BILL ANALYSIS
AB 2651
Page 1
Date of Hearing: April 13, 2010
ASSEMBLY COMMITTEE ON VETERANS AFFAIRS
Paul J. Cook, Chair
AB 2651 (Knight) - As Introduced: February 19, 2010
SUBJECT : Veterans farm and home purchases.
SUMMARY : The acts authorizing the various bonds issues for these
purposes require the Controller to pay, from the General Fund,
the principal and interest on the bonds when due, and to be
reimbursed for those costs from the Veterans' Farm and Home
Building Fund of 1943. Specifically, this bill would authorize
the Controller to establish a zero-balance account within the
General Fund and to transfer to that account, from the Veterans'
Home Building Fund of 1943, those amounts necessary to pay from
the General Fund the principal and interest on the bonds as it
comes due.
EXISTING LAW establishes the Veterans Farm and Home Purchases
Act of 1974, the object of which is to enable veterans to
acquire farms and homes:
1.Provisions of the Act are administered by the California
Department of Veterans Affairs through the CalVet Home Loan
Program.
2.Uses State of California Veterans General Obligation Bonds
(referred to as QVMB in federal law) to finance loans to
eligible veterans. The program purchases homes and farms for
resale to the eligible veterans under a Contract of Sale.
3.Provides that the state will collect sufficient moneys in
addition to all other revenues of the State to provide for
payment of debt service on the bonds. (Military and Veterans
Code 998.304 (a) and (b).)
4.States that onthe dates on which the State Controller issues
warrants for the payment of the debt service on the Veterans
Bonds, the Veterans Farm and Home Building Fund of 1943 (the
"1943 Fund") must return to the General Fund the amount paid
for such debt service. (Military and Veterans Code
998.304(c).)
5.Moneys from the 1943 Fund may only be used for financing the
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Veterans Farm and Home Purchase Program, for its
administration, for the temporary investment of surplus funds
and for transfer to the general fund to pay debt service
costs. (Veterans of Foreign Wars v. State of California, 36
Cal.App.3d 688)
FISCAL EFFECT : Unknown.
COMMENTS :
The author state that this bill will save CalVet Home Loan
Programs hundreds of millions of dollars. The difference in the
interest rate paid for a Baa1 rated bond verses a AA- rated bond
can be 1% or more. We obtained the MMD for General Obligation
Bonds from the Bond Buyer to obtain the interest rates for Baa
and AA rated bonds. The Baa bond was at an interest rate of
5.79% and the AA bond was at 4.33% for a difference in interest
of 1.46%. This is an interest rate difference of 1.46%. Based
on our remaining bond authority of approximately $1 billion
outstanding for 30 years, we would save about $438 million
dollars in interest payments. (1.46% x $ 1 billion x 30 years =
$438 million savings) In addition, there could be additional
savings if we are able to do refundings of our current
outstanding $ 1.7 billion of bonds.
The rating agencies have rated the California Department of
Veterans Affairs' general obligation bonds at a lower rating
than the California Department of Veterans Affairs' revenue
bonds (subordinate credit) because of the requirement that the
general fund must first pay the California Department of
Veterans Affairs' general obligation bond debt service before
the reimbursement is received from the 1943 Fund. The rating
agencies feel that there is a chance that the State may not be
able to make debt service payment on general obligation bonds,
including California Department of Veterans Affairs' bonds,
because on any given day the State's cash flows may not be
sufficient to pay debt service on bonds after the payment to the
schools.
When the State Controller Office experiences a cash shortfall on
a Veterans debt service payment day, State law (Government Code
17200) mandates that the State Controller Office should manage
the State's cash resources so as to preserve available cash for
the highest priority obligations of the General Fund, by issuing
"registered warrants" even before all the cash resources of the
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General Fund are exhausted. (See Government Code 17221.) The
State Controller Office makes every effort to be sure that debt
service on general obligation bonds, as the second-highest
priority of the General Fund (after public education), would be
paid.
If the unencumbered cash resources were not sufficient to make
general fund Payments, the State Controller Office has the
ability to borrow from other special funds that have been
identified as borrowable resources, which have balances that are
not immediately needed. (Government Code 16310.)
This bill establishes a bond debt service payment method that
will improve the ratings provided by the credit rating agencies
for Veterans General Obligation Bonds which would save hundreds
of millions of dollars in interest payments for California
veterans that participate in the home loan program. This would
provide a legal payment process that would allow the national
rating agencies to rate the Veterans General Obligation Bonds at
least as high as CalVet's revenue bonds. Currently, the States
General Obligation Bond rating is Baa1 and the Veterans Revenue
bonds are rated AA-.
This bill would establish the Veterans Bond Payment Fund, a
Special Fund, to make Veterans General Obligation bond debt
service payments. CalVet would be able to transfer debt
service payments from CalVet's 1943 Fund into this special fund
without the risk that the funds could be used by the controller
for other purposes. The Veterans General Obligation Bond debt
service payment would then be paid from this Special Fund.
The addition of this payment process will provide rating
agencies and investors with assurance that CalVet General
Obligation Bond debt service payments will always be paid as
long as there are funds in either the general fund or the CalVet
1943 Fund.
REGISTERED SUPPORT / OPPOSITION :
Support
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Opposition
AB 2651
Page 4
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Analysis Prepared by : Eric Worthen / V. A. / (916) 319-3550