BILL ANALYSIS
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THIRD READING
Bill No: AB 2651
Author: Knight (R)
Amended: 6/3/10 in Senate
Vote: 27 - Urgency
SENATE VETERANS AFFAIRS COMMITTEE : 4-0, 6/14/10
AYES: Denham, Correa, Negrete McLeod, Cedillo
NO VOTE RECORDED: Wyland
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 74-0, 5/6/10 (Consent) - See last page for
vote
SUBJECT : Veterans farm and home purchases: bond acts
SOURCE : Department of Veterans Affairs
DIGEST : This bill (1) creates a revolving fund known as
the Veterans Bond Payment Fund within the Military and
Veterans Code 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, and (3) does not apply to
debt service for refunding bonds.
ANALYSIS : Existing law has established the Veterans'
Farm and Home Purchase Act (Cal-Vet) to help veterans buy
homes at a lower interest rate through the Department of
Veterans' Affairs (DVA).
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This bill:
1.Creates in the State Treasury a revolving special fund
known as the Veterans' Bonds Payment Fund, which moneys
will be used solely to pay debt service, as defined, on
bonds issued pursuant to all veterans' farm and home
purchase bond acts, as specified, and all moneys in this
fund would be continuously appropriated for this purpose.
2.Authorizes moneys in the Veterans' Bonds Payment Fund to
be transferred to an account within the Refunding Escrow
Fund for the purposes of paying debt service, as
prescribed.
3.Prohibits moneys from being borrowed or transferred from
the Veterans' Bonds Payment Fund to the General Fund or
the General Cash Revolving Fund, as specified.
4.Requires payments made under the Veterans Bond Act of
2008 to be transferred to the Veterans' Bonds Payment
Fund, rather than to the General Fund.
5.Does not grant a lien on the Veterans' Farm and Home
Building Fund, the Veterans' Bonds Payment Fund, or the
money therein to the holder of any bonds issued under the
act.
6.Provides that for any of the existing payments of debt
service, with respect to any bonds issued pursuant to a
veterans' farm and home purchase bond act, the Controller
shall first draw warrants against the appropriation from
the Veterans' Bond Payment Fund, and, to the extent
moneys in the fund are insufficient to pay the amount of
debt service then due, shall draw warrants against the
appropriation made by the bond act from the General Fund.
Background
Since 1922, the Legislature has passed, and the voters have
approved, 27 Cal-Vet bond issues totaling $9.3 billion.
A little over 63 percent of voters approved Proposition 12
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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 (1943 Fund).
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.
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.
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.
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.
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.
Section 16470 of the Government Code 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.
Refunding bonds are used by agencies to fund the buyout of
"callable" (early payoff) bonds.
Comment
According to the Senate Veterans Affairs Committee
analysis:
The track record of the Cal-Vet home loan program is
perfect: the Cal-Vet program has never impacted the
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general fund of the state in the 90 years of its
existence.
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.
The DVA 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.
After discussions with fiscal experts, DVA is seeking to
create a revolving fund called the "Veterans' Bond
Payment Fund" to pay investors.
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.
The 1943 Fund would then reimburse the revolving fund
instead of the general fund.
With a better bond rating, DVA 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.
According to the bill's sponsor, DVA, "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 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 = $438 million
savings) In addition, there could be additional savings
if we are able to do refunding of our current outstanding
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$ 1.7 billion of bonds."
This bill exempts the Veterans' Bond Payment Fund from
the PMIB authority in Section 16470 of the Government
Code so that PMIB cannot take any funds while the
revolving fund is waiting to reimburse the State
Controller.
$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. DVA has issued callable bonds at 6.25 percent
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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 6/14/10)
Department of Veterans Affairs (source)
American Legion
AMVETS
Vietnam Veterans of America
California State Commanders Veterans Council
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Beall, Bill
Berryhill, Tom Berryhill, Blakeslee, Blumenfield,
Bradford, Brownley, Buchanan, Caballero, Charles
Calderon, Carter, Chesbro, Conway, Cook, Coto, Davis, De
Leon, DeVore, Emmerson, Eng, Evans, Feuer, Fletcher,
Fong, Fuentes, Fuller, Furutani, Gaines, Galgiani,
Garrick, Hagman, Hall, Harkey, Hayashi, Hernandez, Hill,
Huber, Huffman, Jeffries, Jones, Knight, Lieu, Logue,
Bonnie Lowenthal, Ma, Miller, Monning, Nava, Nestande,
Niello, Nielsen, Norby, V. Manuel Perez, Portantino,
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Ruskin, Salas, Saldana, Silva, Skinner, Smyth, Solorio,
Audra Strickland, Swanson, Torlakson, Torres, Torrico,
Tran, Villines, Yamada, John A. Perez
NO VOTE RECORDED: Bass, Block, De La Torre, Gilmore,
Mendoza, Vacancy
TSM:mw 6/14/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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