HOUSE BILL REPORT

HB 1349

BYRepresentatives Grimm, Holland, Locke, H. Sommers, Silver, Bristow, R. King, Sayan and McLean;by request of State Treasurer

Revising provisions relating to investment of bond proceeds.

House Committe on Ways & Means

Majority Report:  Do pass.  (30)

      Signed by Representatives Grimm, Chair; Bristow, Vice Chair; Appelwick, Basich, Belcher, Braddock, Brekke, Brough, Butterfield, Dellwo, Ebersole, Fuhrman, Grant, Hine, Holland, Locke, McLean, Nealey, Peery, Rust, Sayan, Schoon, Silver, H. Sommers, Spanel, Sprenkle, Taylor, Valle, Wang and Winsley.

House Staff:Bill Robinson (786-7136)

AS REPORTED BY COMMITTEE ON WAYS & MEANS JANUARY 25, 1988

BACKGROUND:

The Federal Tax Reform Act of 1986 limited the amount of arbitrage earnings state and other municipalities may receive from bond proceeds. Arbitrage is the "profit" from investing bond proceeds at a higher interest rate than the interest rate (yield) paid on the bonds. The new tax code requires the state to expend the gross bond proceeds (bond proceeds plus any interest income) within six months of the issuance of the bonds. If the state is unable to expend the bond funds within the six month period, the state must rebate any arbitrage earning to the Federal Government within five years of the issuance of the bonds. The penalty for non-compliance is to make the bond issue taxable retroactive to the issuance date.

In order to better identify and account for any excess arbitrage earnings, the State Treasurer is requesting a separate account in the state treasury to deposit any excess arbitrage earnings owed to the Federal Government.

SUMMARY:

House Bill 1349 creates a separate account within the state treasury titled the excess earnings account. The State Treasurer shall transfer into the excess earnings account any money owed to the federal government as a result section 148 of the internal revenue code.  Payments from the account to the federal government require a legislative appropriation. The bill also includes an emergency clause.

Fiscal Note:      Requested January 15, 1988.

Effective Date:The bill contains an emergency clause and takes effect immediately.

House Committee ‑ Testified For:    Tim Kerr, State Treasurer's Office.

House Committee - Testified Against:      None Presented.

House Committee - Testimony For:    Described the effect of the 1986 Federal Tax Reform Act on the state's ability to earn arbitrage on state land issues and the need for the separate account.

House Committee - Testimony Against:      None Presented.