ALAMEDA, Calif. — The California attorney general’s office appears to have junked a proposal by Democrats to raise $8 billion by securitizing revenue from bottle and can deposits.
The Assembly proposal arguably violates Proposition 58, a prohibition on long-term borrowing to finance deficits voters approved in 2004,
Democrats had proposed borrowing $8.7 billion from the California Beverage Recycling Fund, which would be applied to a “California Jobs Fund” they proposed to create as part of the budget.
The attorney general’s letter was released Thursday by Assembly Republicans, who oppose the proposal. Members of the GOP minority are needed to obtain the two-thirds majority required to pass a budget.
“The attorney general’s opinion confirms what we have said all along — the Assembly Democrats’ borrowing scheme is a lead zeppelin that’s not going to fly,” Martin Garrick, the Assembly Republican leader, said in a statement Thursday.
The five-page letter puts an interpretation of Proposition 58 on the record.
It was signed by Constance LeLouis, supervising deputy attorney general, for attorney general and Democratic nominee for governor Jerry Brown.
“We conclude that a court could reasonably determine that the proposed transaction violates Proposition 58,” she wrote. “Accordingly, we could not give an unqualified opinion approving the issuance of bonds based on this transaction.”
The letter notes that the securitization plan was modeled on previously enacted tobacco and tribal gaming securitizations, in which a future revenue stream is sold to a special purpose trust to finance the purchase of that revenue stream by issuing bonds.
The proceeds of the proposed securitization would be deposited into one new fund, and then loaned to another — never formally entering the general fund.
Despite the circuitous flow of funds, it remains possible a court may “focus instead on the fact that the state 'obtains money’ as a result of the securitization in the form of the proceeds of the sale of the revenue stream,” the letter said.
If a court concludes the net result of the securitization is to fund a year-end state budget deficit, it may disregard the form of the transaction and look solely to its substance, thereby determining that it violates Proposition 58, according to the letter.
“A court may be more likely to do so where the securitization does not appear to have any significant independent economic purpose or necessity,” the letter said. “In this case, the proposed transaction produces a disproportionate amount of funds relative to the short-term needs for the beverage recycling program.”
