Massachusetts legislators are considering whether to override Gov. Deval Patrick's veto of a capital gains tax bill that contains restrictions for independent authorities seeking to enter into swap agreements.
Lawmakers have not decided if they will take up the issue once the Senate and the House resume formal sessions in mid-September. Patrick vetoed the capital gains bill Friday. Legislators had "a limited" discussion of a potential override of the governor's veto during the weekend, said Wayne Weikel, spokesman for Rep. Charles Murphy, D-Burlington. Murphy chairs the House Ways and Means Committee.
The capital gains bill includes language that would require independent authorities in the state to gain gubernatorial approval before utilizing any derivatives. If enacted, it would add an additional step for agencies and government entities looking to use swaps.
Sen. Mark Montigny, D-New Bedford, crafted the amendment to help the state avoid future derivative problems such as the Massachusetts Turnpike Authority's five swaps with UBS Securities LLC.
Paul Lehnus, an aide to Montigny, said the senator is optimistic that the legislature will move to override Patrick's veto when it returns next month.
Lawmakers have until Dec. 31 to overturn the governor's decision, according to Weikel.
"The assumption we're operating under is that the legislature felt strongly about this and acted on it and that we can override the governor pretty much at will," Lehnus said. "And I think we're hoping that that's what will happen here."
The five floating-to-fixed-rate UBS swaps for a notional amount of $800 million now carry the state's general obligation pledge in order to help avoid having to make a termination payment to the bank. State officials are still working with UBS to cure a possible $67 million termination payment on a swap attached to senior bonds. Massachusetts has until Aug. 21 to resolve the issue.
MassPike at one point faced a potential $400 million termination payment on the five derivatives.
The capital gains tax bill would direct 50% of future increases in capital gains receipts to the state's rainy-day fund and reserve another 2% to help pay down other post-employment benefit liabilities.
The governor earlier this year proposed reserving a portion of increases in capital gains revenue during robust economic times to help the state during fiscal downturns. He said that language issues in the derivatives amendment, along with other factors, prompted his veto.
One issue is that the derivatives language casts a wide net over what would qualify as a derivative under the legislation and would therefore be subject to the state-level approval process.
"Derivative financial products shall mean financial instruments with values derived from, or based upon, the value of other assets or on the level of an interest-rate index including, but not limited to, a call option on a bond, an interest rate swaptions, caps, floors, collars, inverse floaters, auction rate securities or any other financial transaction of a similar nature," according to the bill.
The administration believes the broad classification of derivatives products would limit independent authorities unnecessarily, said Bob Bliss, spokesman for the Executive Office of Administration and Finance.
"The definition includes a call option on a bond, which suggests that any bonds subject to early prepayment, including fixed-rate bonds that have no association with the derivative financial product whatsoever, would be treated as a [derivative] for purposes of the legislation," Bliss said. "And as a result, virtually every debt issuance by any quasi-public entity or independent authority would be subject to the approval of the secretary of A&F and the governor, and in some instances the state treasurer."
In addition, Bliss said the amendment would compromise the legal and financial independence of authorities from the commonwealth, which could be viewed negatively by the rating agencies.