BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
                              Senator Isadore Hall, III
                                        Chair
                                2015 - 2016  Regular 

          Bill No:           SB 797           Hearing Date:    4/28/2015
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          |Author:    |Committee on Governmental Organization               |
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          |Version:   |4/15/2015                                            |
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          |Urgency:   |No                     |Fiscal:      |Yes             |
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          |Consultant:|Felipe Lopez                                         |
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          SUBJECT: Government finance


            DIGEST:    This bill updates the types of securities that are  
          eligible for the investment of surplus state funds to include  
          commercial paper issued by a federally or state-chartered bank  
          or a state-licensed branch of a foreign bank that is approved by  
          the Pooled Money Investment Board (PMIB).  The bill also repeals  
          various obsolete obligation bond acts. 

          ANALYSIS:
          
          Existing law:
          
          1)Specifies the types of securities that are eligible for the  
            investment of surplus state funds, including commercial paper  
            of "prime" quality as defined by a nationally recognized  
            organization that rates these securities, if the commercial  
            paper is issued by a corporation, trust, or limited liability  
            company that is approved by the PMIB as meeting specified  
            conditions.  

          2)Prohibits a purchase of commercial paper from exceeding 180  
            days maturity.

          3)Establishes the County Jail Capital Expenditure Bond Act of  
            1981 which authorizes the issuance and sale of $280 million in  
            state general obligation bonds to finance the construction,  
            reconstruction, remodeling, and replacement of county jails  







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            and for deferred maintenance.  The act established the County  
            Jail Capital Expenditure Finance Committee for the purpose of  
            authorizing the issuance and sale of the bonds authorized by  
            the act.

          4)Establishes the County Jail Capital Expenditure Bond of 1984  
            which authorizes the issuance and sale of $250 million in  
            state general obligation bonds to finance the construction,  
            reconstruction, renovation, and remodeling, and replacement of  
            county jails and for deferred maintenance.  The act  
            established the County Jail Capital Expenditure Finance  
            Committee for the purpose of authorizing the issuance and sale  
            of the bonds authorized by the act.

          5)Establishes the New Prison Construction Bond Act of 1984 which  
            authorized the issuance and sale of $300 million in state  
            general obligation bonds to finance the construction,  
            renovation, and remodeling of state correctional facilities  
            and for deferred maintenance.  The act established the 1984  
            Prison Construction Committee for the purpose of authorizing  
            the issuance and sale of the bonds authorized by the act. 

          6)Establishes the Cameron-Unruh Beach, Park, Recreational, and  
            Historical Facilities Bond Act of 1964 which authorizes the  
            issuance and sale of $150 million in state general obligation  
            bonds to finance the acquisition and development of lands for  
            recreational purposes.  The act establishes the State Park and  
            Recreation Finance Committee for the purpose of authorizing  
            the issuance and sale of the bonds authorized by the act.

          7)Establishes the State Beach, Park, Recreational, and  
            Historical Facilities Bond Act of 1974, also known as the  
            Z'berg-Collier Park Bond Act, which authorizes the issuance  
            and sale of $250 million in state general obligation bonds to  
            finance the acquisition and development of lands for  
            recreational purposes.  The act establishes the State Park and  
            Recreation Finance Committee for the purpose of authorizing  
            the issuance and sale of the bonds authorized by the act. 

          8)Establishes the Recreation and Fish and Wildlife Enhancement  
            Bond Act of 1970 which authorizes the issuance and sale of $60  
            million in state general obligation bonds to finance the  
            design and construction of recreation facilities, fish and  
            wildlife enhancement features, and fishing access sites.  The  
            act establishes the Recreation and Fish and Wildlife  








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            Enhancement Finance Committee for the purpose of authorizing  
            the issuance and sale of the bonds authorized by these  
            provisions.

          9)Establishes the Clean Water Bond Law of 1970 which authorizes  
            the issuance and sale of $250 million in state general  
            obligation bonds to finance grants to municipalities for water  
            reclamation projects.  The Clean Water Bond Law of 1970  
            establishes the Clean Water Finance Committee for the purpose  
            of authorizing the issuance and sale of the bonds authorized  
            by these provisions.

             10)  Establishes the Clean Water Bond Law of 1974 which  
               authorizes the issuance and sale of $250 million in state  
               general obligation bonds to finance grants to  
               municipalities for water reclamation projects.  The Clean  
               Water Bond Law of 1974 establishes the Clean Water Finance  
               Committee for the purpose of authorizing the issuance and  
               sale of the bonds authorized by these provisions.

          This bill:

          1)Updates the types of securities that are eligible for the  
            investment of surplus state funds to include commercial paper  
            issued by a federally or state-chartered bank or a  
            state-licensed branch of a foreign bank that is approved by  
            the PMIB.  

