BILL ANALYSIS �
SB 633
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Date of Hearing: June 19, 2012
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Mary Hayashi, Chair
SB 633 (Huff) - As Amended: June 11, 2012
SENATE VOTE : 35-0
SUBJECT : Bonds: fine for unauthorized use.
SUMMARY : Authorizes the Department of Finance (DOF) to order
any state entity authorized by a bond act to allocate funds from
bond sales, as specified, to cease and desist from allocating
any additional funds from bond sales under specified conditions.
Specifically, this bill :
1)Authorizes the DOF to order any state entity authorized by a
bond act to allocate funds from bond sales, as specified, to
cease and desist from allocating any additional funds from
bond sales when DOF has:
a) Audited the board, department, or agency and made a
finding that funds have been used in a manner not
authorized by the bond act;
b) Prescribed corrective action, or any other measure it
deems necessary, to remedy the unauthorized use of funds,
and has notified the board, department, or agency that it
must implement or comply with the prescribed corrective
action or measure within 60 days of receiving notice of the
corrective action or measure; and,
c) Determined that the board, department, or agency has not
implemented or complied with the corrective action or
measure within 60 days.
2)Prohibits the DOF from ordering a corrective action or measure
that results in nonpayment to the audited state entity for
contractual obligations entered into or performed in good
faith.
3)Requires that a DOF-issued cease and desist order be
reasonably designed to ensure compliance with a corrective
action or measure and avoid unnecessary disruption of the
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underlying bond-funded project or program.
4)Applies to the allocation of funds authorized by a bond act
adopted on or after January 1, 2013.
EXISTING LAW establishes the State General Obligation Bond Law,
which provides procedures to authorize the issuance, sale, and
repayment of state general obligation (GO) bonds.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of this bill . According to the author's office,
"Revenue generation from the sale of bonds is an increasingly
popular trend in California governance. According to the Little
Hoover Commission (LHC), Californians authorized $77 billion in
GO bonds between 1970 and 2004. Since 2006, Californians have
authorized $54 billion.
"The DOF's Office of State Audits and Evaluations is tasked with
auditing the use of bond proceeds. When such an audit
determines an entity has misspent bond funds, the DOF proposes a
corrective action plan, which includes a deadline for
implementation.
"SB 633 seeks to empower the �DOF] by allowing them to attach
consequences for noncompliance. When an administering entity
fails to implement the corrective action plan to the
satisfaction of the DOF by the deadline, this bill grants the
DOF the authority to order the administering entity to cease and
desist from the allocation of additional funds from bond sales.
This order shall remain in effect until the DOF is satisfied
that the administering entity has fully complied with the
corrective action plan."
Background . In June 2009, the LHC released a report, Bond
Spending: Expanding and Enhancing Oversight. The LHC studied
efforts to bolster accountability and transparency in bond
spending - particularly for the five bond measures enacted in
2006 - to determine whether they were adequate. The report's
first recommendation was that "the Legislature and state
government entities administering bond programs must improve
oversight to ensure bond money is spent efficiently and
effectively and as voters intended." The report also revealed
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that there are "no hard sanctions for organizations that misuse
bond money. Rather than a verbal slap on the wrist, the
possibility of incurring a financial penalty might deter
organizations from mishandling the money."
According to the DOF's Office of State Audits and Evaluation
(OSAE), OASE will review an agency or department's bond
operations, including bond amounts claimed and expended. If
OASE has concerns with the bond expenditure process, OASE will
prepare and submit a draft report with recommendations to the
agency that oversees the department that is the subject of an
audit, and OASE may request the agency to prepare a corrective
action plan to address the recommendations. DOF, itself, does
not prescribe a corrective action plan. Once the agency
receives the draft report, it has 60 days to submit a written
response and confirm or refute factual information. If the
agency disagrees with the findings in the draft report, it can
also request a third-party opinion from the Attorney General
(AG) on whether the agency is compliant with relevant public
bond acts.
