BILL ANALYSIS Ó
Bill No: SB
506
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2011-2012 Regular Session
Staff Analysis
SB 506 Author: Simitian
As Introduced: February 17, 2011
Hearing Date: April 26, 2011
Consultant: Art Terzakis
SUBJECT
State Finance: warrants
DESCRIPTION
SB 506 updates and modernizes existing law pertaining to
registered warrants (RWs), as specified and establishes a
procedure whereby RWs can be offset against the taxes of
true investors, rather than those of financial
intermediaries in order to attract new investors to
California bonds. Specifically, the measure:
1. Revises and recasts current law that authorizes
a taxpayer who has a tax liability with respect to
personal income taxes or bank and corporation taxes
and who is a payee named in a RW to pay the tax
liability with the RW, as specified.
2. Establishes a procedure whereby a RW may be
issued for the payment of principal or interest due
on a state bond.
3. Authorizes the State Controller to promulgate
regulations to implement item #2 above and exempts
the Controller from the rulemaking provisions of the
Administrative Procedure Act.
EXISTING LAW
Existing law authorizes a taxpayer who has a tax liability
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with respect to personal income taxes or bank and
corporation taxes and who is a payee named in a RW to pay
the tax liability with the RW, as specified.
Existing law, the Administrative Procedure Act, governs the
procedure for the adoption, amendment, or repeal of
regulations by state agencies and for the review of those
regulatory actions by the Office of Administrative Law.
(Government Code Section 11340 et seq.)
BACKGROUND
Warrants are the government equivalent of checks, and are
issued by the Controller to pay the state's obligations.
There are three types of warrants: registered warrants
(RWs), registered reimbursement warrants (RAWs), and
registered refunding warrants.
The State Constitution mandates that education and debt
service have priority status for regular warrants. The
state Constitution, federal law and a court order require
that state payroll, the California Public Employees
Retirement System, the California State Teachers Retirement
System, In-Home Supportive Services and Medi-Cal providers
also be paid with regular warrants. The State may issue
RWs for all other payments, including those to private
businesses, local governments, taxpayers receiving income
tax refunds and owners of unclaimed property.
A RW is a "promise to pay," or an IOU, that is issued by
the State when there are not enough funds to pay all of its
General Fund obligations. RWs bear interest and are
redeemable by the State Treasury only when the General Fund
has sufficient money. RWs are presently considered legal
investments for all trust funds, insurance funds, savings
and loan funds, and funds of all counties, municipal
corporations, districts, public corporations, political
subdivisions, or state agencies. Further, state law
expressly permits a taxpayer to pay a tax liability, as
specified, in whole or in part, by a check in an amount not
to exceed the amount of a RW, and the law declares "all
warrants are payable in such coin or currency of the U.S.
as at the time of payment is legal tender for the payment
of public and private debts."
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Purpose of SB 506: The author's office maintains that
major corporations, including some of California's most
well-known companies, are currently precluded from
investing in California debt because California debt does
not meet the companies' investment criteria (due to credit
risk). The author's office believes that this problem can
be remedied with an update to existing law. The author's
office points out that existing law was drafted during a
time when California issued physical bonds to investors -
today the State distributes bonds through financial
institutions that hold bonds on an investor's behalf. This
has left uncertainty over who the "bondholder" is. As a
result, any tax benefits from state-issued RWs would accrue
to the financial institution rather than the true investor
in California debt. To resolve this problem, this measure
clarifies that RWs can be offset against the taxes of true
investors, rather than those of financial intermediaries.
The author's office emphasizes that it is unlikely that
California would ever need to issue RWs for its bond
obligations (as they have second priority after education
funding for available funds). Thus, the proposed change
will have little material impact on the State Treasury, but
will pave the way for additional investment in California
debt.
PRIOR/RELATED LEGISLATION
SB 120 (Anderson) 2011-12 Session. Would require a state
agency to accept a registered warrant (RW), or other
similar evidence of indebtedness issued by the State
Controller, for payment of any state obligation. (Pending
in this Committee)
SB 11 (Anderson) 2011-12 Session. Would prohibit a state
entity from assessing a fine, interest, or penalty on a
debt owed to the state for the payee of a RW if the debt
owed to the state was imposed between January 1, 2006 and
December 31, 2009 and would change the due date of a state
debt to 30 days after the payable date of registered
warrants. (Pending in this Committee)
AB 1044 (Butler) 2011-12 Session. Would require the BOE to
accept RWs from a taxpayer with any tax, surcharge, or fee
obligation owed when the RW has been paid directly to that
tax, surcharge, or fee payer. (Pending in Assembly Rev &
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Tax Committee)
AB 1506 (Anderson) 2009-10 Session. Similar to SB 120
(Anderson) of 2011-would have required all state
departments, upon a specified determination made by the
State Controller's Office, to accept RWs, in lieu of cash
payments. (Vetoed - Governor's message stated, "IOUs place
enormous financial strains on recipients who are unable to
use them to pay their own obligations, including debts owed
to the state. However, requiring state departments to
accept IOUs in lieu of cash payments defeats the purpose of
issuing IOUs in the first place. It would exacerbate the
state's cash crisis and would accelerate the possibility of
the state defaulting on its debt service and payroll
obligations.)
SBX3 23 (Ashburn) 2009-10 Session. Would have prohibited
the State Controller from issuing a RW for the purpose of
making payments for a refund of taxes imposed under the
Personal Income Tax Law. (Held in Senate Rules Committee)
SUPPORT: As of April 22, 2011:
Apple Inc. (sponsor)
Cisco Systems, Inc.
eBay Inc.
Google Inc.
Oracle Corporation
Qualcomm Inc.
OPPOSE: None on file as of April 22, 2011.
FISCAL COMMITTEE: Senate Appropriations Committee
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