BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 2651
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          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  








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            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  








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          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 
           








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          Analysis Prepared by  :    Eric Worthen / V. A. / (916) 319-3550