BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 506 HEARING: 5/4/11
AUTHOR: Simitian FISCAL: Yes
VERSION: 2/17/11 TAX LEVY: No
CONSULTANT: Grinnell
STATE FINANCE: WARRANTS
Enacts a process for beneficial owners of state debt to pay
taxes with warrants used to pay that debt.
Background and Existing Law
The California Constitution provides that state support of
education has first priority on state revenues, then
requires the state to pay principal and interest on
voter-approved, general obligation (GO) debts and
liabilities until discharged after that.
When available cash falls below liabilities, the Controller
pays its creditors with registered warrants, which are
essentially IOUs that pay interest and may be redeemed on a
date specified in the warrant. State Controller John
Chiang last issued registered warrants from July to
September, 2009 due to the state's lack of cash, which paid
3.75% of interest per year.
Since 1983, state law allows holders of warrants to use
them to pay state income and corporation tax liabilities,
including estimated payments. The taxpayer sends a copy of
the warrant and a check in the amount of the warrant,
without interest. The state cannot present the check for
payment, and the bank cannot pay it until the warrant is
payable. The taxpayer sacrifices interest on the warrant
if he or she chooses to pay taxes with it, and must make a
declaration to that effect when submitting the check.
State law further provides that if the state issues a
warrant to pay principal and interest on state bonds must
be paid prior to any other warrant.
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Proposed Law
Senate Bill 506 revises and recasts provisions in state law
that allows taxpayers to pay taxes using registered
warrants.
The measure states that if the state issues a registered
warrant for payment of principal and interest on a state
general obligation bond or revenue anticipation note that
is held in book entry form by a securities settlement
system, the beneficial owner of the bond is deemed to be
the taxpayer permitted to pay taxes with a registered
warrant under existing law.
The bill applies the process for taxpayers holding
registered warrants described above for beneficial owners
of state bonds who receive registered warrants issued in
lieu of payments, including:
The process for sending a check to the state agency
responsible for collecting the tax not to exceed the
principal amount of the warrant.
The beneficial owner must additionally prove
ownership of the state bond, in addition to any other
information as determined by the Controller.
The state cannot present the check for payment, and
the bank cannot pay it until the warrant is payable.
The beneficial owner paying taxes with the warrant
sacrifices in any interest, and must repay the state
for any interest paid or ultimately received on the
warrant after the date of submission, even when the
principal amount of the warrant attributable to the
beneficial ownership of the bond is larger than the
amount of the check.
The beneficial owner of the bond paying taxes with
the warrant cannot sell, transfer, or assign the bond
until the warrant is payable, and pays interest if
necessary.
SB 506 allows the Controller to promulgate regulations,
exempt from the Administrative Procedures Act, to implement
its provisions, including:
Specifying the information that the beneficial
owner must provide to evidence bond ownership,
including principal and interest due and the issuance
of the warrant.
Requiring the beneficial owner to acknowledge that
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he or she is not entitled to interest, and must return
any interest accruing on the warrant.
Requiring the beneficial owner to acknowledge that
he or she cannot sell, transfer, or assign the bond
until after the warrant is payable.
Providing a process for interest repayment,
including collection methods and penalties.
The bill specifies that a taxpayer submitting a payment
under the above provisions shall be credited to the
taxpayer's account in payment of the liability. The
measure additionally bars any state entity from taking any
action that would materially adversely impair, limit, or
restrict the rights of a beneficial owner of a state bond.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Some major corporations in
California are currently precluded from investing in
California debt because California debt does not meet the
companies' investment criteria. A remedy to this problem
exists in current law but the statute needs to be updated.
In the past, ownership bonds were in a paper form. Now,
those documents are in electronic form. This bill defines
the beneficial owner of a registered warrant, issued for
the principal or interest due on a state bond that is held
in book entry by a security settlement system, to be the
taxpayer who is permitted to submit the check in payment of
existing taxes.
The original statute was drafted during a time when most
bond owners had paper certificates showing that they own
the bonds. As advancements have been made, electronic
systems have been created so that the owner no longer has a
"coupon" to clip.
While this is a technical issue the clarification will
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remove an impediment so that California corporations can
invest in California bonds in the unlikely event that a
registered warrant is ever issued for its bond obligation,
the corporation can use the warrant to offset tax
liabilities.
The State Controller will promulgate regulations to
implement the bill.
2. Punished Enough ? The financial and political media has
consistently questioned the State of California's ability
to repay its bonds, despite assurances that California's
Constitution gives general obligation bondholders second
call after education, and the state's perfect track record
for paying bondholders. California bonds require extra
yield when compared to other states, peaking at 1.71
percentage points in July 2009, and ratings agencies
consistently assign its debt the lowest ratings for any
state in the nation. Despite budget cuts enacted earlier
this year, California still faces a multi-billion dollar
budget deficit, which may again necessitate the issuance of
registered warrants if cash falls short of payments. State
Treasurer Bill Lockyer has cautioned that the state will
not sell any bonds until January, 2012 unless the
Legislature enacts a balanced budget.
Amidst the debate in the financial world, SB 506 erects a
process by which state bondholders may pay taxes with
warrants issued by the state in lieu of timely cash
payments of principal and interest. Given the difficulty
of defending the safety and relative value of the state's
debt in capricious credit markets, should the state really
put into practice a statutory process that assumes
bondholders will be paid in warrants, something that's
never happened before and could only come to pass in
apocalyptic circumstances? The measure may give current
and future investors in the state's debt caution when they
see that the state is explicitly creating a process not to
pay in the accustomed medium of cash.
3. Of Brothers and dimes . Supported by some of
California's most successful and profitable firms, SB 506
clarifies that in the event bondholders are paid in
warrants, bondholders may apply those warrants to their
taxes. Because corporate treasuries are bound by strict
investment criteria to ensure good returns to shareholders
SB 506 -- 2/17/11 -- Page 5
at a minimum risk, these firms state that allowing warrants
to be used to pay taxes gives them the certainty to invest
in California bonds despite the relatively low credit
rating. SB 506 sets up a process that provides the
security necessary for these firms invest in California
debt, thereby bringing potential new buyers to market.
4. Bonds and bondage . California is the largest issuer in
the tax exempt market, and 18th largest overall, and
increased its debt load from $34 billion in 2003 to $91
billion today. Debt service payments as a percentage of
the budget have doubled to 7.71% in the same time period.
According to the Treasurer's 2010 Debt Affordability
Report, California has $68.77 billion in outstanding
general obligation debt, $41.58 billion in approved but
unissued debt, for a total of $110.35 billion with general
fund revenues of approximately $90 billion. These totals
do not include non-general obligation debt, such as the
Economic Recovery Bonds. As California's debt load grows,
the Legislature has less money to fund other priorities.
5. Not this time . Last year, SB 1494 (Committee on
Revenue and Taxation) allowed the Board of Equalization to
accept registered warrants as payment for Sales and Use
Taxes, which it already does by regulation for its fee
programs. The measure was enacted, but only after this
provision was deleted from the bill in the Assembly
Appropriations Committee.
6. Don't Go There . SB 506 provides an exemption from the
Administrative Procedures Act for regulations issued by the
Controller to implement its provisions. The Administrative
Procedures Act exists to ensure that agencies issue
regulations that are consistent with the underlying
stature, often serving as an important check on agency
powers. Such an exemption isn't clearly needed, so the
Committee may wish to consider deleting it.
Support and Opposition (4/28/11)
Support : TechNet; Apple, Inc; Cisco, Inc.; eBay, Inc.;
Google, Inc.; Oracle Corporation; Qualcomm, Inc.;
Opposition : None submitted.
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