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 SB 506 (Simitian) continued Page 2 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." SB 506 (Simitian) continued Page 3 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 & SB 506 (Simitian) continued Page 4 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 ********** SB 506 (Simitian) continued Page 5