BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 633 HEARING: 1/11/12
AUTHOR: Huff FISCAL: No
VERSION: 1/5/12 TAX LEVY: No
CONSULTANT: Grinnell
BONDS: FINE FOR UNAUTHORIZED USE
Sanctions Entities that Inappropriately Spend Bond
Funds.
Background and Existing Law
When public agencies issue bonds, they essentially borrow
money from investors, who provide cash in exchange for the
agencies' commitment to repay the principal amount of the
bond plus interest in the future. Bonds are divided into
two categories: revenue bonds, which repay investors out of
revenue generated from the project the agency buys with
bond proceeds, like a parking garage, and
general-obligation bonds, which the state pays out of
general revenues and is guaranteed by the agency's full
faith and credit.
California relies on the California Constitution and the
state's General Obligation Bond Law to issue
general-obligation debt. The Constitution allows the
Legislature to authorize general obligation bonds for
specific purposes with a two-thirds vote of the Assembly
and Senate, as it did with the Safe, Clean, and Reliable
Drinking Water Supply Act (SBx7 2, Cogdill, 2010), but must
be enacted by majority vote of the state's electorate.
Voters can direct the state to sell bonds by initiative, as
they have for parks, water projects, high-speed rail, and
stem cell research, among others.
The General Obligation Bond Law requires bond acts to set
the amount of bonds to sell, create a finance committee
generally chaired by the State Treasurer that enacts a
resolution that causes the bonds to be sold, and designate
an agency that requests the finance committee to sell the
bonds. In either case, the Treasurer sells the bonds to
investors, and then remits the bond proceeds to the fund
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authorized in the bond act. The state promises investors
purchasing a general obligation bond payment of principal
and interest regardless of the proceeds' use.
The State Controller's Office may audit any disbursement of
state funds, and occasionally audits bond expenditures.
Additionally, the Bureau of State Audits in 2007 included
bond accountability on its list of high-risk issues facing
the state. The Legislature requires the lead agencies
administering bond funding to report specified information
to the Legislature and the Department of Finance (AB 1368,
Kehoe, 2003). In 2007, Governor Schwarzenegger signed an
executive order to expand oversight of spending the
proceeds of the 2006 infrastructure bonds, but the website
dedicated to the effort, www.bondaccountability.ca.gov ,
doesn't show any audit results. The executive order
directed the Department of Finance's Office of State Audits
and Evaluation to audit the use of bond proceeds, and those
audits can be found on its website. However, neither that
office nor any of the others can levy any direct sanctions
against the agency for unauthorized use to deter future
misuse.
Proposed Law
Senate Bill 633 enacts sanctions on boards, committees, and
entities that spend bond funds in an unauthorized way.
After an audit by the Department of Finance that finds that
bond revenues have been expended for a purpose not
authorized in the act, the board, committee, or entity
responsible for the unauthorized use shall:
Promptly repay all improperly expended funds to the
bond fund.
Pay a fine equal to 5% of the total amount of bond
revenues that were expended improperly. The agency
cannot pay the fine from the bond fund.
State Revenue Impact
No estimate.
Comments
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1. Purpose of the bill . According to the author, "Since
2006, Californians have authorized the sale of $54 billion
in general obligation bonds. Administration of such huge
sums of money creates significant risk of wasteful or
fraudulent spending, and California's present fiscal crisis
places a premium on ensuring every public dollar delivers
maximum value. However, there are currently no meaningful
penalties for the misuse of bond funds. SB 633 provides
the much needed punitive consequences that will correct
improper expenditures and ensure compliance with bond
authorization acts."
2. A little ain't enough . State law requires public
disclosure in many different areas in the hopes that
information in the public sphere will improve public
agencies' decision-making and accountability. SB 633
presumes stronger tonic is needed for unauthorized use of
bond funds by requiring a tangible sanction whenever the
Department of Finance deems that an agency has failed to
spend bond funds appropriately. Agencies must reduce
spending on another purpose to pay the fine absent an
appropriation to do so. The Committee may wish to consider
why unauthorized use of bond funds necessitates the
relatively uncommon measure of requiring the Department of
Finance to fine another state agency. Additionally, the
Committee may wish to consider the tradeoff of requiring an
agency to transfer funds from its general operations to
reimburse a bond fund and pay a fine.
