BILL ANALYSIS
Bill No: SB
826
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2009-2010 Regular Session
Staff Analysis
SB 826 Author: Committee on Governmental Organization
As Introduced: March 19, 2009
Hearing Date: April 28, 2009
Consultant: Art Terzakis
SUBJECT
General Obligation Bonds
DESCRIPTION
SB 826 makes a number of technical changes to the General
Obligation Bond Law to clarify the way the law applies to
negotiated sales of bonds. Specifically, this measure:
1. Clarifies that when the state issues premium bonds, the
premium may be used to cover costs associated with
issuing the bonds
2. Clarifies that the State may spread interest payments
for a bond and a hedging contract connected to that bond
over subsequent fiscal years to avoid exceeding the
maximum interest rate permitted by law.
3. Clarifies the definition of "effective fixed interest
rate" for purposes of a hedging contract and requires the
Treasurer to determine, with regard to bonds that have an
effective fixed interest rate through a hedging contract,
that the hedging contract either significantly reduces
variable rate risk or qualifies for integration with the
bonds in calculating the yield on the bonds under certain
federal rules.
.
4. Authorizes the payments of interest on a bond and the
payments on a hedging contract that exceed the maximum
rate in a fiscal year to be paid in subsequent fiscal
years.
SB 826 (G.O. Committee) continued
Page 2
5. Provides the Treasurer greater administrative
convenience by deleting an existing provision of law
which treats unissued commercial paper notes as if they
were issued.
6. Modernizes the provisions for issuance of bond
anticipation notes, as specified, and provides greater
flexibility to the Treasurer to structure the terms of a
bond anticipation note.
7. Clarifies that certain provisions apply only to
competitive sales, while also creating some necessary
distinctions with respect to negotiated sales. Also,
ensures that certain provisions will not be interpreted
as placing unnecessary requirements on negotiated sales.
8. Makes a variety of other nonsubstantive and conforming
changes.
EXISTING LAW
The State General Obligation Bond Law (GOBL) sets forth the
procedures for the issuance and sale of bonds governed by
its provisions and for the disbursal of the proceeds of the
sale of those bonds. The law provides for various
oversight and reporting requirements for the expenditure of
state funds, including the proceeds of bonds.
BACKGROUND
Purpose of SB 826: This measure has been introduced on
behalf of the State Treasurer who is asking for a number of
technical changes to the GOBL to clarify the way the law
applies to negotiated sales of bonds.
The Treasurer's Office states that in the years since the
GOBL was adopted, the bond market has changed dramatically.
For example, at one time all State GO bond sales were done
at competitive bid. Later, provisions were added to the
GOBL to permit negotiated sales under certain conditions,
but the presumption remained that competitive bids were
preferred. The Treasurer's Office notes that under current
circumstances where the State has to issue bonds in
multi-billion dollar sales, and with a very volatile
market, negotiated sales will be used far more frequently
SB 826 (G.O. Committee) continued
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than competitive sales, and hence the GOBL is being
"cleaned up" to more fully treat negotiated sales.
The Treasurer's Office also points out that this measure
incorporates a number of changes suggested by the Attorney
General's Office and bond counsel to clarify existing law
and provide the State with more flexibility in light of the
changes that have taken place in the bond market. These
changes are designed to ensure that the State has every
opportunity to issue bonds under the best structure and at
the best rates possible to protect the interest of the
State's taxpayers.
PRIOR/RELATED LEGISLATION
SB 503 (Kehoe) 2009-10 Session. Would require the State
Controller, annually, on or before April 30 to audit
certain bond projects and examine any record that relates
to the use of bond proceeds. (Pending in this Committee)
SB 784 (Torlakson) 2007-08 Session. Would have established
new reporting and audit provisions applicable to general
obligation bonds authorized on or after November 7, 2006,
in order to ensure maximum transparency and accountability
regarding the expenditure of bond funds. (Died on Assembly
Appropriations Suspense File)
SB 28 (Brulte) Chapter 97, Statutes of 2001. Made numerous
substantive changes to the GOBL to modernize and
update the law.
SUPPORT: State Treasurer's Office
OPPOSE: None on file as of April 24, 2009.
FISCAL COMMITTEE: Senate Appropriations Committee