BILL ANALYSIS
AB 1277
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Date of Hearing: May 20, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 1277 (Harkey) - As Introduced: February 27, 2009
Policy Committee:
AppropriationsVote:
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill gives the treasurer authority to delay sales of
voter-approved bonds when (a) the resulting amount of debt
service payments would exceed six percent of total GF revenues,
(b) when the cost of commercial paper needed to fund a start up
loan would be more than three times the normal cost, or (c) when
the treasurer determines that the pooled money investment
account does not have sufficient funds to lend an amount equal
to the bond proceeds.
FISCAL EFFECT
1)No direct effect, since the bill merely provides authority to
cancel bond sales for specified reasons.
2)However, if a treasurer were to follow the intent of the bill,
the state could face major costs, potentially in the tens of
millions of dollars, related to cancellation of construction
contracts and increased reliance on costly short term
borrowing (see discussion below).
3)In addition, if the cancellation of bond sales were to result
in a build up of loans outstanding from the PMIA, funding for
state operations and local assistance programs could be
jeopardized.
COMMENTS
1)Purpose . The author indicates the purpose of the bill is to
give the treasurer tools to keep the state solvent and to
control the amount of debt outstanding. The author further
AB 1277
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states that there are currently no limits on the debt
California can approve or obtain, and that this lack of
oversight has contributed to the current financial crisis.
2)Background . Among other duties, the state treasurer is
responsible for issuing voter-approved general obligation
bonds for the purpose of financing major infrastructure
projects. Bond sales are the final step of a three-stage
process.
a) First, upon appropriation of the funds, the state agency
responsible for managing the capital outlay is provided
access to a revolving account set up in the state treasury.
Payments can be made from this account cover
contract-related costs, including planning, design and
construction. The funds in these revolving accounts come
from the pooled money investment account - which is the
state's "checking account," where state revenues are
deposited and funds are withdrawn for normal operations.
b) Second, the revolving fund loans are quickly paid off by
the proceeds from sale of commercial paper, which are short
term loans from private markets. The source of repayment
for these notes is the long term bonds that the state is
authorized to sell.
c) Third, when the cumulative amount of commercial paper
outstanding reaches a predetermined level, the treasurer
issues long term bonds. The proceeds of the bonds are then
used retire the commercial paper outstanding.
In early 2009, the combination of the global credit crunch and
California's budget problems caused California to temporarily
lose access to the commercial paper and long-term bond
markets. As a result, the loans "backed up" in the PMIA,
threatening the ability of the state to fund its regular
operations. In response to that problem, the governor issued a
freeze on capital outlay spending, halting projects throughout
the state. That freeze was lifted when the state passed the
budget and regained access to the commercial paper and bond
markets.
Existing law gives the treasurer authority to cancel bond
sales for any reason. The only limitation is that, after two
consecutive cancellations, subsequent cancellations must be
approved by the bond committee set up by the act approving the
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bond. This bill would give the treasurer unlimited authority
in specific circumstances.
3)Key issues . This bill raises several important issues. First,
neither the state treasurer nor credit rating agencies believe
there is an appropriate amount of debt service that a state
may incur. Debt affordability depends on a variety of factors,
including the state's priorities regarding investment in
infrastructure versus spending on other programs. A related
problem is that delaying bond sales when the state reaches a
predetermined cap may preclude the treasurer from taking
advantage of favorable interest rates and other circumstances
that could otherwise reduce the long term cost of financing
the infrastructure.
Even if the state did wish to adopt a cap on bonded
indebtedness, however, placing a limit on bond sales - the
final stage of the capital outlay financing process - would be
a disruptive way to accomplish such an end. Putting a freeze
on the final stage of financing would necessitate mid-stream
cancellations or delays of projects, raising contracting costs
to the state. A more effective way would be for the
Legislature to delay appropriation of bond funds for new
projects, or for the administration to halt projects before
contracts are let and work begins.
Similarly, halting bond sales because of high interest rates
in the commercial paper markets or because of the lack of
sufficient funds in the PMIA would be counter productive. This
is because the proceeds of GO bond sales are used to pay off
debt in these two areas. Halting bond sales could force the
state to leave borrowed funds in high-interest commercial
paper and preclude it from paying off loans from the PMIA.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081