BILL ANALYSIS                                                                                                                                                                                                    




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           826 (Wright)
          
          Hearing Date:  5/18/2009        Amended: 5/13/2009
          Consultant:  Bob Franzoia       Policy Vote: GO 12-0
          _________________________________________________________________ 
          ____
          BILL SUMMARY: SB 826 would, regarding general obligation bonds,  
          do the following:
          - Require the State 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.
          - Provide that amounts payable or contractual obligations  
          regarding bonds that bear a variable interest rate are backed by  
          the full faith and credit of the state if the bond act was  
          approved by the voters after January 1, 2002.
          - Provide that instead of payments owed by the state from  
          exceeding a specified maximum rate after an offset, that the  
          payment of any amounts owed by the state shall be deemed to be  
          included with the appropriation for interest on the bonds.  This  
          bill would allow 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, under  
          specified conditions.
          - Would delete the condition in existing law which requires when  
          the finance committee, created by the bond act determines to  
          issue commercial paper notes, for purposes of determining the  
          principal amount of outstanding bonds, that the principal amount  
          deemed outstanding be the maximum amount authorized in the  
          resolution.
          - Increase from two years to five years the maturation date on  
          notes issued on a negotiated or a competitive bid basis.
          - Revise provisions regarding the competitive sale of bond and  
          the conditions for bidding in a competitive sale or purchasing  
          in a negotiated sale.
          - Require a bond finance committee, if determining that  
          refunding is necessary or advisable to effect a savings in debt  
          service cost to the state, to include as interest on a refunded  
          bond, the interest, if any, which will result from a related  
          hedging contract.
          - Authorize the finance committee, when determining debt service  










          savings, to base the interest of a refunding bond upon the  
          effective fixed interest rate under a hedging contract.
          _________________________________________________________________ 
          ____
                            Fiscal Impact (in thousands)

           Major Provisions         2009-10      2010-11       2011-12     Fund
           Revision of negotiated bond       Likely no new costs; potential  
          savings from           General
          sales provisions       lower interest rates or by avoiding  
          penalties
                                 when project funding is delayed  
          _________________________________________________________________ 
          ____

          STAFF COMMENTS: According to the State Treasurer the above  
          provisions are technical and provide greater flexibility in the  
          sale of bonds.  Some of the provisions are suggested by the  
          Department of Justice which reviews and approves the terms and  
          conditions of bond sales.  
           
          Page 2
          SB 826 (Wright)

          This bill proposes changes to clarify negotiated sales of bonds.  
           In the years since the General Obligation Bond Law (GOBL) was  
          adopted, the bond market has changed dramatically.  For example,  
          at one time all state general obligation 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.  In  
          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 than  
          competitive sales, and hence the provisions of the GOBL are  
          being revised to more fully treat negotiated sales.

          The Department of Justice and bond counsel have suggested  
          changes to clarify existing law and also to 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 the opportunity to issue bonds under the best  
          structure and at the best rates possible.  However, fluctuating  
          rates make it difficult to quantify any potential cost savings. 

          On occasion, short term negotiated sales may have a higher  










          initial rate but result in overall savings by avoiding the  
          payment of penalties that may occur on public works projects  
          when the state cannot meet contractual funding obligations.