This would provide a legal payment process that would allow the national rating agencies to rate the Veterans General Obligation Bonds at least as high as CalVet's revenue bonds. Currently, the States General Obligation Bond rating is Baa1 and the Veterans Revenue bonds are rated AA-. This bill would establish the Veterans Bond Payment Fund, a Special Fund, to make Veterans General Obligation bond debt service payments. CalVet would be able to transfer debt service payments from CalVet's 1943 Fund into this special fund without the risk that the funds could be used by the controller for other purposes. The Veterans General Obligation Bond debt service payment would then be paid from this Special Fund. The addition of this payment process will provide rating agencies and investors with assurance that CalVet General Obligation Bond debt service payments will always be paid as long as there are funds in either the general fund or the CalVet 1943 Fund. REGISTERED SUPPORT / OPPOSITION : Support > Opposition AB 2651 Page 4 > Analysis Prepared by : Eric Worthen / V. A. / (916) 319-3550