BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 189|
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THIRD READING
Bill No: AB 189
Author: Assembly Budget Committee
Amended: 7/23/09 in Senate
Vote: 27 - Urgency
WITHOUT REFERENCE TO COMMITTEE
PRIOR VOTE NOT RELEVANT
SUBJECT : State warrants
SOURCE : State Controller John Chiang
DIGEST : Senate Floor Amendments of 7/23/09 delete the
prior version of the bill expressing the intent of the
Legislature to enact statutory changes relating to the 2009
Budget Act.
This bill now make changes intended to improve the state's
ability to sell registered reimbursement warrants the next
time the state's fiscal situation requires a reimbursement
warrant sale.
This bill is the same as SB 116 (Calderon) which passed the
Senate with a vote of 36-0 on May 10, 2009, and is on the
Assembly reconsideration file.
ANALYSIS :
Existing law:
CONTINUED
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1. Authorizes the issuance of registered reimbursement
warrants (RAWs) and other warrants by the state (Section
17200 et seq. of the Government Code), and authorizes
the State Treasurer, State Controller, and State
Director of the Department of Finance, sitting as the
Pooled Money Investment Board (PMIB), to set the rate of
interest on RAWs (Section 17222).
2. Provides that, in lieu of prescribing a precise interest
rate on RAWs, the PMIB may fix a maximum rate of
interest for the RAWs (currently capped at five
percent), and prescribe that the interest rate is either
of the following:
A. Fixed, in accordance with the best bids for the
warrants, if the warrants are sold at public sale.
B. Fixed or variable on the terms and conditions
the State Controller must approve at the time the
warrants are sold, if the warrants are sold in
negotiated sales (Section 17244).
3. Provides that, if the State Controller requests that
RAWs be issued, and the Governor determines that the
need for those RAWs is justified, a copy of the written
request from the State Controller must be provided to
the chairperson and vice chairperson of the Senate
Budget and Fiscal Review Committee and the Assembly
Budget Committee, the chairperson and vice chairperson
of the Joint Legislative Budget Committee, and the
chairperson and vice chairperson of the Senate and
Assembly Appropriations Committee (Section 17240.5).
4. Provides that, no later than 15 days following the
completion of a RAW issuance, the State Controller shall
report on the specific details of the issuance to the
legislative committees referenced immediately above
(Section 17240.5).
This bill:
1. Adds RAWs and other warrants issued by the state to the
list of eligible securities for the investment of state
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surplus moneys (currently, only state bonds and state
notes are so eligible).
2. Authorizes the PMIB to fix the rate of interest paid on
any RAW at no more than 12 percent per annum (up from
not more than five percent per annum), if it determines
that doing so is in the best interests of the state.
3. Establishes or modify other related interest rate
ceilings, by providing for a maximum interest rate of 12
percent on registered warrants, including those issued
on account of nonpayment of principal or interest on
revenue anticipation notes, and a maximum interest rate
of 11 percent on registered warrants issued to pay
obligations under any state credit enhancement or
liquidity agreement.
4. Authorizes the State Controller, with the concurrence of
the Department of Finance and the Office of the State
Treasurer, to fix periodic payment dates for interest on
RAWs or provide that interest on these warrants be paid
only upon redemption, as specified.
5. Prohibits the State Controller from selling RAWs at less
than face value.
6. Clarifies that any premium received in connection with
the sale of any RAW be deposited in the General Fund and
used for the payment of interest on those RAWs.
7. Allows the State Controller to sell RAWs that may be
redeemed by PMIB, prior to the RAW's maturity date, at a
redemption price not to exceed 110 percent of the
principal amount of the RAW, plus accrued interest.
8. Provides that if, at any time, it is necessary to issue
registered warrants on account of nonpayment of interest
on a RAW (something that could happen if the General
Fund lacked sufficient money to pay that interest), the
registered warrants would pay interest at the fixed or
variable rate specified in the RAW, but further provides
that in no case may the total sum of interest payments
paid on the RAWs and the registered warrants exceed the
interest that could have accrued on the RAWs, if those
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warrants had been issued at a rate of 12 percent per
annum.
9. Makes additional, conforming changes.
Background
Revenue anticipation notes are short-term financing tools
used to borrow money within a fiscal year. Their issuance
is quite common, and is necessitated by the fact that the
state's revenue stream, which peaks in April and can fall
considerably during months in which tax receipts are low,
does not evenly match its expenses, which are more evenly
spread across the fiscal year.
