Chapter 11Public Financing

Section § 5900

Explanation

This law highlights the importance of bonds for California's state and local governments to finance public projects. It explains that interest on these bonds is usually tax-free at the federal level, which makes them cheaper and easier to sell. However, new federal tax laws could limit which bonds can be issued with tax-free interest. This might force governments to issue bonds with taxable interest, which have different conditions and market demands. The law notes that while governments can issue these taxable bonds, they might not have clear authority to do so in a cost-effective way.

The Legislature finds and declares all of the following:
(a)CA Government Code § 5900(a) The ability of the state and local governments to issue bonds is essential to their ability to finance public improvements and other projects and programs which serve important public purposes and have major social and economic consequences to the people of California.
(b)CA Government Code § 5900(b) The exemption of interest on these bonds from federal income taxation has been a major feature of this financing, reducing interest costs to the state and local government issuers and enhancing the marketability of the bonds.
(c)CA Government Code § 5900(c) Proposed federal tax legislation would substantially curtail the purposes for, and conditions under which, bonds may be issued with interest exempt from federal income taxation, with the result that in order to provide financing for those purposes or under those conditions state and local governments will in some instances be required, or elect, to issue bonds which bear interest not exempt from federal income taxation. These bonds often have different terms and structural features and are sold and traded in a different market than bonds the interest on which is exempt from federal income taxation.
(d)CA Government Code § 5900(d) The state and local governments have the power to issue bonds bearing interest subject to federal income taxation, but the state and local governments may lack clear authority to structure this financing for the applicable market or otherwise to achieve the lowest effective borrowing cost or terms most suitable to the state or local government issuer, the project, or the financing program.
bonds issuance public financing tax-exempt bonds federal income taxation interest exemption bond marketability federal tax legislation taxable interest bonds effective borrowing cost public improvements financing structural features of bonds
(Added by Stats. 1986, Ch. 1389, Sec. 1. Effective September 30, 1986.)

Section § 5901

Explanation

This law section intends for California's state and local governments to have the needed powers and flexibility to enter the market for bonds that are taxed under federal income rules. These bonds are a way for governments to raise money but come with federal tax implications.

It is the intent of the Legislature that state and local governments be provided with the powers and flexibility necessary and appropriate for them to access the market for bonds which bear interest subject to federal income taxation.
state governments local governments bond market access federal income tax interest-bearing bonds financial flexibility government financing tax implications bond issuance public funding taxable bonds fiscal policy municipal bonds legislature intent financial instruments
(Added by Stats. 1986, Ch. 1389, Sec. 1. Effective September 30, 1986.)

Section § 5902

Explanation

This section defines key terms used in the chapter related to government finance. It clarifies that 'bonds' refer to various forms of government debt and related financial instruments. The term 'legislative body' refers to the governing board of a state or local government. Lastly, 'state or local government' encompasses various state entities, cities, counties, and other public organizations.

As used in this chapter, the following words and terms shall have the following meanings, unless the context otherwise indicates or requires another or different meaning or intent:
(a)CA Government Code § 5902(a) “Bonds” means bonds, notes, warrants, bond anticipation notes, commercial paper, or other evidences of indebtedness, or lease, installment purchase, or other agreements or certificates of participation therein.
(b)CA Government Code § 5902(b) “Legislative body” means the governing body or board of the state or local government.
(c)CA Government Code § 5902(c) “State or local government” means the state, any department, agency, board, commission, or authority of the state, or any city, city and county, county, public district, public corporation, authority, agency, board, commission, or other public entity.
government finance bonds government debt financial instruments government agreements legislative body state entities local government public organizations governing board commercial paper indebtedness public district public corporation public entity
(Added by Stats. 1986, Ch. 1389, Sec. 1. Effective September 30, 1986.)

Section § 5903

Explanation

This section explains what a state or local government can do if they determine that the interest on certain bonds will be taxable under federal law at the time of issuance. They can set specific terms for how the bonds are issued, including where and in what form they will be paid, and what interest rates will apply. The bonds can be sold publicly or privately, and the government may create contracts to manage the financial aspects of bonds, such as interest rate swaps or futures. These financial strategies can only be used if the bonds are highly rated. Additionally, the government can use bond proceeds or other funds to secure the bonds or contracts made under this section, including investing in specified securities.

