BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
1506 (Anderson)
Hearing Date: 8/2/2010 Amended: 3/17/2010
Consultant: Bob Franzoia Policy Vote: G O 9-0
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BILL SUMMARY: AB 1506, an urgency measure, would, if the
Controller determines specified conditions are met, require a
state agency to accept, from a payee, a warrant or other similar
evidence of indebtedness issued by the Controller endorsed by
that payee, at full face value, for the payment of any
obligations owed by that payee to that state agency. This bill
would specify that its requirements do not apply to certain
obligations and would require the Controller, pursuant to
specified conditions, submit a report to the Joint Legislative
Budget Committee. The provisions of this bill would be
inoperative on July 1, 2012 and would repeal them on January 1,
2013.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Controller report Up to $100 one time
General/
Special
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STAFF COMMENTS: This bill may meet the criteria for referral to
the Suspense File.
Warrants are the government equivalent of checks, and are issued
by the Controller to pay the state's obligations. The state
issues warrants to satisfy its obligations to vendors,
contractors, hospitals, workers, and other entities. Registered
warrants have a date certain when they can be cashed.
If the Controller determines that there may be insufficient
funds to pay all obligations, the state may issue warrants to
preserve enough cash to make priority payments such as education
and debt service with warrants. The State Constitution, federal
law and court orders require that state payroll, retirees, and
Medi-Cal providers also be paid with warrants. The state may
issue warrants for other non-priority payments, including those
to private businesses, local governments, taxpayers receiving
income tax refunds and owners of unclaimed property. There is a
cost to each state entity to redeem warrants.
When warrants are registered, the state promises to pay the face
value as soon as cash is available. Under Government Code
Sections 17201-17204, warrants are legal investments for funds
of all banks and are negotiable instruments. Warrants bear
interest at a rate fixed by the Pooled Money Investment Board
from the date of registration to the date of maturity, which is
also determined by the board.
Under Government Code Section 17280.1, the Franchise Tax Board
is required to accept state-issued warrants in satisfaction of
taxpayer obligations to the State. In July, 2009, the Board of
Equalization voted to accept warrants in satisfaction of
obligations associated with tax programs it administers. The
Employment Development
Page 2
AB 1506 (Anderson)
Department also began accepting warrants in August 2009. The
Department of Motor Vehicles and most other agencies, however,
did not accept warrants in lieu of cash.
This bill requires state agencies to accept warrants at full
face value as payments for obligations owed the state. State
agencies would be required to accept warrants after certain
determinations, including a determination of no "net cost to the
state," are made by the Controller.
Staff notes this bill refers to "warrants or other similar
evidence of indebtedness." The intent of this language is
unclear because a warrant is not indebtedness. Warrants are
issued by the Controller as the sole means of paying the state's
obligations. A warrant is not a check or other negotiable
instrument and is not a cash equivalent. It is not paid "to the
order of" or "on demand" or "upon presentation" and there are no
holders of due course rights that attach under the Commercial
Code. Rather, a regular warrant is payable only when there is
sufficient cash available to meet the obligation. As a
practical matter, because cash is normally available to redeem a
regular warrant, the warrant is perceived as a check or cash
equivalent.
Historically, the state's revenue was derived primarily from ad
valorem taxes which were payable in December and May of each
year. Consequently, all warrants issued prior to the receipt of
ad valorem taxes were registered. Today, when there is a severe
cash shortfall, the Controller recognizes that hundreds or
thousands of warrants will be issued without sufficient cash in
the Treasury and registers the warrants as was done more than
100 years ago by recording the warrant numbers by the date of
issuance. The purpose of the registration process is to bring
order to the process in which the warrants are redeemed. The
warrants so registered are called by date of issuance to ensure
that the first out are the first to be redeemed. With this
process, the Controller is better able to call batches of
warrants for redemption as cash in the Treasury will allow.
When viewed in this manner, it is easy to understand that the
registration process does not alter the character of the
instrument. The holder of the warrant is compensated with
interest for the inconvenience of waiting for cash.
Because a warrant, registered or otherwise, is issued in
anticipation of cash receipt, it has been determined by the
California Supreme Court they that warrants do not constitute an
indebtedness of the state (Riley v. Johnson 219 Cal. 513). In
Riley, the Supreme Court found that registered warrants were a
charge against unapplied moneys in the General Fund and as such,
does not constitute a debt within the meaning of the State
Constitution. (Staff notes the debt limit of the State
Constitution prohibits the state from carrying debt that exceeds
$300,000,000 from one fiscal year to the next without a vote of
the electorate.) Staff recommends the bill be amended to strike
references to "other similar forms or evidence of indebtedness."