BILL ANALYSIS                                                                                                                                                                                                    Ó




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  AB 1408                     HEARING:  6/29/11
          AUTHOR:  Committee on Banking & Finance FISCAL:  Yes
          VERSION:  5/2/11                      TAX LEVY:  No
          CONSULTANT:  Grinnell                 

                            STATE BOND DENOMINATIONS
          

           Reduces minimum general obligation bond denominations from 
                                 $1,000 to $25.


                           Background and Existing Law  

          The California Constitution prohibits the Legislature from 
          creating general obligation (GO) debt of over $300,000 
          without voter approval, except to repel invasion or 
          suppress insurrection.  When voters approve GO bonds, they 
          create a Committee to determine when the bonds should be 
          sold, specify its aggregate amount, and set its rates and 
          maturities.  Current law directs the committees when 
          adopting a resolution determining that selling the bonds is 
          necessary and desirable, that bonds be sold in minimum 
          $1,000 denominations.  The denomination threshold applies 
          to "zero coupon," which pay no interest, or "capital 
          appreciation" bonds, which only pay interest at maturity.  
          The State Treasurer wants to lower the denomination amount 
          to find more investors in the state's bonds.


                                   Proposed Law  

          Assembly Bill 1408 reduces the minimum denomination for 
          regular, zero coupon, and capital appreciation bonds at 
          $25.


                               State Revenue Impact
           
          No estimate.


                                     Comments  





          AB 1408 -- 3/9/11 -- Page 2



          1.   Purpose of the bill  .  According to the Author, "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.  This 
          change does not create any new bond authorizations."

          2.   Change is the only constant  .  According to the 
          Treasurers' Office, the current $1,000 denomination 
          conforms to its traditional bond sale practices, which 
          typically lump bonds together in $5,000 increments.  
          However, the financial industry is always concocting new 
          products for investors, and developed $25 par securities to 
          help corporate and other municipal issuers sell to a 
          broader range of investors.  A broader range of investors 
          results in higher demand and reduces interest rates for an 
          issue, all else equal.   Since many investors have fled the 
          municipal market in the last six months for a variety of 
          reasons, removing the limitation should save the state 
          money by lowering interest rates, and conform to more 
          modern practices currently used by competing issuers, 
          assuming the state once again issues debt. 


                                 Assembly Actions  

          Assembly Revenue and Taxation  9-1
          Assembly Appropriations       12-4
          Assembly Floor           58-19


                         Support and Opposition  (6/23/11)

           Support  :  State Treasurer Bill Lockyer

           Opposition  :  Unknown.