If, prior to issuing any bonds, the legislative body determines that the interest payable on the bonds to be issued by the state or local government will be subject to federal income taxation under the law in existence on the date of issuance or pending on the date of issuance with an effective date preceding the date of issuance, then notwithstanding any other provision of law, the ordinance, resolution, indenture, agreement, or other instrument providing for the issuance of the bonds may provide for any of the following:
(a)CA Government Code § 5903(a) The bonds shall be in the denominations, in the form, either bearer or registered, and payable at the place or places, either within or without the United States, at the time or times, in lawful money of the United States of America, with the maturity or maturities, with the terms of redemption, and at the interest rate or rates, either fixed or variable, including methods of determining the rate or rates if variable, as the legislative body shall determine.
(b)CA Government Code § 5903(b) The bonds shall be sold at public or private sale, in such manner and place or places, either within or without the United States, and at the price or prices, above or below par, as the legislative body shall determine.
(c)CA Government Code § 5903(c) In connection with, or incidental to, the sale and issuance of the bonds, the state or local government may offer, sell, and issue warrants for additional bonds, as well as issue additional bonds pursuant to these warrants on terms consistent with this chapter, and may enter into any contracts which the legislative body determines to be necessary or appropriate to place the obligation of the state or local government, as represented by the bonds and the contract or contracts, in whole or in part on the interest rate, cashflow, or other basis desired by the legislative body, including, without limitation, contracts commonly known as interest rate swap agreements, forward payment conversion agreements, futures, or contracts providing for payments based on levels of or changes in interest rates, or contracts to exchange cashflows or a series of payments, or contracts, including, without limitation, options, puts or calls to hedge payment, rate, spread, or similar exposure. These contracts or arrangements may also be entered into by state or local governments in connection with, or incidental to, entering into any agreement which secures bonds, including bonds issued by private entities. These contracts and arrangements shall be made upon the terms and conditions established by the legislative body, after giving due consideration for the creditworthiness of the counterparties, where applicable, including any rating by a nationally recognized rating agency or any other criteria as may be appropriate. In addition, these contracts and arrangements may be made only if the bonds are rated in one of the three highest rating categories by two nationally recognized rating agencies, and if there has been receipt, from any rating agency rating the bonds, of written evidence that the contract or agreement will not adversely affect the rating.
(d)CA Government Code § 5903(d) In connection with, or incidental to, the sale and issuance of the bonds, or entering into any of the contracts or arrangements referred to in subdivision (c), the state or local government may enter into credit enhancement or liquidity agreements, with payment, interest rate, security, default, remedy, and other terms and conditions as the legislative body shall determine.
(e)CA Government Code § 5903(e) Proceeds of the bonds and any moneys set aside or pledged to secure payment of the bonds, or any of the contracts entered into pursuant to subdivision (c), may be invested in securities or obligations described in the ordinance, resolution, indenture, agreement, or other instrument providing for the issuance of the bonds and may be pledged to and used to service any of the contracts or agreements entered into pursuant to this section.
bonds issuance taxable interest federal income taxation bearer bonds registered bonds public or private sale interest rate swap liquidity agreements credit enhancement investment securities payment security financial contracts variable interest rates derivatives bond rating requirements
(Amended by Stats. 2014, Ch. 201, Sec. 4. (SB 1462) Effective January 1, 2015.)

Section § 5903.5

Explanation

This law says that bonds will follow certain rules from Section 5903 if the interest on those bonds isn't taxed under federal law when issued. This is true even if other laws suggest otherwise. These rules apply if the bonds are issued by the same government for the same project within 45 days of similar bonds issued under Section 5903.

Section 5903 shall apply to any bonds the interest on which will not be subject to federal income taxation under the law in existence on the date of issuance or pending on the date of issuance with an effective date preceding the date of issuance, notwithstanding any other provision of law, if the bonds are issued by the same state or local government for the same project or purpose and within 45 days of the date of issuance of bonds described in Section 5903.
tax-exempt bonds federal income taxation bond issuance same government same project 45-day rule Section 5903 non-taxable interest state or local bonds federal tax law issuance date pending laws government projects bond regulations effective date
(Added by Stats. 1987, Ch. 845, Sec. 2. Effective September 21, 1987.)

Section § 5904

Explanation

This law allows the state or local government to take necessary steps and make agreements to ensure that bonds are registered or qualified for sale according to federal or state securities laws.

