BILL ANALYSIS
SB 116
Page 1
SENATE THIRD READING
SB 116 (Ron Calderon)
As Amended April 28, 2009
2/3 vote. Urgency
SENATE VOTE :36-0
BANKING & FINANCE 10-0 APPROPRIATIONS 14-0
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|Ayes:|Nava, Gaines, Anderson, |Ayes:|De Leon, Nielsen, |
| |Fong, Fuentes, Mendoza, | |Ammiano, Coto, Davis, |
| |Ruskin, Swanson, Torres, | |Fuentes, Hall, Harkey, |
| |Tran | |Miller, John A. Perez, |
| | | |Skinner, Solorio, Audra |
| | | |Strickland, Torlakson |
| | | | |
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SUMMARY : Makes changes intended to improve the state's ability
to sell registered reimbursement warrants also known as revenue
anticipation warrants or registered warrants (RAWs) the next
time the state's fiscal situation requires a reimbursement
warrant sale. Specifically, this bill :
1)Adds RAWs and other warrants issued by the state to the list
of eligible securities for the investment of state surplus
moneys.
2)Authorizes the Pool Money Investment Board (PMIB) to fix the
rate of interest paid on any RAW at no more than 12% per
annum, if it determines that doing so is in the best interest
of the state.
3)Modifies 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)Authorizes the California State Controller (Controller), with
the concurrence of the Department of Finance (DOF) and the
Office of the State Treasurer (Treasurer), to fix periodic
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payment dates for interest on RAWs or provide that interest on
these warrants be paid only upon redemption, as specified.
5)Prohibits the Controller from selling RAWs at less than face
value.
6)Clarifies that any premium received in connection with the
sale of any RAW be deposited in the General Fund (GF) and used
for the payment of interest on those RAWs.
7)Allows the Controller to sell RAWs that may be redeemed by
PMIB, prior to the RAW's maturity date, at a redemption price
not to exceed 110% of the principal amount of the RAW, plus
accrued interest.
8)Provides that if, at any time, it is necessary to issue RAWs
on account of nonpayment of interest on a RAW, the RAWs 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 RAWs exceed the
interest that could have accrued on the RAWs, if those
warrants had been issued at a rate of 12% per annum.
9) Makes additional, conforming changes.
10)Contains an urgency clause.
EXISTING LAW :
1)Authorizes the issuance of RAWs and other warrants by the
state [Government Code Sections 17200 et seq.]; and,
authorizes the Treasurer, Controller, and DOF, sitting on the
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 5%), 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; or,
b) Fixed or variable on the terms and conditions the
Controller must approve at the time the warrants are sold,
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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 Joint Legislative Budget Committee, and the
chairperson and vice chairperson of the Senate and Assembly
Committee on Appropriations (Section 17240.5).
4)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).
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 : According to the author's office this bill is
cleanup legislation, intended to allow the state to make use of
the changes enacted at the request of the Controller through AB
1533 (Assembly Banking and Finance Committee), 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 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.
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Unfortunately, when the Controller engaged in preliminary
discussions during the fall of 2008, to test the waters for a
possible RAW sale, the Controller learned that additional
statutory changes would be necessary, before the Controller's
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 Controller, Attorney
General, 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. 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.
Background: 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
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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, 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 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.
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 Controller is the lead agency responsible for
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issuing RAWs, the process of issuing all state obligations is
collaborative involving 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
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
PMIB, set the maximum rate of interest of and approves the
payment procedures for RAWs. Once the maximum amount of RAWs,
the maximum rate of interest, and the payment procedures are
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 DOF
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.
Previous Legislation: AB 1533 (Assembly Banking and Finance
Committee), Chapter 336, Statutes of 2007, authorized the state
to sell RAWs at variable interest rates, through negotiated
sales and 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.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
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FN: 0001451