SENATE BILL REPORT

HB 2312

BYRepresentatives H. Sommers, Schoon and Rasmussen; by request of State Treasurer

Expanding the public funds investment account.

House Committe on Capital Facilities & Finance

Senate Committee on Ways & Means

Senate Hearing Date(s):February 26, 1990

Majority Report:  Do pass as amended.

      Signed by Senators McDonald, Chairman; Craswell, Vice Chairman; Amondson, Bailey, Bauer, Bluechel, Cantu, Fleming, Gaspard, Johnson, Lee, Newhouse, Saling, Smith.

Senate Staff:Steve Jones (786-7715)

                  March 2, 1990

AS REPORTED BY COMMITTEE ON WAYS & MEANS,  FEBRUARY 26, 1990

BACKGROUND:

The 1986 federal Tax Reform Act placed restrictions on state and local governments' ability to earn arbitrage on tax exempt borrowing.  One of the restrictions required state and local governments to expend the gross proceeds of any bond issue within six months of the date of issue.  Gross proceeds include the proceeds from the bond sale plus any interest earnings.

Washington laws on the investment of bond proceeds run counter to the federal tax law in two ways.  First, expending the "gross proceeds" of a bond sale for any given project is not possible.  The interest earnings on some bond funds remain in the fund, while interest earnings on other funds are deposited into the state general fund.  Interest earnings deposited in the general fund are not expended for the project and are therefore subject to penalty. Second, the investment of bond funds are commingled with other funds in the treasury for efficiency reasons and the earnings are credited to the respective funds once each year.  This annual distribution of interest earnings may not permit the earnings portion of gross proceeds to be spent within the federally specified time frame.

One solution to this dilemma would be to deposit state bond proceeds in the local government investment pool.  This will enable the State Treasurer to create separate accounts for each bond issue, monitor the investment earnings, and apply the earnings to capital projects.  Funds in the investment pool retain all their investment earnings.  To the extent general fund revenues are lowered by the interest income distribution, the loss would be partially offset by the need for fewer bonds that would eventually be paid from the general fund.  The lower revenue would also be mitigated by avoiding interest rebates and other federal tax code compliance costs.

SUMMARY:

State bond proceeds or other forms of indebtedness, including lease payments, may be invested in the public funds investment account when the investments are made to comply with the Internal Revenue Code of 1986.  The Washington State Housing Finance Commission, Washington Health Care Facilities Authority, and the Washington Higher Education Facilities Authority may invest their money in the public funds investment account.  All interest earnings of the public funds investment account will be retained in the account and exempt from deposit requirements to the general fund.

Appropriation:    none

Revenue:    none

Fiscal Note:      available

SUMMARY OF PROPOSED SENATE AMENDMENT:

References to the Housing Finance Commission, Health Care Facilities Authority, and Higher Education Facilities Authority are deleted.

Senate Committee - Testified: Tim Kerr, Deputy State Treasurer