          2)Prohibits a purchase of commercial paper from exceeding 270  
            days maturity.

          3)Deletes obsolete language pertaining to various bond acts.

          Background

          Purpose of the bill:  The author contends that the bill is clean  
          up legislation that deletes various bond act language that is no  
          longer necessary.  

          The author further argues that by adding a federally or  
          state-chartered bank or a state-licensed branch of a foreign  
          bank that is approved by the PMIB, the state would be able to  
          continue to obtain a diverse variety of commercial paper  
          securities on a daily basis.  The author further argues that the  
          ability to utilize commercial paper with maturities of as long  








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          as 270 days would benefit the Pooled Money Investment Account  
          (PMIA) by giving them more options to use this 180-270 day  
          window. 

          Pooled Money Investment Account (PMIA):  The State Treasurer  
          invests taxpayers' money to manage the State's cash flow and  
          strengthen the financial security of local government entities.   
          The Investment Division manages the PMIA on behalf of the  
          Treasurer.  The Investment Division staff invests PMIA funds in  
          a wide range of securities, using more than 100 brokers,  
          dealers, banks and direct issuers of commercial paper and  
          corporate debt.  Under current law, PMIA moneys can only be  
          invested in U.S. government securities, securities of  
          federally-sponsored agencies, domestic corporate bonds,  
          interest-bearing time deposits in California banks, savings and  
          loan associations and credit unions, prime-rated commercial  
          paper, repurchase and reverse repurchase agreements, security  
          loans, banker's acceptances, negotiable certificates of deposit  
          and loans to various bond funds.

          The Treasurer's Office states that commercial paper has been a  
          very useful tool in the Investment Division's daily cash  
          investments of surplus money.  Commercial paper is a short-term,  
          unsecured promissory note issued by entities typically used as a  
          source of working capital, receivable financing, and other  
          short-term financing needs.  Because of the ability to issue in  
          short maturities, commercial paper is used to fill short-term,  
          unexpected cash flow needs.  In addition, because of the ability  
          of many issuers to adjust their offered issuances to meet the  
          PMIA's cash flow needs, the PMIA has been able to effectively  
          use this type of investment. 

          For commercial paper, in addition to the "prime" designation of  
          the securities themselves, the law requires that the issuers of  
          these securities be corporations, trusts, or limited liability  
          companies approved by the PMIB.  The law goes on to further  
          restrict commercial paper maturities to no longer than 180 days,  
          to restrict the amount purchased by the PMIA to no more than 10%  
          of the outstanding commercial paper of an issuer, and to  
          restrict the concentration of commercial paper to no more than  
          30% of the PMIA portfolio.

          On February 18, 2014, the Federal Reserve Board issued a ruling  
          to strengthen supervision and regulation of large U.S. bank  
          holding companies and foreign bank organizations.  Under this  








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          ruling, a foreign banking organization that meets or exceeds the  
          threshold for formation of a U.S. intermediate holding company  
          (a U.S. non-branch asset of $50 billion) on July 1, 2015, is  
          required to organize its U.S. operations such that most of its  
          U.S. subsidiaries are held by a U.S. intermediate holding  
          company by July 1, 2016.  By that date, the U.S. intermediate  
          holding company must hold the foreign banking organization's  
          ownership interest in any U.S. bank holding subsidiary and any  
          depository institution subsidiary and in U.S. subsidiaries  
          representing 90% of the foreign banking organization's assets  
          not held by the bank holding company or depository institution.   
          In addition, the ruling provides a foreign banking organization  
          until July 1, 2017 to transfer its ownership interest in any  
          residual U.S. subsidiary to the U.S. intermediate holding  
          company.

          The PMIB has recently learned from a number of foreign banks  
          from whom the PMIB purchases commercial paper investments that  
          they plan on restructuring to come into compliance with the new  
          ruling before the 2016 deadline.  As a result, based upon a  
          strict interpretation of the law, the PMIB would not be allowed  
          to purchase these investments because the current law allows the  
          PMIB to only purchase commercial paper issued by a corporation,  
          trust, or limited liability company. 

          Prior/Related Legislation
          
          SB 826 (Committee on Governmental Organization), Chapter 205,  
          Statutes of 2009.  The bill made a number of technical changes  
          to the State General Obligation Bond Law to clarify the way the  
          law applies to the negotiated sales of bonds.

          SB 28 (Brulte), Chapter 97, Statutes of 2001.  The bill updated  
          provisions of State General Obligation Bond Law and facilitated  
          implementation of previously authorized borrowing structures. 

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


            SUPPORT:  

          California State Controller's Office
          California State Treasurer's Office 









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          OPPOSITION:

          None received