BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 1408| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 1408 Author: Assembly Banking and Finance Committee Amended: 5/2/11 in Assembly Vote: 21 SENATE GOVERNANCE & FINANCE COMMITTEE : 6-3, 6/29/11 AYES: Wolk, DeSaulnier, Hancock, Hernandez, Kehoe, Liu NOES: Huff, Fuller, La Malfa SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8 ASSEMBLY FLOOR : 58-19, 5/23/11 - See last page for vote SUBJECT : General obligation bonds SOURCE : State Treasurer Bill Lockyer DIGEST : This bill reduces minimum general obligation bond denominations from $1,000 to $25. ANALYSIS : 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 CONTINUED AB 1408 Page 2 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. This bill reduces the minimum denomination for regular, zero coupon, and capital appreciation bonds at $25. Comments 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. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No SUPPORT : (Verified 8/15/11) State Treasurer Bill Lockyer (source) ARGUMENTS IN SUPPORT : 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." ASSEMBLY FLOOR : 58-19, 5/23/11 CONTINUED AB 1408 Page 3 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Cedillo, Chesbro, Davis, Dickinson, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, Galgiani, Gatto, Gordon, Hagman, Hall, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Lara, Bonnie Lowenthal, Mendoza, Miller, Mitchell, Monning, Nestande, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, Skinner, Solorio, Swanson, Torres, Wieckowski, Williams, Yamada, John A. Pérez NOES: Conway, Donnelly, Beth Gaines, Garrick, Grove, Halderman, Harkey, Jeffries, Jones, Knight, Logue, Mansoor, Morrell, Nielsen, Norby, Silva, Smyth, Valadao, Wagner NO VOTE RECORDED: Cook, Gorell, Ma AGB:kc 8/15/11 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED