BILL ANALYSIS Ó
SENATE COMMITTEE ON TRANSPORTATION AND HOUSING
Senator Jim Beall, Chair
2015 - 2016 Regular
Bill No: AB 422 Hearing Date: 7/14/2015
-----------------------------------------------------------------
|Author: |McCarty |
|----------+------------------------------------------------------|
|Version: |4/20/2015 |
-----------------------------------------------------------------
-----------------------------------------------------------------
|Urgency: |No |Fiscal: |No |
-----------------------------------------------------------------
-----------------------------------------------------------------
|Consultant|Eric Thronson |
|: | |
-----------------------------------------------------------------
SUBJECT: Sacramento Regional Transit District: line of credit
DIGEST: This bill enables Sacramento Regional Transit District
(Sacramento RT) to obtain a short-term revolving line of credit
for operating purposes.
ANALYSIS:
Existing law:
1)Establishes the Sacramento RT to operate a single unified
public transportation system in the Sacramento region in order
to meet the present and future public transportation, and mass
and rapid transit, needs of the region.
2)Enables Sacramento RT to borrow funds in accordance with
provisions related to securitized limited obligation notes,
short-term loans, and grant anticipation notes.
This bill:
1)Enables Sacramento RT to obtain a short-term revolving line of
credit, secured by a note, for operating purposes in
anticipation of receipt of any future funds available to
Sacramento RT.
2)Specifies that the note related to the line of credit cannot
have a maturity date of more than 60 months (5 years) from the
date of issuance.
AB 422 (McCarty) Page 2 of ?
3)Specifies that the maximum amount of indebtedness for this
line of credit cannot exceed either:
The most anticipated revenues from federal operating
grants in a single fiscal year.
Eighty-five percent of funds that are pledged to repay
the principal and interest of the note in a single fiscal
year.
COMMENTS:
1)Purpose. Like many transit agencies in California, Sacramento
RT receives a significant percentage of its operating budget
from the Federal Transit Administration (FTA). The FTA
dollars arrive on a reimbursement basis. Sacramento RT begins
spending the money at the start of its fiscal year (July 1),
but has to wait for congressional action on the FTA budget
before it can receive the funds. In the past, this meant
receiving the FTA funds within 12 months of the start of
Sacramento RT's fiscal year. More recently, the receipt of
funds has taken as long as 18 months.
State law allows local governments to use short-term borrowing
to bridge funding gaps under what is typically referred to as
the temporary revenue anticipation note (TRAN) statute. Under
this law, a local agency takes out a line of credit at the
start of the fiscal year and must pay the note in full by the
end of the same fiscal year, although in some cases the
maturity date can be extended from 12 to 15 months.
Sacramento RT has relied on the TRAN statute to address the
cash-flow issue created by the FTA funding process for the
last decade. According to Sacramento RT, however, banks are
now hesitant to lend to Sacramento RT under TRAN because the
gap between the start of Sacramento RT's fiscal year and the
actual receipt of FTA funds continues to grow, and there is no
guarantee that the FTA dollars will come in within the
necessary 12 to 15 months to meet statutory requirements for
repayment.
The author contends that this bill would give Sacramento RT
greater flexibility to negotiate a short-term line of credit
with banks that reflects the reality of its financial
situation. The bill allows Sacramento RT to borrow through a
revolving line of credit with a maturity date of up to 60
AB 422 (McCarty) Page 3 of ?
months from the date of issuance. This longer term credit
line will enable Sacramento RT to obtain the best possible
interest rate and, according to Sacramento RT, "will result in
budgetary improvements and will save the district money over
time." Sacramento RT claims this problem is unique to them
and does not expect other transit operators to need similar
authority.
2)Concerns. Typically, it can be a sign of financial trouble
when an entity begins to borrow against future revenues to pay
for today's operating costs. In some ways, this practice is
akin to someone utilizing payday loan establishments - one
begins paying interest in order to spend expected income
before it's received, diminishing the value of that income and
slowly sinking into increasing levels of debt. Sacramento RT
contends that this is not the case with its current situation,
and it appears that Sacramento RT currently intends to
responsibly use the authority this bill grants to resolve a
timing issue related to federal operating grants. This bill,
however, creates the opportunity for abuse of this short-term
borrowing strategy, and enacting this language as-is could set
an unintended precedent.
To allay this concern, the committee may wish to amend the
bill in the following ways:
Require repayment immediately upon receipt of federal
funds. This bill allows for a 60-month (5-year) line of
credit, which Sacramento RT contends will reduce the
overall borrowing costs because they won't have to pay loan
origination costs each year and can amortize those costs
over the 5 years. This also seems to allow, however,
Sacramento RT to take up to five years to pay off any
extension of credit. According to Sacramento RT, that is
not the intention of the bill. To keep it from carrying a
balance from year-to-year, the committee may wish to amend
the bill to require Sacramento RT to repay the outstanding
balance immediately upon receipt of federal funds.
Limit to anticipated federal operating grants. This
bill allows Sacramento RT to obtain a line of credit in
anticipation of receipt of any operating grants.
Sacramento RT states that they only intend to use this
authority to bridge the gap between expenditure of funds
and receipt of federal operating grants. The committee may
AB 422 (McCarty) Page 4 of ?
wish to amend the bill to limit the line of credit to be in
anticipation of receipt of federal operating grants in
order to restrict Sacramento RT from expanding this
authority to borrow against other future operating grants.
1)Maximum indebtedness. There are two issues that should be
resolved in relation to the maximum amount Sacramento RT can
borrow under this authority. As stated earlier, this bill
limits the line of credit's maximum amount of indebtedness to
either the most anticipated revenues from federal operating
grants in a single fiscal year, or 85% of funds that are
pledged to repay the principal and interest of the note in a
single fiscal year. First, Sacramento RT points out that the
85% limit is superfluous because banks will not loan money
without a much larger pledge of funds, and therefore could be
amended out of the bill. Second, because the bill ties the
borrowing limit to the most anticipated revenues in a single
year, there is the possibility for Sacramento RT to borrow
more than it expects to receive in the next year. The
committee may wish to amend this section of the bill to 1)
eliminate the superfluous 85% limitation and 2) tie the
borrowing limit to the anticipated revenue amount for the next
fiscal year instead of just "a" fiscal year.
Related Legislation:
AB 1143 (Dickinson, Chapter 537, Statutes of 2011) - among other
things, expanded Sacramento RT's ability to engage in short-term
borrowing.
Assembly Votes:
Floor: 56-19
L Gov: 7-0
Trans: 13-3
FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local:
No
POSITIONS: (Communicated to the committee before noon on
Wednesday,
July 8, 2015.)
SUPPORT:
AB 422 (McCarty) Page 5 of ?
Sacramento Regional Transit District (sponsor)
California Bankers Association
City of Sacramento
OPPOSITION:
None received
-- END --