The state or a local government may take any actions, and enter into any agreements, necessary or appropriate to register or qualify the bonds described in Section 5903 for offer and sale under the federal or any state’s or nation’s securities laws and to comply with those laws.
bond registration securities compliance local government actions offer and sale of bonds bond qualification federal securities laws state securities laws local government agreements public bond offering legal compliance for bonds government bond registration securities regulations bond sale agreements public securities offerings registration of bonds
(Added by Stats. 1986, Ch. 1389, Sec. 1. Effective September 30, 1986.)

Section § 5905

Explanation

This law allows state or local governments in California to create or fully acquire corporations that are not banks. These corporations are meant to carry out financing programs that have been approved and deemed beneficial by the respective legislative bodies of the governments involved.

One or more state or local governments may cause to be formed, and may acquire all, but not less than all, of the voting stock in, one or more corporations, not chartered by a state or federal agency as a depository institution, but organized for the purpose of undertaking financing programs approved by each legislative body and found by each legislative body to be of benefit to the state or local government.
state governments local governments corporate formation voting stock acquisition non-depository corporations financing programs legislative approval government-benefit programs corporate ownership program organization California finance public sector corporations
(Added by Stats. 1986, Ch. 1389, Sec. 1. Effective September 30, 1986.)

Section § 5906

Explanation

This law states that bonds issued by state or local governments, and the people who buy them, are not subject to California's laws against charging excessively high interest rates (usury laws). This exemption also applies to any financial agreements involving these bonds, like loans or leases, ensuring that these transactions can occur without being limited by usury laws.

Any bonds issued by a state or local government pursuant to this chapter, or otherwise, and the purchasers or holders thereof, shall be exempt from the usury provisions of Section 1 of Article XV of the California Constitution. Any loan, lease, installment sale, investment, forbearance of money, or other agreement between a user of the proceeds of or other moneys pledged to bonds and the issuer of the bonds, or entered into by or on behalf of the issuer of the bonds that provides for the use of the proceeds of the bonds or other moneys pledged to or securing the bonds, and the issuer of the bonds or any person acting on its behalf in connection with the foregoing shall be exempt from the usury provisions of Section 1 of Article XV of the California Constitution. This section creates and authorizes exempted classes of transactions and persons pursuant to Section 1 of Article XV of the California Constitution.
state bonds local government bonds usury exemption interest rate limits California Constitution Article XV bond agreements financial transactions bond proceeds exempt transactions bond purchasers bond holders section 1 exemption legal interest rates investment agreements money forbearance
(Amended by Stats. 2006, Ch. 538, Sec. 231. Effective January 1, 2007.)

Section § 5907

Explanation

This law states that if there are bonds that were approved by voters before this law came into effect, they won't be affected by this new law if it conflicts with what voters originally agreed to when they approved these bonds.

This chapter shall not affect bonds approved by the voters of the state or local government issuer prior to the effective date of this chapter, to the extent that this chapter is inconsistent with the measure authorizing those bonds.
voter-approved bonds state bonds local government bonds inconsistency effective date bond measures pre-existing bonds voter authorization bond issuer existing obligations
(Added by Stats. 1986, Ch. 1389, Sec. 1. Effective September 30, 1986.)

Section § 5908

Explanation

This law allows for entering into all necessary contracts, including those for professional services, to carry out the powers granted by this chapter.

The authority conferred by this chapter includes the authority to enter into any and all contracts incident to the exercise of the authority conferred by this chapter, including, without limitation, contracts for the performance of professional services.
contract authority professional services service contracts contractual agreements government contracting contract execution contract performance contractual rights government authority contract administration
(Added by Stats. 1986, Ch. 1389, Sec. 1. Effective September 30, 1986.)

Section § 5909

Explanation

This law section states that if there's a conflict between the rules in this chapter and any other existing laws or future special acts, the rules in this chapter take priority.

To the extent that the provisions of this chapter are inconsistent with any other provision of general law or special act or any part thereof, now or hereafter enacted, the provisions of this chapter shall be controlling.
conflict of laws chapter priority inconsistent provisions special act controlling provisions legal precedence general law hierarchy of laws statutory conflict law supremacy legal inconsistency
(Added by Stats. 1987, Ch. 845, Sec. 4. Effective September 21, 1987.)