BILL ANALYSIS
SB 116
Page 1
Date of Hearing: June 11, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
SB 116 (Calderon) - As Amended: April 28, 2009
Policy Committee: Banking and
Finance Vote: 10-0
Urgency: Yes State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill raises the interest rate cap on registered
reimbursement warrants (also referred to as revenue anticipation
warrants, or RAWs) and makes several other changes aimed at
making RAWs more marketable in the current poor credit
environment. Specifically, the bill:
1)Authorizes the pooled money investment board (PMIB) to pay up
to 12 % annual interest, up from the current 5% cap, if it
determines that doing so is in the best interest of the state.
2)Provides that, in the event it becomes necessary to issue
registered warrants because of nonpayment of principal or
interest on a RAW or revenue anticipation note (RANS), the
registered warrants would pay interest at the fixed or
variable rate specified in the RAW or RAN, subject to a 12%
cap.
3)Establishes or modifies related interest rate ceilings,
including a maximum interest rate of
11% on registered warrants issued to pay obligations under any
state credit enhancement or liquidity agreement.
4)Authorizes the Controller to fix periodic payment dates for
interest on RAWs, instead of requiring that interest be paid
only upon redemption.
5)Allows the state to invest surplus monies in RAWs and other
warrants (currently, only state bonds and state notes are
eligible investments).
SB 116
Page 2
6)Allows the Controller to sell RAWs with call provisions
(permitting the controller to redeem them prior to full
maturity), as long as the redemption price is no more than
110% of the principal amount of the RAW plus accrued interest.
FISCAL EFFECT
1)The changes in this bill should reduce overall borrowing
costs, resulting in potentially significant GF savings (tens
of millions of dollars). The savings occur to the extent the
bill (a) provides the state with greater access to normally
lower-cost variable rate credit markets, (b) facilitates
greater diversification of short-term debt, and (c) allows the
state to avoid paying prohibitively high fees for private
credit enhancements.
2)At the same time, the increase in interest rate caps exposes
the state to interest rate risk. This could result in higher
borrowing costs in instances where short-term interest rates
rise sharply after the state issues variable rate RAWs.
COMMENTS
1)Rationale . The purpose of this bill is to provide the state
with access to variable rate credit markets and make related
changes aimed at expanding the markets for state RAWS. It is
the product of discussions among the State Controller, State
Attorney General, State Treasurer, and the state's bond
counsel, Orrick, Herrington & Sutcliffe regarding additional
statutory needed to fully implement changes aimed at making
RAWs more marketable.
2)Background - short term financial instruments used by the
state. This bill is primarily directed at RAWs, but affects
several instruments used by California for paying its bills
and covering cash shortfalls in its GF.
a) Warrants . In normal times, the main payment instrument
is a warrant, which is the state's equivalent of a check.
The warrant is drawn on GF for payments to service
providers, contractors, local governments, school
districts, and employees. Each warrant is paid from
unapplied monies in the state's GF (that is, money that is
not otherwise obligated for higher-priority purposes as
specified in law or regulations).
SB 116
Page 3
b) RANs. To help ensure that unapplied monies are
available for payments throughout the year, the state often
issues short term notes (called revenue anticipation notes,
or RANs) to bridge the mismatch between the timing of
revenues and expenditures that occur within a fiscal year.
RANs are not sold to cover year-end shortfalls, as they
must be repaid prior to June 30 of the fiscal year in which
they are sold. RANs can only be issued once a budget is
signed.
c) Registered warrants . In years in which the state faces
significant cash shortfalls and cannot sell RANS (either
because it does not have a budget in place or there are
insufficient funds at the end of the year for the RANS to
be repaid), it may be required to issue registered warrants
instead of regular warrants. A registered warrant is, in
effect, an IOU - or a promise by the state that it will pay
the face value, plus interest, as soon as sufficient
unapplied money is available.
d) RAWs. As an alternative to issuing thousands of
individual registered warrants during periods of serious
cash shortfalls, the state can sell registered
reimbursement warrants (RAWS) to the public in order to
raise cash to cover its obligations. In general, RAWs are
short term debt instrument similar to RANS. However, RAWS
differ from RANs in several significant ways. In
particular, existing law does not require that a budget be
enacted prior to the issuance of a RAWs, and RAWs can have
maturities extending past the end of the fiscal year. (The
maturities may not, however, extend across the end of more
than one fiscal year.)
Given the negative fiscal circumstances surrounding the
issuance of RAWs, these warrants are considered to be a
higher-risk investment than RANs, usually requiring higher
interest rates and/or expensive private credit enhancements
in order to be marketable. The issuance of RAWs has been
infrequent, occurring just seven times since they were
authorized in 1936 (1936, 1982, 1992, 1993, 1994, 2002, and
2003).
e) Registered refunding warrant. A related instrument is a
registered refunding warrant, which can be sold by the
SB 116
Page 4
Controller to the public to pay maturing RAWs.
3)Challenges relating to RAW sales. In addition to the negative
budget and financial circumstances that normally surround a
RAW issuance, there are several other factors that have
hampered the state's ability to market RAWS to the public.
Until recently, RAWs were required to have fixed interest
rates (as opposed to variable rates) and be sold through a
competitive bidding process (as opposed to negotiated sales).
Existing law continues to require that RAWS be sold at fixed
maturities (with no call provisions), with no periodic payment
of interest, and with a rate cap of 5%. The laws regarding RAW
issuance are considerably more restrictive than for RANs,
which have no interest rate caps, may be sold competitively or
through negotiation, and can pay interest prior to maturity.
In past years, the state has been able to market RAWs despite
this lack of flexibility by purchasing credit guarantees from
private financial institutions. However, in the current credit
environment, banks are reluctant to provide such guarantees
under any circumstances, and any that are purchased will
likely be prohibitively expensive.
In addition, given concerns about volatility in the credit
markets, the 5% cap on variable rate interest is not high
enough to attract investors, making it extremely difficult for
the state to sell variable rate RAWs. The lack of access to
variable rate markets is significant, given concerns that
there is not enough demand in fixed rate markets - at
reasonable interest rates - for the amount of RAWs that the
state may have to sell.
In an attempt to make RAWs more marketable, the Legislature
passed AB 1533 (Committee on Banking & Finance), Chapter 336,
Statutes of 2007, which authorized the Controller to sell RAWS
at variable interest rates through negotiated sales. However,
when the State Controller engaged in preliminary discussions
during the fall of 2008 related to a possible RAW sale, it
became apparent that additional changes would be necessary to
enable the state to sell variable rate RAWs. In particular, it
was noted that the 5% rate cap on RAWs is too low for variable
rate debt issued during periods of financial stress and
potential credit market volatility. A similar concern exists
for the 5% cap on refunding warrants and registered warrants.
Absent a credit enhancement, in the event the state is not
SB 116
Page 5
able to pay off the RAWs at maturity, investors would receive
registered warrants or refunding warrants instead of actual
payment.
The bill raises interest rate caps on RAWs, thereby enabling
the state sell RAWS on variable rate markets. By allowing
registered warrants and refunding warrants to bear the same
interest rate as the RAWs, the bill also gives investors
assurance that, if the state is unable to repay the RAWs at
maturity, they will at least continue to receive interest at
market rates until the warrants are eventually paid off. This
will improve the marketability of RAWs sold without credit
guarantees.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081