Increases the limit which may be invested in any one company or agency of the federal government which issues certain bonds, notes or other evidences of indebtedness

Section 1 would amend subdivisions 3-a, 18 and 19 of section 98 of the State Finance Law to increase from $250 million to $500 million the maximum investment that the Comptroller may hold in (i) the debt of a single federal agency which receives the highest rating of all independent rating agencies that rate its obligations; (ii) investments of a certain defined corporation; and (iii) investments in banker's acceptance of anyone bank or trust company.

Section 2 would amend subdivision a of section 423 of the Retirement and Social Security Law to allow the comptroller to hold investments in the name of the common retirement fund in addition to his or her name as trustee of the fund.

Section 3 would amend paragraph (a) of subdivision 2 of section 56 of the State Finance Law to provide that when the State issues fixed rate bonds to refund variable rate bonds, the determinations as to whether there is a present value savings or an actual savings in any year shall be made assuming that interest will be paid on the variable rate bonds being refunded at the maximum rate permissible under the variable rate documents.

Section 4 would remove from paragraph (a) of subdivision 4 of section 57 of the State Finance Law the current limitations on the amount of premium that the State can receive on its sale of bonds, and section 5 would make a similar amendment to paragraph (a) of subdivision 4 of section 60 of the State Finance Law with respect to bonds issued for housing and urban renewal purposes.

Section 6 of the bill would amend section 69-c of the State Finance Law governing public authorities issuing State-supported debt to clarify that the new provisions assuming present value savings on variable to fixed rate refundings would also apply to the determination of whether there is a savings in every year. Section 7 of the bill would remove the sunset on certain other provisions relating to the refunding of variable rate debt by public authorities that issue State-supported debt.

Section 8 of the bill would amend section 98-a of the State Finance Law to provide that (a) the Comptroller can invest monies in the States short-term investment pool ("STIP") in public authority obligations in which he is authorized to invest State moneys pursuant to Section 98 or the State Finance Law and to authorize the Comptroller to invest up to 5% of the proceeds of the short-term investment pool in obligations of the State, local governments and certain public authorities that have a maturity in excess of 12 years.

Sections 9 and 10 of this bill would amend subparagraph (a) of subdivision 2 of paragraph b of section 90.10 of the Local Finance Law to make amendments relating to local government refundings similar to those made for the State in section 6 of this act.

Section 11 of this bill would amend subdivision 5 of section 3234 of the public authorities law to establish the majority of directors present and voting in favor of approving a resolution authorizing the issuance of bonds or notes or any supplemental or amendatory resolution by the New York Local Government Assistance Corporation shall include the Director of the Budget, the Comptroller and the chairperson of the New York Local Government Assistance Corporation.

Section 12 of the bill would amend subdivision 1 of section 2976 of the public authorities law to provide that refundings of variable rate debt, either with other variable rate debt or with fixed rate debt, will not be subject to the to the State's bond issuance charge.

Section 13 of this bill provides for an immediate effective date.

Justification

The following issues are dealt with by this legislation:

1) In the late 1980's, legislation was enacted that expanded the list of investments that the Comptroller may invest in for the State's Short Term Investment Pool (STIP). At that time the maximum balance in STIP was under $5 billion and the limit for each investment was set at $250 million which represented approximately 5% of the total pool. Since that time the STIP balance has more than tripled, at times exceeding $16 billion, while the limits have remained unchanged. At current levels, the investment limits are met very quickly resulting in a large portion of STIP being invested in lower yielding Treasury bills. Increasing the limits to $500 million (which would be less than 5% of the total portfolio) will allow STIP to earn additional investment income. In these times of impending budget gaps over the next few years, STIP could potentially earn an additional $15 million yearly due to the difference in spreads between Treasury bills and those investments that currently are limited to $250 million.

2) RSSL 423 requires that the Comptroller hold the assets of the CRF in his own name. For some time public equity and fixed income have been registering assets in the name of the New York State Common Retirement Fund, due to issues with how Treasury securities can be held. We are now having a similar problem with reregistering the hedge funds; some administrators won't register in the name of the Comptroller as Trustee, and we either have to register in the name of the CRF or will have to reregister when the Comptroller changes.

3) There is currently significant turmoil in the variable rate municipal bond market resulting from concerns about the liquidity of auction rate securities and the downgrade and potential for further downgrades of municipal bond insurers. Many auction rate securities are not finding purchasers even at maximum interest rates, thus resulting in failed auctions. Interest rates on those auction rate bonds that can be resold and on variable rate demand obligations insured by downgraded insurers have increased significantly. One way of removing the uncertainty of interest rate fluctuations in the variable rate market is to refund variable rate bonds with fixed rate bonds. While such refundings automatically reduce uncertainty, it is sometimes difficult to meet present value and annual savings requirements because it is hard to predict whether high interest rates will continue in the future. This bill would allow certain State and local issuers to assume that interest would be paid at the maximum rate permitted under variable rate documents when variable rate debt is refunded with fixed rate debt. While this assumes the worst case scenario for the variable debt, it allows issuers to remove the vagaries of the variable rate market. They would no longer be dependant on either auctions or the ratings of insurers or liquidity providers.

Local governments and public authorities can issue their debt at a discount or at a premium of any amount. Only State general obligation bonds are limited in the amount of premium that can be received. Currently it is often more cost effective to raise the same amount of money with premium bonds than it is with par bonds or discount bonds. There is no reason why the State should be precluded from achieving the best overall interest cost on its debt. Removing the premium limitations will make refunding existing variable rate debt more cost effective and will give the State the same options already available to public authorities and local governments.

Currently, if variable rate debt is remarketed under existing bond documents no bond issuance charge is collected. However, if the same result is achieved through a refunding, the bond issuance charge is collected. Interest rates on many existing variable rate bond issues are high because the bonds are insured by bond insurers that have been downgraded or are at risk of being downgraded. In many cases the only way to timely remove the existing insurer from the bonds is by refunding them. Yet the bond issuance charge makes it significantly more expensive to refund the bonds. Issuers should be encouraged to take whatever actions are necessary to reduce bon-owing costs resulting from the current variable rate tax-exempt bond market turmoil, and removing the bond issuance charge will serve this end.

The Comptroller is currently authorized to invest monies in STIP in obligations of the State, local governments and certain public authorities the securities of which, by virtue of their enabling legislation, may be held by any officer who is authorized to invest in state obligations. The securities of certain other public authorities are eligible investments for other monies held by the Comptroller pursuant to section 98 of the State Finance Law, but not for STIP which is invested pursuant to section 98-a By making securities of those public authorities specifically enumerated in section 98 eligible investments for STIP monies, these obligations would be treated the same as those of other public authorities the Comptroller is authorized to invest in. This would allow the Comptroller to invest monies in STIP in the variable rate securities of these authorities at a time when interest rates are unstable.

Additionally, monies in STIP may only be invested in securities maturing or redeemable at the option of the holder within 12 years of the investment date. While this provision authorizes STIP to invest in variable rate demand bonds which have a put feature, it would not authorize it to invest in auction rate securities that require investors to continue to hold bonds if another purchaser cannot be found. By allowing up to 5% of the moneys in STIP to be invested in securities of the State, local governments or certain public authorities with a maturity longer than 12 years, this bill would make auction rate securities of these entities eligible for investment of STIP monies. This could help provide liquidity for these auction rate securities.