LOS ANGELES -- Gov. Pete Wilson this week vetoed legislation calling for the state's major pension funds to produce a report on the feasibility of providing credit enhancement for local government bonds.
The State Teachers' Retirement System and the Public Employees Retirement System "have the existing authority to conduct such a study and to provide credit enhancement programs," Wilson said in a veto message released Monday.
Accordingly, Wilson said, "This bill is unnecessary."
The veto ends a months-long effort by legislators to urge the pension systems to examine the idea.
As originally introduced, Assembly Bill 916 required the pension systems to establish credit enhancement programs as part of their investment strategy. The bill was later amended -- to ask for a study only -- after officials at the public employees system identified potential conflicts in guaranteeing bonds of local governments that also are clients of the system.
"If you're a local agency under contract with PERS to administer your pension program, you're issuing bonds using your own local agency's pension funds to secure them," said Betty Yee, a consultant for the Assembly Local Government Committee.
Officials at the public employees system feared the scenario could run afoul of Internal Revenue Service provisions prohibiting so-called self-dealing.
In his veto message, Wilson noted that the teachers system "has already begun the process of establishing a credit enhancement program for industrial development bonds."
The teachers system also concluded that conflict-of-interest problems could arise in guaranteeing school district bonds.
But the teachers system reasoned it could do some credit enhancement programs -- such as one for IDBs -- because "they don't impact school districts," according to Jennifer Morrill, director of legislation for the teachers system.
Other retirement systems have explored similar programs, and an Oregon pension fund last year insured a private conduit bond issue.
A.B. 916 grew out of California Debt Advisory Commission hearings late last year on the financial pinch facing local governments. The stress developed partly because the state shifted $3.7 billion of local property tax revenues to school purposes over the last two years.
Some local officials suggested the credit enhancement program could improve market access for weaker borrowers.
Questions have been raised, however, about whether certain local bonds carrying higher risks would meet prudent investment standards for the pension systems. Pension officials said, for example, that private bond insurers pass on certain bonds for good reason.
Wilson, in his veto message, said the teachers system "may issue a report" on its actual experience with the IDB enhancement program "as an example for general application."
Another state official familiar with A.B. 916 said the governor might be correct in saying the bill was unnecessary.
The official said, however, that the bill expressed the Legislature's desire for a report that the pension systems otherwise might not be inclined to do.
There is a perception that the pension systems "are lukewarm" about the concept, even if it might fill a void in the municipal market, the official said.
Mary Moore, senior editor of California Public Finance, a weekly newsletter of The Bond Buyer, contributed to this story.