BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 116 (Calderon) Hearing Date: April 15, 2009
As Amended March 19, 2009
Fiscal: Yes
Urgency: No
SUMMARY Would make changes intended to improve the state's
ability to sell registered reimbursement warrants (RAWs) the
next time the state's fiscal situation requires a RAW sale
(which may be as early as June 2009, according to the State
Controller's Office).
DIGEST
Existing law
1. Authorizes the issuance of RAWs and other warrants by the state
(Government Code Sections 17200 et seq.), and authorizes the
State Treasurer, State Controller, and State Director of
Finance, sitting as the Pooled Money Investment Board (PMIB), to
set the rate of interest on RAWs (Section 17222);
2. Provides that, in lieu of prescribing a precise interest rate
on RAWs, the PMIB may fix a maximum rate of interest for the
RAWs (currently capped at five percent), and prescribe that the
interest rate is either of the following:
a. Fixed, in accordance with the best bids for the
warrants, if the warrants are sold at public sale;
b. Fixed or variable on the terms and conditions the
Controller must approve at the time the warrants are sold, if
the warrants are sold in negotiated sales (Section 17244);
3. Provides that, if the Controller requests that RAWs be issued,
and the Governor determines that the need for those RAWs is
justified, a copy of the written request from the Controller
must be provided to the chairperson and vice chairperson of the
Senate Committee on Budget and Fiscal Review and the Assembly
Committee on Budget, the chairperson and vice chairperson of the
SB 116 (Calderon), Page 2
Joint Legislative Budget Committee, and the chairperson and vice
chairperson of the Senate and Assembly Committee on
Appropriations (Section 17240.5);
4. Further provides that, no later than 15 days following the
completion of a RAW issuance, the Controller shall report on the
specific details of the issuance to the legislative committees
referenced immediately above (Section 17240.5).
This bill
1. Would add RAWs and other warrants issued by the state to
the list of eligible securities for the investment of state
surplus moneys (currently, only state bonds and state notes
are so eligible);
2. Would authorize the PMIB to fix the rate of interest paid
on any RAW at no more than 12 percent per annum (up from not
more than 5% per annum), if it determines that doing so is
in the best interests of the state;
3. Would establish or modify other related interest rate
ceilings, by providing for a maximum interest rate of 12% on
registered warrants, including those issued on account of
nonpayment of principal or interest on revenue anticipation
notes, and a maximum interest rate of 11% on registered
warrants issued to pay obligations under any state credit
enhancement or liquidity agreement;
4. Would authorize the Controller to fix periodic payment
dates for interest on RAWs or provide that interest on these
warrants be paid only upon redemption, as specified;
5. Would prohibit the Controller from selling RAWs at less
than face value;
6. Would clarify that any premium received in connection with
the sale of any RAW be deposited in the General Fund and
used for the payment of interest on those RAWs;
7. Would allow the Controller to sell RAWs that may be
redeemed by the Controller, at his or her option, prior to
the RAW's maturity date, at a redemption price not to exceed
110 percent of the principal amount of the RAW, plus accrued
interest;
SB 116 (Calderon), Page 3
8. Would provide that if, at any time, it is necessary to
issue registered warrants on account of nonpayment of
interest on a RAW (something that could happen if the
General Fund lacked sufficient money to pay that interest),
the registered warrants would pay interest at the fixed or
variable rate specified in the RAW, but further provides
that in no case may the total sum of interest payments paid
on the RAWs and the registered warrants exceed the interest
that could have accrued on the RAWs, if those warrants had
been issued at a rate of 12% per annum;
9. Would make additional, conforming changes.
COMMENTS
1. Purpose of the bill To improve the state's chances of
selling RAWs at the lowest possible cost to the state, the
next time the state's fiscal situation warrants a RAW sale
(which may be as early as June 2009, according to the State
Controller's Office).
2. Background SB 116 is cleanup legislation, intended to
allow the state to make use of the changes enacted at the
request of the State Controller through AB 1533 (Committee
on Banking and Finance), Chapter 336, Statutes of 2007. In
2007, in order to improve the state's ability to meet its
fiscal obligations during difficult fiscal times, the State
Controller sponsored legislation allowing it to sell RAWs at
variable rates, rather than only at fixed rates, and through
negotiated sales, rather than only through public sales. AB
1533 was enacted to accomplish this aim.
