BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1408
                                                                  Page  1

          Date of Hearing:   April 25, 2010

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                                   Mike Eng, Chair
              AB 1408 (B.& F. Committee) - As Introduced:  March 9, 2011
          
          SUBJECT  :   General obligation bonds

           SUMMARY  :   Makes technical change to the State General 
          Obligation Bond Law, to allow the minimum denomination of bonds 
          that can be sold to $25 or multiples of that sum.  

           EXISTING LAW  

          The State General Obligation Bond Law requires that bonds must 
          be sold in minimum denominations of $1000.  (Government code, 
          Section 16731).

           FISCAL EFFECT  :   Unknown

           COMMENTS  :   

          This technical change to the law, sponsored by the State 
          Treasurer 

          Section 16731(a) of The General Obligation Bond Law (GOBL) 
          requires that General Obligation (GO) bonds be sold in minimum 
          denominations of one thousand dollars ($1,000) or multiples of 
          that sum. In the past, this requirement worked well for the 
          issuance of bonds since traditional fixed-rate bonds were 
          generally sold in $5,000 increments. However, due to the 
          evolving nature of the bond market and the magnitude of 
          authorized but unissued bonds remaining to be sold, flexibility 
          is needed in determining the minimum denominations of bonds in 
          order to achieve the best structure and rates possible for 
          future bond sales. For example, one product that could 
          potentially open up a largely untapped investor base requires 
          that bonds be sold in minimum denominations of twenty-five 
          dollars ($25) or multiples thereof.

          The California Alliance for Consumer Protection opposes this 
          technical bill on several grounds including:

             1)   Source: There is no identified funding source for this 
               program.   According to the Treasurer's office, there are 








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               around 100 outstanding, voter approved bonds on the books 
               that have been approved since the early 60's that are still 
               open for use by the state. As such, we need to ask, what 
               funding source will the bonds come from?  A follow up 
               question is this: if it comes from a voter approved source 
               or 'pot', will that source or fund benefit or be 
               reimbursed? (In other words, if the money comes from voter 
               approved educational bonds, shouldn't voter approved 
               educational projects benefit and not the general fund?).  

             2)   Policy: There is no overall direct marketing policy with 
               respect to the program's implementation, oversight, 
               operations and design.  For example, how and where will 
               consumers be able to purchase or redeem these items, and 
               from whom? (Will consumers have to go to investment 
               counselors or brokers or can consumers walk in and purchase 
               or sell them at their neighborhood financial institution?).
             3)   Profitability: This measure begs the question, how much 
               will it cost to make these products available to the public 
               and how much will it cost small investors and consumers to 
               purchase them?  This is important because it will not only 
               dictate costs for the state, but costs for the target 
               market - the small investor. For example, if it costs $10 
               to buy a $25 bond and then $10 to sell it, is that a 
               benefit for the consumer or the State of California? 

             4)   Costs to the state: I understand that this is a policy 
               committee, and as such, the issue(s) I am going to raise 
               here will be better addressed by either the Rev. and Tax 
               Committee or the Budget Committee, but it should be placed 
               on the table for review: Has anyone taken into 
               consideration the overall costs to the state, not just in 
               terms of running the project, but in terms of the "tax 
               deductions" that consumers will be taking? For example, if 
               it costs $10 to buy the bond, and then $10 to sell the 
               bond, that is a combined $20. If the bond pays a modest 
               interest of say 5% over a 5 year period, will the state or 
               consumer actually be making any money off the project? This 
               question is based on long held concept that investors are 
               allowed under tax law to deduct expenses related to the 
               purchase and sale of investment items, and as such, those 
               $10 fees become tax deductions, especially when a profit is 
               made. When you add in promotional, operation and unforeseen 
               costs, we are begging this question: are we really making 
               money or just transferring it from one pocket to another? 








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          In response to this opposition committee staff offers the 
          following:

          1)This bill does not establish a new program.  It is a technical 
            change to the state's General Obligation Bond law.

          2)Since this bill does not create a new program, marketing 
            outreach is not necessary.

          3)This technical change will not cost the state or investors 
            additional money.  This is a technical change to give the 
            Treasurer flexibility.

          4)Finally, this bill does not establish a new program nor 
            jeopardize the state's bond program.  It is a technical change 
            to an arbitrary bond denomination cap.  This is designed to 
            provide flexibility to Treasurer.   Additionally, committee 
            staff rejects the idea that the issues outlined in opponents 
            #4 would be "better addressed" by other committees such as Rev 
            & Tax or Budget Committee.  Clearly, banking and finance staff 
            have the necessary expertise to determine that this is a 
            technical bill that does not establish a new program, nor does 
            it impact or lead to any of the consequences raised by the 
            opposition.

           Amendments.
           
          Committee staff suggests the following amendment to the 
          Government code that also contains a reference to the minimum 
          denomination of bonds.

          16731.5.  (a) Notwithstanding any other provision of this 
          chapter, the committee may provide for the issuance of all or 
          part of the bonds authorized to be issued as zero coupon or 
          capital appreciation bonds. The committee shall adopt a 
          resolution finding that issuance of these bonds is necessary and 
          desirable, directing the Treasurer to arrange for preparation of 
          the requisite number of suitable bonds, and specifying other 
          provisions relating to the bonds including the following:
             (1) The date, number, denominations, and aggregate par value 
          of the bonds payable at maturity. The aggregate par value may be 
          represented by bond certificates in denominations as the 
          committee deems appropriate, but not less than  one thousand 
          dollars ($1,000)   twenty-five dollars ($25)  .








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           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          California State Treasurer 

           Opposition 
           
          California Alliance for Consumer Protection (CACP)
           www.TheCaliforniaIndex.org  
           
          Analysis Prepared by  :    Mark Farouk / > / (916) 319-3081