BILL ANALYSIS Ó
AB 1408
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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
AB 1408
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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