BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 797|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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CONSENT
Bill No: SB 797
Author: Committee on Governmental Organization
Amended: 4/15/15
Vote: 21
SENATE GOVERNMENTAL ORG. COMMITTEE: 7-0, 4/28/15
AYES: Hall, Block, Hernandez, Hill, Hueso, Lara, McGuire
NO VOTE RECORDED: Berryhill, Gaines, Galgiani, Vidak
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
SUBJECT: Government finance
SOURCE: Author
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.
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Page 2
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 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
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Page 3
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 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.
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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
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,
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Page 5
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
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.
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Prior/Related Legislation
SB 826 (Committee on Governmental Organization, Chapter 205,
Statutes of 2009) 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) 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: (Verified 5/12/15)
California State Controller's Office
California State Treasurer's Office
OPPOSITION: (Verified 5/12/15)
None received
Prepared by: Felipe Lopez / G.O. / (916) 651-1530
5/13/15 16:07:10
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