BILL ANALYSIS
SENATE COMMITTEE ON VETERANS AFFAIRS
JEFF DENHAM, CHAIRMAN
Bill No: AB 2651
Author: Knight
Version: As amended June 3, 2010
Hearing Date: June 14, 2010
Fiscal: Yes
Consultant: Donald E. Wilson
SUBJECT OF BILL
Veterans' Bond Payment Fund
PROPOSED LAW
1. This bill creates a revolving fund known as the
"Veterans' Bond Payment Fund" within the Military &
Veterans' Code (MVC) to pay debt service on Cal-Vet
Home Loans.
2. Prohibits any of the money in the Bond Payment Fund
from being considered "surplus money" as defined in
section 16470 of the Government Code.
3. The new law will not apply to debt service for
refunding bonds.
4. An urgency clause has recently been added.
EXISTING LAW AND BACKGROUND
1. Existing law has established the Veterans' Farm &
Home Purchase Act (Cal-Vet) to help veterans buy homes
at a lower interest rate through the California
Department of Veterans' Affairs (CDVA).
2. Since 1922, the Legislature has passed, and the
voters have approved, 27 CalVet bond issues totaling
$9.3 billion.
3. A little over 63% of voters approved Proposition 12
of 2008, known as the Veterans' Bond Act, to authorize
the sale of up to $900 million for Cal-Vet loans,
which would be deposited into the Veterans' Farm and
Home Building Fund of 1943, ("The 1943 Fund").
4. Although the money for debt service is already in
the 1943 fund, the State Controller on a specific date
in the year pays debt services on bonds out of the
state's general fund.
5. Although veterans with home loans pay all the
interest and principle, technically the general fund
is impacted until the 1943 fund repays the general
fund.
6. The repayment is not directly pledged out of the
1943 fund to bondholders and does not provide
bondholders with a direct right to take any of the
assets of the 1943 fund.
7. California's fiscal situation has caused a
degradation of the state's bond rating meaning bonds
associated with the general fund get a higher interest
rate based on the inherent risk of investment.
8. Because of the technicality that there is a short
general fund exposure until the 1943 fund reimburses
the state general fund for bond debt service payments,
Cal-Vet's bond debt service payments pay the general
fund interest rate regardless of Cal-Vet's independent
bond rating.
9. Government Code 16470 allows the Pooled Money
Investment Board (PMIB) to take money from funds by
declaring them "surplus funds" if it does not consider
those funds to be of immediate use.
10. Refunding bonds are used by agencies to
fund the buyout of "callable" (early payoff) bonds.
COMMENT
1. The track record of the Cal-Vet home loan program
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is perfect: the Cal-Vet program has never impacted the
general fund of the state in the 90 years of its
existence.
2. Money that could be used on veteran housing is
instead used on debt service because the general fund
is acting as an anchor around the neck of the 1943
fund in dragging it towards junk bond rating.
3. The California Department of Veterans' Affairs
(CDVA) has proposed this measure to make sure more
Cal-Vet money is made available to veterans for home
loans rather than paying investors for debt service.
4. After discussions with fiscal experts, CDVA is
seeking to create a revolving fund called the
"Veterans' Bond Payment Fund" to pay investors.
5. If the revolving fund pays investors instead of the
general fund, then the Cal-Vet home loan program
should be able to be detached from the state's
inferior bond rating on Wall Street.
6. The 1943 fund would then reimburse the revolving
fund instead of the general fund.
7. With a better bond rating, CDVA estimates that on
its next sale alone (depending on the size of its
sale) that between $500,000 and $700,000 dollars of
interest could be saved.
8. There is a bond sale scheduled for the latter part
of June, hence the new urgency clause in the bill.
9. According to the bill's sponsor-CDVA, "This bill
will save CalVet 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
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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 refunding of
our current outstanding $ 1.7 billion of bonds."
10. This bill exempts the Veterans' Bond
Payment Fund from the PMIB authority in Government
Code section 16470 so that PMIB cannot take any funds
while the revolving fund is waiting to reimburse the
state controller.
11. $90 million of this sale will be for the
purpose of refunding bonds. Often when a bond is
sold, the bond is sold with a "callable" clause
meaning the issuer can call in the bond and pay it off
early if the issuer so chooses. CDVA has issued
callable bonds at 6.25% but present market rates are
below six percent. The refunding escrow account is
necessary because the bonds can only be called on
certain dates. Some of the bond money from the sale
will be put into the escrow account to be withdrawn on
the callable date while the rest of the sale will be
issued at a lower interest rate.
PRIOR ACTIONS
Assembly Veterans 9-0
Assembly Appropriations 15-0
Assembly Floor 74-0
SUPPORT
CDVA (Sponsor)
OPPOSE
None received
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