BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                   SB 506|
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                              UNFINISHED BUSINESS


          Bill No:  SB 506
          Author:   Simitian (D), et al
          Amended:  8/18/11 
          Vote:     21

           
           SENATE GOVERNMENTAL ORG. COMMITTEE  :  12-0, 4/26/11
          AYES:  Wright, Anderson, Berryhill, Cannella, Corbett, De 
            León, Evans, Hernandez, Padilla, Strickland, Wyland, Yee
          NO VOTE RECORDED:  Calderon

           SENATE GOVERNANCE & FINANCE COMMITTEE :  9-0, 5/4/11
          AYES:  Wolk, Huff, DeSaulnier, Fuller, Hancock, Hernandez, 
            Kehoe, La Malfa, Liu

           SENATE APPROPRIATIONS COMMITTEE  :  Senate Rule 28.8

           SENATE FLOOR  :  39-0, 5/23/11 (Consent)
          AYES:  Alquist, Anderson, Berryhill, Blakeslee, Calderon, 
            Cannella, Corbett, Correa, De León, DeSaulnier, Dutton, 
            Emmerson, Evans, Fuller, Gaines, Hancock, Hernandez, 
            Huff, Kehoe, La Malfa, Leno, Lieu, Liu, Lowenthal, 
            Negrete McLeod, Padilla, Pavley, Price, Rubio, Runner, 
            Simitian, Steinberg, Strickland, Vargas, Walters, Wolk, 
            Wright, Wyland, Yee
          NO VOTE RECORDED:  Harman

           ASSEMBLY FLOOR  :  Not available


           SUBJECT  :    State finance:  warrants

           SOURCE  :     Apple Inc.
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           DIGEST  :    This bill updates and modernizes existing law 
          pertaining to registered warrants.

           Assembly Amendments  delete language that authorizes the 
          State Controller to promulgate regulations to establish a 
          procedure where a registered warrant may be issued for the 
          payment of principal or interest due on a state bond.

           ANALYSIS  :    Existing law authorizes holders of warrants to 
          use registered warrants (RWs) to pay state income and 
          corporation tax liabilities, including estimated payments.

          This bill updates and modernizes existing law pertaining to 
          RWs.  Specifically, this bill:   

          1. Revises and recasts current law that authorizes a 
             taxpayer who has a tax liability with the respect to 
             personal income taxes or bank and corporation taxes who 
             is a payee named in a RW to pay the tax liability with 
             the RW. 

          2. Establishes a procedure whereby a RW may be issued for 
             the payment of principal or interest due on a state 
             bond. 


           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:  RWs, registered 
          reimbursement warrants, 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 

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          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." 

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes   
          Local:  No

           SUPPORT  :   (Verified  5/16/11) (unable to reverify at time 
          of writing)

          Apple Inc. (source)
          Cisco Systems, Inc.
          eBay Inc.
          Google Inc.
          Oracle Corporation
          Qualcomm Inc.
          TechNet

           ARGUMENTS IN SUPPORT  :    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 

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          result, any tax benefits from state-issued RWs will accrue 
          to the financial institution rather than the true investor 
          in California debt.  To resolve this problem, this bill 
          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.


          PQ:do  8/29/11   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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