Once OASE receives the agency's written response, it will
evaluate the response, and prepare a final report. The final
report becomes officially public and will include OASE's audit
findings and recommendations, the agency's written response,
OASE's evaluation of the written response, and OASE's request to
the agency to prepare a corrective action plan. According to
the OASE, the majority of agencies are compliant with report
recommendations and egregious actions are rare. If OASE and an
agency disagree, an AG opinion agreeing with an agency on the
interpretation of the bond act will generally satisfy OASE.
Since OASE only issues recommendations to the agency and does
not prescribe corrective actions, it will submit information
that it feels is compelling to the DOF budget office, and the
Legislature can take action in the Budget Act. OASE does not
have an appeals process because it does not issue actions, only
recommendations, and leaves it to the agency's discretion and
authority as an oversight entity to recover funds misspent by a
department or bond fund recipient. If a department or grantee
has misused funds, the oversight agency can request the
recipient to return those funds or sue for recovery. In the
event the agency misspends funds or is complicit with
unauthorized bond fund use, OASE can submit information to the
DOF budget office, as described above.
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This bill would allow the DOF to cease and desist in the
allocation of funds from future bond sales if an agency does not
comply with a correction action plan within 60 days, as an
alternative to going through the legislative budget process.
Support . According to the LHC, "The LHC supports this measure
based on findings and recommendations in its report, Bond
Spending: Expanding and Enhancing Oversight (June 2009). In
this report, the LHC reviewed reports by the State Controller's
Office (SCO) and audits by the DOF that revealed certain
organizations had misspent GO bond money. The LHC found that
when an oversight entity found misspending, there were no
sanctions for organizations that misuse bond money. In public
hearing testimony, the LHC was told there are no statutes that
allow state agencies to impose penalties."
According to the California Taxpayers Association, "During the
last decade, GO bonds have grown increasingly popular as a
mechanism for financing large public infrastructure projects.
Concerns regarding oversight of bond fund expenditures prompted
former Governor Schwarzenegger to issue an executive order in
2007 requiring audits of state agency bond fund spending. Five
years later, the state auditor reported that, in the case on the
bond revenues from the 2006 Strategic Growth Plan, only a small
number of audits have been completed.
"GO bonds are supported by tax revenues and approved by the
voters for specific purposes. Given the current demand for
limited state funds, this bill would implement sanctions against
non-compliant state agencies to help ensure that moneys
entrusted to the state by the voters are spent effectively, and
consistent with the purposes for which they were approved."
Opposition . According to The Nature Conservancy, "There are
existing mechanisms to ensure transparency in bond expenditures,
including legislative oversight, audits by the DOF and SCO,
annual and final reports by departments receiving bond funds,
the state's bond accountability Web site, public hearings, and
competitive grant process on specific program expenditures. In
addition, the State Auditor has the authority to conduct audits
of bond expenditures when requested to do so by the Legislature.
"�This bill] gives too much authority to the DOF by authorizing
DOF, based on audit findings without standards, to free bond
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dollars at many agencies with little proof or reason and for an
undefined length of time. Some of the audit teams'
recommendations are contrary to the intent of the bill; and
audit teams have issue contradictory recommendations to
agencies, making it difficult to comply with such
recommendations."
According to the Los Angeles Unified School District, "This
proposal puts significant power and control in the hands of a
single entity, as is the case with the State Allocation Board
(SAB). The SAB consists of six legislative members, a
Governor's appointee, and three state agencies, including the
DOG, who chairs the SAB. The role and purpose of the SAB is to
develop policies and or procedures for the administration of the
School Facility Program to allocate state authorized bond funds.
SB 633 would significantly increase the power of the DOF and
restricts the ability of the remaining SAB members to develop or
support policies or procedures opposed by the DOF."
REGISTERED SUPPORT / OPPOSITION :
Support
Association of California Water Agencies
California Chamber of Commerce
California Taxpayers Association
Little Hoover Commission
Opposition
Amigos de los Rios
Audubon California
California Releaf
California Urban Forests Council
Coalition for Adequate School Housing
Los Angeles Unified School District
The Nature Conservancy
The Trust for Public Land
Analysis Prepared by : Joanna Gin / B.,P. & C.P. / (916)
319-3301
SB 633
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