Unfortunately, when the State Controller engaged in preliminary
discussions during the fall of 2008, to test the waters for
a possible RAW sale, he learned that additional statutory
changes would be necessary, before his office could fully
utilize the authority given to it through AB 1533. SB 116
contains those statutory changes, which have been developed
through discussions among the State Controller, State
Attorney General, State Treasurer, and the state's bond
counsel, Orrick, Herrington & Sutcliffe.
The statutory changes contained in SB 116 would allow the state
to sell RAWs with interest rates of up to 12% (compared to
the existing cap of 5%), if it became necessary to do so.
SB 116 (Calderon), Page 4
The state's credit rating, which is currently the lowest
among all fifty states, may make it difficult to sell enough
fixed interest rate RAWs, and impossible to sell variable
interest rate RAWs, with a cap of 5%, in the current market
environment. Other changes would authorize the state to pay
periodic interest on RAWs, rather than paying interest only
upon RAW redemption, and to issue "callable" RAWs that would
allow the state to pay them off prior to their maturity
dates. The bill would also update existing, outdated
statutes that restrict certain state entities from investing
in state warrants, something they may wish to do, if the
warrants bear attractive interest rates. RAWs and other
warrants are already permitted investments for local
agencies; SB 116 would add these as permitted investments
for state agencies. Finally, the bill addresses the ways in
which the state would handle certain "what if/worse case"
scenarios, which are unlikely to happen, but on which
existing law is silent. The need for SB 116 is best
understood within the context of a more general discussion
of the state's cash flow management tools.
California uses several types of state obligations to help with
its cash flow management, including revenue anticipation
notes and warrants.
Revenue anticipation notes are short-term financing tools used
to borrow money within a fiscal year. Their issuance is
quite common, and is necessitated by the fact that the
state's revenue stream, which peaks in April and can fall
considerably during months in which tax receipts are low,
does not evenly match its expenses, which are more evenly
spread across the fiscal year.
Warrants are the government equivalent of checks, and are
issued by the State Controller nearly every business day of
the year, in order to pay state obligations. Three types
of warrants may be used when the state suffers a revenue
shortfall, including registered warrants, registered
reimbursement warrants (RAWs), and registered refunding
warrants. The differences are as follows:
Registered warrants are like checks written against
insufficient funds. Normally, all warrants issued by the
Controller are paid upon presentation. Warrants are
payable from so-called "unapplied money," which is the
state's version of the balance in its checking account
SB 116 (Calderon), Page 5
after deducting all checks outstanding. In order for the
Controller to determine whether the state has enough
unapplied money to pay all warrants it is required to
issue on any given day, the Controller must rank the
obligations that are to be paid. Some types of
obligations have priority over others. For example,
general obligation bond debt service has priority over
payments to vendors supplying goods and services to state
agencies. If, after ranking all of the state's
obligations and setting aside all money that must be
earmarked, reserved, or otherwise set apart for higher
ranking obligations, the Controller determines that there
is not enough unapplied money to pay a warrant, the
warrant will be registered. In issuing these registered
warrants, the state is promising to pay their face value
as soon as sufficient unapplied money is available.
Registered warrants bear interest until they are paid.
Registered reimbursement warrants (RAWS) are like
marketable, post-dated checks. They are sold by the
Controller to the public, to raise cash to pay state
obligations, in lieu of issuing individual registered
warrants to numerous creditors. RAWs are not due to be
paid by the state until their maturity date, which is
established by the Controller at the time the RAWs are
issued. Like registered warrants, they bear interest
until they are paid. The issuance of RAWs is quite rare
and has only occurred seven times since they were
authorized in 1936 (1936, 1982, 1992, 1993, 1994, 2002,
and 2003).
Registered refunding warrants can be sold by the
Controller to the public to pay maturing RAWs. Like
RAWs, refunding warrants are like post-dated checks.
They have a maturity date, and bear interest until paid.
Although the State Controller is the lead agency responsible
for issuing RAWs, the process of issuing all state
obligations is a collaborative one which involves the
Governor (sometimes directly and sometimes through the
Department of Finance), State Treasurer, State Controller,
Director of Finance, and Attorney General, as well as
several private sector financial advisors and bond counsel
knowledgeable about these instruments. Thus, despite the
fact that the Controller is the lead agency responsible for
issuing RAWs, the Treasurer, Attorney General, and multiple
SB 116 (Calderon), Page 6
other government entities are very involved in the issuance
process.
