BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
116 (Calderon)
Hearing Date: 5/11/2009 Amended: 4/28/2009
Consultant: Maureen Ortiz Policy Vote: BFI 10-0
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BILL SUMMARY: SB 116, an urgency measure, makes numerous
changes to law that authorizes the State Controller to sell
registered reimbursement warrants (RAWs).
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Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
Increase in rate cap -----------------unknown
----------------------- General
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STAFF COMMENTS: This bill may meet the criteria for referral to
Suspense.
SB 116 could result in unknown costs from the provision that
authorizes the increase in the interest rate cap, however, any
increases are unquantifiable at this time and will be dependent
upon the market rates and the amount of debt that is sold.
SB 116 is a cleanup to AB 1533 (Chapter 336, Statutes of 2007)
which authorized the Controller to sell RAWs at variable rates.
However, when the Controller was engaged in preliminary
discussion during the fall of 2008, it was discovered that
statutory changes would be necessary before the RAWs could be
sold. Specifically, SB 116 will provide for the following:
1) Increases the maximum interest rate paid from 5% to 12% if
the Pooled Money Investment Board determines that it is in the
best interest of the state ,
2) Authorizes the Controller to make periodic interest payments
ahead of the normal schedule if cash becomes available, and upon
obtaining the concurrence of the Department of Finance and the
State Treasurer's Office,
3) Prohibits the sale of RAWs at less than face value in order
to ensure that any amount drawn against the General Cash
Revolving Fund for the sales of RAWs would be repaid on a
dollar-for-dollar basis,
4) Restricts the use of any premium received on the sale of
RAWs to the payment of interest on those warrants,
5) Clarifies that if insufficient funds are available to pay a
RAW at maturity, the warrant will continue to bear interest on
the principal amount only, and,
6) Makes additional conforming changes necessary for issuance.
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SB 116 (Calderon)
It is anticipated that there will be some savings by allowing
the Controller to redeem the RAWs before their maturity date,
and from allowing the Controller to make periodic interest
payments before the maturity date. Also, millions of dollars of
savings could be realized to the extent that the variable rate
RAWs become marketable. The Controller already has the authority
to issue RAWs at variable rates which would be sold at a lesser
rate than the existing fixed rate. For example, if the fixed
rate is 4.5% and the variable rate is 2.5%, the state of
California would realize substantial savings in interest
payments by issuing the RAWs at variable rates. However, the
financial community has not expressed an interest in purchasing
variable rate RAWs, therefore making them unmarketable, with the
existing statutory interest rate cap of 5%. According to the
State Controller's Office, the risk involved in increasing the
interest rate cap is if the rates climb rapidly during the two
year exposure period.
According to the SCO, reasons for the increase in the interest
rate cap are as follows:
1) The variable rate allowed under current law does not allow
interest to go beyond 5%, therefore, variable rate RAWs which
could be sold at a much lesser expense to the state are not
currently marketable.
2) The current interest on G.O. Bonds is capped at 11%, and, as
such, this is what the financial community is accustomed to
receiving. This bill will allow RAWs to be sold at comparable
rates if the market warrants.
3) Some syndicate banks are being formed to support the state's
cash flow and purchase RAWs, while other banks want to provide
credit support for RAWs. Without this bill, the purchaser will
only receive up to 5% interest, but registered warrants sold to
back RAWs are paid up to 11%. Consequently, unenhanced RAWs are
not even negotiated, and the state is required to pay large
upfront costs for credit enhancement.
Another cost savings aspect to this bill is that allowing the
interest rate cap to fluctuate with the market rate will allow
the state to sell unenhanced RAWs thereby resulting in savings
of potentially millions of dollars in upfront fees. Enhanced
RAWs are back by creditors who currently are authorized to
receive 11% interest if the state defaults. Unenhanced RAWs are
not backed by creditors and are bound by an interest rate cap of
5% which limits the Controller's options and ability to sell
them. Since the recent downturn of the economy, banks are less
willing to lend the state of California money without either
backing by other creditors, or substantial upfront fees.
The changes in this bill have been negotiated between the
Controller, Attorney General, Treasurer, and the state's bond
counsel Orrick, Herrington & Sutcliffe and amendments have been
taken to address concerns by the Department of Finance. The
bill is necessary to improve the state's chances of selling RAWs
which might be necessary as early as June in order to assist
with the state cash-flow problems.
RAWs are like marketable, post-dated checks which are sold to
the public to raise cash to pay state obligations. They are not
payable by the state until their maturity date, but
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SB 116 (Calderon)
they bear interest until they are paid. The issuance of RAWs is
rare and has occurred only seven times since they were
authorized in 1936 (1936, 1982, 1992, 1993, 1994, 2002, and
2003). It is likely that they may be issued in June or July of
this year. According to the State Controller's Office,
implementation of this bill is necessary before the Attorney
General can issue a validity opinion for a state RAWs sale. The
amount of the budget deficit will not be known until the May
Revision is released later this month. The State Controller's
Office, the State Treasurer's Office and the Department of
Finance are developing strategies to access the short-term
borrowing market to meet the state's upcoming cash flow needs.
Options being explored include a) RANs, b) RAWs, c) a
combination of RANs and RAWs, and d) federal assistance if
available.
The problem with attempting to issue RAWs with the current
interest rate cap of 5% is that investors will not lend the
state money unless the interest is allowed to rise as the market
rates fluctuate. AB 1533 of last year authorized the Controller
to sell RAWs at variable rates, however, although the variable
rate would save the state money in the short term, they are not
currently marketable with the existing cap of 5%.
California uses several types of state obligations to help with
its cash flow management, including revenue anticipation notes
and warrants which are defined as follows:
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.
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, reimbursement warrants (also known as
RAWs), and refunding warrants.
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 Department of Finance,
State Treasurer, State Controller, and Attorney General, as well
as several private sector financial advisors and bond counsel.