SENATE BILL REPORT

SB 6245

BYSenators McDonald, Gaspard, Zimmerman, Lee and Rasmussen; by request of State Treasurer

Revising provisions relating to investment of bond proceeds.

Senate Committee on Ways & Means

Senate Hearing Date(s):January 20, 1988

Majority Report:  Do pass.

      Signed by Senators McDonald, Chairman; Cantu, Deccio, Gaspard, Hayner, Johnson, Moore, Newhouse, Saling, Smith, Talmadge, Williams, Zimmerman.

Senate Staff:Gary Benson (786-7715)

                  February 11, 1988

AS PASSED SENATE, FEBRUARY 10, 1988

BACKGROUND:

The 1986 federal Tax Reform Act changed several federal laws regarding the issuance of tax exempt bonds by state and local governments.  Prior to the 1986 changes, revenues raised by the sale of tax exempt bonds needed to be 80 percent spent within three years of the bond sale.  With the new law, the state must now spend the gross proceeds (bond proceeds plus earnings on the interim investment of the proceeds) within six months of the issuance of the bonds.  If the state is unable to do this, it must rebate the difference (arbitrage) between the interest rate at which the bonds were sold and the interest rate at which the bond proceeds were invested by the state.  This rebate must occur within five years of the issue date of the bonds.  The penalty for noncompliance is to make the bonds taxable retroactive to their issue date.

SUMMARY:

An "excess earnings account" is created in the state treasury.  The State Treasurer is to transfer to this account arbitrage earnings on bond proceeds.  Subject to appropriation, these earnings are to be remitted to the U.S. Treasury.

Appropriation:    none

Revenue:    none

Fiscal Note:      none requested

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

Senate Committee - Testified: Tim Kerr, Deputy State Treasurer