Legislative Analyst's Office

Analysis of the 2002-03 Budget Bill

State Treasurer (0950)

The State Treasurer has a number of responsibilities related to the management of the state's financial assets. These responsibilities include:

The Governor's budget proposes expenditures totaling $26 million for the Treasurer's office in 2002-03, which represents a decrease of 17 percent from current-year expenditures. The request includes $12 million from the General Fund, a 28 percent decrease from 2001-02. This decrease is primarily related to reduced expenditures for the second phase of the office's debt management system.

Added Positions For Tobacco Securitization Not Justified

We recommend the Legislature delete $220,000 because additional positions are not needed to implement and manage the administration's proposed Tobacco Securitization Bond Program. (Reduce Item 0950-001-0001 by $220,000.)

Background. The Governor's budget includes $140,000 in the current year and $220,000 in the budget year for two new permanent positions to implement and manage the Tobacco Securitization Bond Program. This program is being proposed by the Governor to raise $2.4 billion in cash to help balance the General Fund budget (for a detailed discussion of this proposal, see Securitization of Tobacco Settlement Revenues in the Health and Social Services chapter of this Analysis). We understand that the administration will be seeking statutory authorization for this program and the $140,000 in current-year funding in a separate bill. The Treasurer's office asserts that these permanent positions are needed because of the complex nature of the tobacco securitization bond sales and the ongoing need to manage variable rate debt that may be sold under the program.

Additional Positions Not Merited. We agree that the sale of bonds backed by revenues from the tobacco settlement will be a complex undertaking, involving a variety of legal and financial issues not normally associated with bond sales. However, we would expect that the great majority of these tasks will be handled through contracts with firms from the Treasurer's existing pool of financial advisors, bond counsel, and underwriters many of which have experience with issuing tobacco securitization bonds. These expenses are normally paid for from the bond proceeds.

Furthermore, as a practical matter, it is highly unlikely that internal staff could be hired and "brought up to speed" in time to assist in the issuance of the tobacco securitization bonds, given the accelerated schedule anticipated for their sale. As an example, we would note that prior to the implementation of the hiring freeze, the Treasurer had filled only one of the seven positions authorized in 2001-02 for implementation of the electricity bond sale and the office's variable rate bond program.

Regarding the need for ongoing positions associated with the tobacco bond program, the main justification offered by the office is increased workload associated with management of variable rate debt. Based on our discussions with local issuers of tobacco settlement bonds, it is unclear whether variable rate bonds could be used for this type of issue, given the uncertainties that variable interest rates would add to calculations involving annual payments and reserve requirements needed to secure tobacco-related bonds. Even if variable rate debt were issued, however, we believe that the added ongoing workload could be easily accommodated within the office's existing budget, given that four new permanent positions were authorized this year for management of variable rate debt.

Analyst's Recommendation. Given the above, we recommend that the Legislature deny the proposal for additional staff relating to tobacco securitization bonds for a savings of $220,000 in the budget year.

Return to General Government Table of Contents, 2002-03 Budget Analysis