BILL ANALYSIS �
SB 120
Page 1
Date of Hearing: July 13, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 120 (Anderson) - As Amended: May 31, 2011
Policy Committee: Business and
Professions Vote: 9 - 0
Urgency: Yes State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill requires state agencies to accept registered warrants
or similar evidence of indebtedness issued by the state for the
payment of obligations owed to them.
FISCAL EFFECT
1)Cash Flow Effects . The bill will not have an immediate impact
on the state due to the on-time enactment of the 2011-12
Budget Act. Future effects would depend on the magnitude of
cash shortfalls that emerge in the future.
a) As an illustration, in the 2010-11 budget and cash
imbalances required the State Controller to issue $1.9
billion in registered warrants between July 2 and August
11, 2010. If similar amounts were issued at some point in
the future and this bill enabled an additional 1% of
registered warrants to be used in satisfaction of
obligations owed to the state, the reduction in state cash
receipts would be about $19 million.
b) Any loss in cash payments resulting from acceptance of
IOUs will require the state to issue additional IOUs to
make up for the additional resulting cash shortfalls. In
extreme circumstances (involving much larger issuances of
IOUs than in the past), the loss of cash could affect the
ability of the state to make priority payments for debt
service or other purposes.
c) The Franchise Tax Board, the Board of Equalization, and
the Employment Development Department are currently
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accepting state registered warrants in lieu of cash
payments. However, numerous other state agencies, including
the Department of Motor Vehicles, are not currently
accepting registered warrants and would be affected.
2)Administrative costs . The bill would result in unknown, but
likely substantial administrative costs for those departments
that are not currently accepting state registered warrants.
Those costs could exceed several hundred thousand dollars.
COMMENTS
1)Rationale . According to the author's office, the bill is a
taxpayers' rights measure that addresses an inequity in
current law, whereby the state may issue IOUs in lieu of
warrants, but is not required to accept these IOUs for
obligations owed to the state.
2)Background . In normal times, the state issues warrants to
satisfy its obligations to vendors, contractors, hospitals,
workers, and other entities. Warrants are the government
equivalent of checks, and are issued by the controller.
During periods of serious cash shortfalls, the state may have
to issue registered warrants. This occurs when, after ranking
all of the state's obligations and setting aside all money
that must be set apart for higher ranking obligations, the
controller determines that there are insufficient funds to pay
a warrant. In this case, the warrant is registered, and the
state promises to pay the face value as soon as money is
available. Under the California Government Code, registered
warrants are legal investments for funds of all banks and are
negotiable instruments. Registered warrants bear interest at a
rate fixed by California law from the date of registration to
the date of maturity, or the date upon which the State
Treasurer advertises that they are payable upon presentation
if they bear no date of maturity.
Under Government Code Section 17280.1, the Franchise Tax Board
is required to accept state-issued warrants in satisfaction of
taxpayer obligations to the State. In July, 2009, the Board
of Equalization voted to accept warrants in satisfaction of
obligations associated with tax programs it administers. The
Employment Development Department also began accepting
warrants in August 2009. The Department of Motor Vehicles and
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most other agencies, however, did not accept warrants in lieu
of cash.
3)Trade-off . While perhaps addressing potential inequities
related to individuals that have received registered warrants
and owe money to the state, from a broader perspective, the
main effect of the bill is simply to shift IOUs from one
entity to another. Given the circumstances leading to IOU
issuance by the state, any reduction in cash payments by one
taxpayer will have to be made up through additional state
payments of registered warrants to other entities. Given that
the controller ranks payments according to priorities, the
additional warrants will, by definition, go for higher
priority payments. In extreme circumstances, mandatory
acceptance of IOUs by all state agencies could affect the
state's ability to make timely payments for debt service or
obligations required by federal law or the state Constitution.
4)Related legislation . In 2010, AB 1506 (Anderson), a
substantially similar bill, was vetoed by Governor
Schwarzenegger. In his veto he noted that "Requiring state
departments to accept IOUs in lieu of cash payments defeats
the purpose of issuing IOUs in the first place. It would
exacerbate the state's cash crisis and would accelerate the
possibility of the state defaulting on its debt service and
payroll obligations."
Analysis Prepared by : Julie Salley-Gray / APPR. / (916)
319-2081