BILL ANALYSIS Ó SENATE COMMITTEE ON TRANSPORTATION AND HOUSING Senator Jim Beall, Chair 2015 - 2016 Regular Bill No: AB 1919 Hearing Date: June 14, 2016 ----------------------------------------------------------------- |Author: |Quirk | |----------+------------------------------------------------------| |Version: |4/4/2016 | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |No | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant|Manny Leon | |: | | ----------------------------------------------------------------- SUBJECT: Local transportation authorities: bonds DIGEST: This bill removes a bond requirement in existing law in order to increase a local transportation authority's flexibility in utilizing bond proceeds sold for transportation capital projects. ANALYSIS: Existing law: 1)Establishes the Local Transportation Authority and Improvement Act and provides for the formation, administration, powers, taxing, and bonding authority for a local transportation authority (authority). 2)Authorizes an authority to issue limited tax bonds secured by a pledge of revenues from the proceeds of retail transactions and use tax approved by the voters. 3)Requires all accrued interest and premiums received on the sale of bonds to be placed in the fund to be used for the payment of the principal of and interest on the bonds. Requires the reminder of the proceeds to be placed in the authority's treasury to be applied to secure the bonds or for the purposes for which the debt was incurred. AB 1919 (Quirk) Page 2 of ? This bill removes, specifically for local transportation authorities, the requirement in existing law to use premiums from the sale of bonds to pay for the principal and interest of the bonds, thereby allowing those bond premiums to be used for other purposes (e.g., capital improvement projects). COMMENTS: 1)Purpose. The author notes, "Current language limits an issuer's ability to structure municipal bonds to best meet investor demand, and in doing so promotes structures that lead to higher interest costs. Commonly, in California and nationally, municipal issuers can issue bonds with either a par structure, discount structure, or premium structure. All proceeds from the bond sale, including any premium generated through a premium bond structure, are eligible to be used for project costs. For authorities, current law does not allow bond premiums to be used to fund capital projects. This reduces the flexibility of issuers and eliminates the incentive or financial benefit to the transportation authority to offer a premium structure to investors." 2)What are premium bonds? Premium bonds are bonds that trade above their par value (i.e., the face value of the bond). Generally, a bond will trade at a premium when it offers a coupon rate (i.e., the yield on the bond paid on its issue date; however, this rate changes as the value of the bond changes) that is higher than prevailing interest rates. Typically, this occurs because investors desire a higher yield and will pay more for it. For example, a Los Angeles wastewater system bond with a par value of $100 million is selling for $119 million because of favorable market conditions. Under current law, authorities are prohibited from using the additional revenue generated ($19 million in the example above) from the sale of premium bonds on transportation capital projects; rather, this specific revenue is required to be used for debt service on the actual par value of the bond. This bill does not change any requirements tied to a local transportation authority's responsibility to pay back bond proceeds over a required time period. Rather, this bill merely provides additional flexibility for local AB 1919 (Quirk) Page 3 of ? transportation authority by allowing the additional revenue generated in the selling of premium bonds to be used for capital projects. Assembly Votes: Floor: 48-30 Local Gov: 6-2 FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No POSITIONS: (Communicated to the committee before noon on Wednesday, June 8, 2016.) SUPPORT: Alameda County Transportation Commission OPPOSITION: None received -- END --