BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 826|
|Office of Senate Floor Analyses | |
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THIRD READING
Bill No: SB 826
Author: Senate Governmental Organization Committee
Amended: 5/13/09
Vote: 21
SENATE GOVERNMENTAL ORG. COMMITTEE : 12-0, 4/28/09
AYES: Wright, Harman, Benoit, Calderon, Denham, Florez,
Negrete McLeod, Oropeza, Padilla, Wiggins, Wyland, Yee
NO VOTE RECORDED: Vacancy
SENATE APPROPRIATIONS COMMITTEE : 12-0, 5/26/09
AYES: Kehoe, Cox, Corbett, Denham, DeSaulnier, Hancock,
Leno, Runner, Walters, Wolk, Wyland, Yee
NO VOTE RECORDED: Oropeza
SUBJECT : General obligation bonds
SOURCE : State Treasurer
DIGEST : This bill makes a number of technical changes to
the General Obligation Bond Law to clarify the way the law
applies to negotiated sales of bonds.
ANALYSIS : Existing law, the General Obligation Bond Law,
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.
CONTINUED
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This bill:
1. Requires 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.
2. Provides 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. Specifies that this contractual obligation is to
repay advances and pay interest thereon under a credit
enhancement or liquidity agreement instead of under a
standby bond purchase agreement or other liquidity
facility.
3. Provides 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 allows 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.
4. Deletes 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.
5. Increases, from two years to five years, the maturation
date on notes issued on a negotiated or a competitive
bid basis.
6. Revises provisions regarding the competitive sale of
bond and the conditions for bidding in a competitive
sale or purchasing in a negotiated sale.
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7. Requires 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.
8. Authorizes 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.
Comments
This bill has been introduced on behalf of the State
Treasurer who is asking for a number of technical changes
to the General Obligation Bond Law to clarify the way the
law applies to negotiated sales of bonds.
The State Treasurer's Office states that in the years since
the General Obligation Bond Law 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
General Obligation Bond Law to permit negotiated sales
under certain conditions, but the presumption remained that
competitive bids were preferred. The State 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 than competitive sales and, hence, the
General Obligation Bond Law is being "cleaned up" to more
fully treat negotiated sales.
The State Treasurer's Office also points out that this bill
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.
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FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
Revision of negotiated Likely no new costs;
potential savings General
bond sales provisions from lower interest rates or
by avoiding
penalties when project funding is
delayed
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.
SUPPORT : (Verified 5/28/09)
State Treasurer (source)
Office of the Attorney General
TSM:mw 5/28/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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