BILL ANALYSIS
SB 826
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Date of Hearing: June 29, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
SB 826 (Committee on Governmental Organization) - As Amended:
May 13, 2009
SENATE VOTE : 39-0
SUBJECT : General obligation bonds.
SUMMARY : Makes a number of technical changes to the State
General Obligation Bond Law (GOBL) to clarify the way the law
applies to the negotiated sales of bonds. Specifically, 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
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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.
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.
EXISTING LAW establishes the GOBL which 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. (Government Code Sections,
16720 et seq.)
FISCAL EFFECT : Unknown
COMMENTS :
This bill 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 State Treasurer's Office states that in the years since 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. The State Treasurer's Office notes that under
current circumstances where the state has to issue bonds in
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multi-billion dollar sales, and with a very volatile market,
negotiated sales will be used far more frequently than
competitive sales and, hence, the GOBL 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.
Background: GO Bonds are general obligations of the state of
California to which the full faith and credit of the state are
pledged. All GO bonds must be approved by voters at a statewide
election and the bonds are generally repaid over 30 years.
Fixed rate GO bonds are only issued on a negotiated basis when
the Treasurer determines that it will result in lower interest
cost than issuing on a competitive basis
Previous 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. (Senate Appropriations)
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.
REGISTERED SUPPORT / OPPOSITION :
Support
California State Treasurer (Sponsor)
SB 826
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California Attorney General
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081