Warrants are the government equivalent of checks, and are
issued by the State Controller nearly every business day of
the year, in order to pay state obligations. Three types
of warrants may be used when the state suffers a revenue
shortfall, including registered warrants, registered RAWs,
and registered refunding warrants. The differences are as
follows:
Registered warrants are like checks written against
insufficient funds. Normally, all warrants issued by the
State Controller are paid upon presentation. Warrants are
payable from so-called "unapplied money," which is the
state's version of the balance in its checking account
after deducting all checks outstanding. In order for the
State Controller to determine whether the state has enough
unapplied money to pay all warrants it is required to issue
on any given day, the State Controller must rank the
obligations that are to be paid. Some types of obligations
have priority over others. For example, general obligation
bond debt service has priority over payments to vendors
supplying goods and services to state agencies. If, after
ranking all of the state's obligations and setting aside
all money that must be earmarked, reserved, or otherwise
set apart for higher ranking obligations, the State
Controller determines that there is not enough unapplied
money to pay a warrant, the warrant will be registered. In
issuing these registered warrants, the state is promising
to pay their face value as soon as sufficient unapplied
money is available. Registered warrants bear interest
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until they are paid.
Registered reimbursement warrants (RAWS) are like
marketable, post-dated checks. They are sold by the State
Controller to the public, to raise cash to pay state
obligations, in lieu of issuing individual registered
warrants to numerous creditors. RAWs are not due to be
paid by the state until their maturity date, which is
established by the State Controller at the time the RAWs
are issued. Like registered warrants, they bear interest
until they are paid. The issuance of RAWs is quite rare
and has only occurred seven times since they were
authorized in 1936 (1936, 1982, 1992, 1993, 1994, 2002, and
2003).
Registered refunding warrants can be sold by the State
Controller to the public to pay maturing RAWs. Like RAWs,
refunding warrants are like post-dated checks. They have a
maturity date, and bear interest until paid.
Although the State Controller is the lead agency
responsible for issuing RAWs, the process of issuing all
state obligations is a collaborative one which involves the
Governor (sometimes directly and sometimes through the
Department of Finance), State Treasurer, State Controller,
Director of Finance, and Attorney General, as well as
several private sector financial advisors and bond counsel
knowledgeable about these instruments. Thus, despite the
fact that the State Controller is the lead agency
responsible for issuing RAWs, the State Treasurer, Attorney
General, and multiple other government entities are very
involved in the issuance process.
The debt distinction . The California State Supreme Court
has ruled that RAWs are not considered debt under the State
Constitution. This distinction is important for two
reasons: (1) different state officials are responsible for
issuing debt (State Treasurer) and issuing warrants (State
Controller), and (2) California's Constitution requires a
two-thirds vote of both houses of the Legislature and a
vote of the people before the state can incur debt of over
$300,000.
In the court case referenced above, the Supreme Court found
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that the issuance of warrants in anticipation of the
receipt of revenues does not create an indebtedness or
liability within the meaning of the debt limitation clause
in the State Constitution. The Court also ruled that
warrants are legal and binding, even if the fiscal period
in which the warrants are issued ends before the state
repays the warrants. The Attorney General has opined that
RAWs may be issued across a maximum of two fiscal years;
they cannot span three or more fiscal years.
Despite the fact that the State Treasurer issues debt and
the State Controller issues warrants, the State Treasurer's
Office and State Controller's Office staff have advised
Senate Governmental Organization Committee staff that the
process of issuing all state obligations is a collaborative
one which involves the Governor (sometimes directly and
sometimes through the Department of Finance), State
Treasurer, State Controller, Director of Finance, and
Attorney General, as well as several private experts
knowledgeable about the marketing of these instruments. In
other words, despite the fact that the State Controller is
the lead agency responsible for issuing RAWs, the State
Treasurer and multiple other government entities are very
involved in the issuance process.
Approval process . Before RAWs may be issued, the Governor
must approve both their issuance and the maximum amount
that may be issued. Once RAW issuance is approved by the
Governor, the State Treasurer, State Controller, and
Director of Finance, sitting as the Pooled Money Investment
Board, set the maximum rate of interest of and approves the
payment procedures for RAWs. Once the maximum amount of
RAWs, the maximum rate of interest, and the payment
procedures are approved, the State Controller may issue the
RAWs. The Attorney General and bond counsel must issue
opinions regarding the legality of RAW issuance, and the
State Treasurer, State Controller, and Department of
Finance must issue certifications and other documents
relating to their issuance.
The approval process for issuing refunding warrants is
similar to that for RAWs, except that the State Treasurer,
rather than the Governor, approves their issuance.
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The issuance of warrants does not require approval by the
Legislature. However, AB 1533 (Assembly Banking and
Finance Committee), Chapter 336, Statutes of 2007, required
the State Controller to formally notify the Legislature
about the proposed sale of any RAWs, and about the details
of any RAW issuances, by notifying the Chair and Vice Chair
of the Senate and Assembly Budget and Appropriations
Committees.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11
2011-12 Fund
Increase in rate
cap-------------unknown--------------General
SUPPORT : (Verified per SB 116 support list)
State Controller John Chiang (source)
Attorney General Jerry Brown
Orrick, Herrington & Sutcliffe
State Treasurer Bill Lockyer
DLW:mw 7/23/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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