3. Coming up with the scratch . SB 633 allows the
Department of Finance to fine agencies that misuse bond
funds. Should the measure be enacted, and penalties
assessed, how would agencies pay the fine? The State
Budget Act annually allocates funds for an agency's general
operations, but a fine would likely be considered an
unanticipated cost. As such, larger agencies could shift
funds around to pay the fine, but small agencies
administering large bond funds likely wouldn't be able to
pay the fine by redirecting current funding. For example,
the Wildlife Conservation Board (WCB) has an operations
budget of approximately $4.5 million in 2010-11, but
allocated $21 million in bond funds in the last fiscal
year. For WCB, a misuse of bond funds of 10% would require
redirecting almost half the agency's operations budget to
meet the bill's repayment obligation ($2.1 million) and
fine ($105,000). An agency that couldn't pay through
SB 633 -- 1/11/12 -- Page 4
redirection could ask the Department of Finance for the
money, who in turn may then ask the Legislature for an
appropriation to pay the fine. If the Legislature denies
the appropriation to pay the fine, what happens then? The
Committee may wish to consider whether the difficulties
associated with repayment obligations and fines are worth
the desired change of behavior.
4. Whodunit ? Bond acts often rely on state agencies to
contract with, or grant money to, a myriad of local
agencies and private firms to accomplish projects specified
in the bond. SB 633 requires the "board, committee, or
agency responsible for the unauthorized use" to repay the
misused bond funds and pay a fine. Given the complexity,
determining which agency is responsible, and for what
portion of the misuse, isn't easy. As part of the
Department of Finance's Office of State Audits and
Evaluation audit of the California Department of Fish and
Game's allocation of Proposition 13 and 50 bond funds, it
found an unauthorized use. The Department made a grant to
the Three Rivers Levee Improvement Authority for mitigation
and restoration activities along three rivers. However,
the Authority used the grant funds to acquire property by
eminent domain, which complied with Department regulations,
but was barred by the bond's implementing statute. In this
case, who should repay the funds, the Department or the
Authority? Would the Department try to reverse the eminent
domain action and reclaim funds from the landowner who
ultimately received the funds? Likewise, if the State
Allocation Board allocated school bond funds to a school
district that contracted with an individual who then
misused the funds, who would be responsible and how would
the misused funds be recovered? The Committee may wish to
consider refining the definition of the entity responsible
for the unauthorized use, allowing the Department of
Finance to assign blame to more than one agency, or
reconsider the means by which an agency can recover
inappropriately allocated funds from contractors and
grantees.
5. Crime and punishment . SB 633 triggers a strict
liability penalty, which serves as a strong deterrent
against bad behavior but doesn't leave any room for the
agency to correct the misuse before the sanction applies.
As such, SB 633 grants a powerful tool to the Department of
Finance to punish unauthorized uses, but doesn't allow
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agencies the explicit power to appeal or fix the problem
once the Department of Finance determines that an agency
misused bond funds. Additionally, the measure neither
defines "unauthorized use," nor deploys a scienter standard
that requires that the agency knowingly misused funds
before triggering sanctions as opposed to more innocent
errors. The Committee may wish to consider refining the
application of the penalty, or replacing it with the
authority to bar an agency from further allocating bond
funds until the agency adopts or implements a corrective
action plan proscribed by the Department of Finance to
remedy prior misuses.
6. Going Forward . SB 633 doesn't explicitly state that it
applies only to allocations of future bond issues.
Applying the bill's provisions to current allocations and
bond issues would create significant uncertainty for both
agencies and recipients of bond funds. The Committee may
wish to consider amending SB 633 to clearly apply its
provisions prospectively.
Support and Opposition (1/5/11)
Support : Association of California Water Agencies, Little
Hoover Commission
Opposition : None Received.