The debt distinction The California State Supreme Court has
ruled that RAWs are not considered debt under the State
Constitution. This distinction is important for two
reasons: 1) different state officials are responsible for
issuing debt (State Treasurer) and issuing warrants (State
Controller); and 2) California's Constitution requires a
two-thirds vote of both houses of the Legislature and a vote
of the people before the state can incur debt of over
$300,000.
In the court case referenced above, the Supreme Court found
that the issuance of warrants in anticipation of the receipt
of revenues does not create an indebtedness or liability
within the meaning of the debt limitation clause in the
State Constitution. The Court also ruled that warrants are
legal and binding, even if the fiscal period in which the
warrants are issued ends before the state repays the
warrants. The Attorney General has opined that RAWs may be
issued across a maximum of two fiscal years; they cannot
span three or more fiscal years.
Despite the fact that the Treasurer issues debt and the
Controller issues warrants, Treasurer's Office and
Controller's Office staff have advised Committee staff that
the process of issuing all state obligations is a
collaborative one which involves the Governor (sometimes
directly and sometimes through the Department of Finance),
State Treasurer, State Controller, Director of Finance, and
Attorney General, as well as several private experts
knowledgeable about the marketing of these instruments. In
other words, despite the fact that the Controller is the
lead agency responsible for issuing RAWs, the Treasurer and
multiple other government entities are very involved in the
issuance process.
Approval process Before RAWs may be issued, the Governor
must approve both their issuance and the maximum amount that
may be issued. Once RAW issuance is approved by the
Governor, the Treasurer, Controller, and Director of
Finance, sitting as the Pooled Money Investment Board, set
the maximum rate of interest of and approve the payment
procedures for RAWs. Once the maximum amount of RAWs, the
maximum rate of interest, and the payment procedures are
SB 116 (Calderon), Page 7
approved, the Controller may issue the RAWs. The Attorney
General and bond counsel must issue opinions regarding the
legality of RAW issuance, and the Treasurer, Controller, and
Department of Finance must issue certifications and other
documents relating to their issuance.
The approval process for issuing refunding warrants is
similar to that for RAWs, except that the Treasurer, rather
than the Governor, approves their issuance.
The issuance of warrants does not require approval by the
Legislature. However, AB 1533 required the Controller to
formally notify the Legislature about the proposed sale of
any RAWs, and about the details of any RAW issuances, by
notifying the Chair and Vice Chair of the Senate and
Assembly Budget and Appropriations Committees.
3. Support . State Controller John Chiang is sponsoring SB 116
to allow his office to sell RAWs at the lowest possible cost
to the state and in an efficient and timely manner.
Writing in support of the bill, State Treasurer Bill Lockyer
states that SB 116 would provide much-needed technical and
clarifying changes, codify legal opinions issued by the
Attorney General concerning redemption rates, allow the
state to pay RAWs back prior to their maturity dates, and
lift an outdated interest rate cap of 5% per year on certain
types of state warrants.
Orrick, Herrington & Sutcliffe serves at the state's bond
counsel in connection with the sale of RAWs by the State
Controller and the sale of RANs by the State Treasurer.
Orrick believes that SB 116 would be of considerable benefit
to California, and urges its passage. Orrick writes that SB
116 "would establish or clarify five exceptions to the
interest rate cap of five percent per annum on state
warrants, including warrants related to RANs. It also would
clarify that interest on reimbursement warrants can be paid
prior to maturity, that reimbursement warrants can be made
subject to redemption prior to maturity, and that
reimbursement warrants may not be sold at a discount. These
changes will answer questions that have been raised by
counsel and public finance banks and investment banks since
the enactment of Assembly Bill No. 1533 in 2007 (the most
recent revision of the warrant statutes). Existing law
permits local agencies, but not state agencies, to invest in
SB 116 (Calderon), Page 8
state warrants. Senate Bill No. 116 would permit surplus
moneys at the state level to be invested in state warrants."
4. Opposition None received.
5. Prior Legislation
a. AB 1533 (Committee on Banking & Finance),
Chapter 336, Statutes of 2007: Authorized the state
to sell RAWs at variable interest rates, through
negotiated sales.
POSITIONS
Support
State Controller John Chiang (sponsor)
State Treasurer Bill Lockyer
Orrick, Herrington & Sutcliffe
Oppose
None received
Consultant: Eileen Newhall (916) 651-4102