BILL NUMBER: AB 2182 CHAPTERED
BILL TEXT
CHAPTER 162
FILED WITH SECRETARY OF STATE JULY 12, 2002
APPROVED BY GOVERNOR JULY 11, 2002
PASSED THE ASSEMBLY JULY 1, 2002
PASSED THE SENATE JUNE 27, 2002
AMENDED IN SENATE JUNE 13, 2002
AMENDED IN SENATE MAY 28, 2002
AMENDED IN ASSEMBLY APRIL 24, 2002
INTRODUCED BY Assembly Member John Campbell
FEBRUARY 20, 2002
An act to add and repeal Section 53601.7 of the Government Code,
relating to local government.
LEGISLATIVE COUNSEL'S DIGEST
AB 2182, John Campbell. Local agency investments.
Existing law prescribes the types of investments in which a local
agency generally may invest its funds for deposit, including United
States Treasury notes, bonds, bills, or certificates of indebtedness,
or those for which the faith and credit of the United States are
pledged for the payment of principal and interest.
This bill would provide, until January 1, 2007, that,
notwithstanding the above-described provisions, a county or city and
county may invest any portion of the funds that it deems wise or
expedient using prescribed criteria that authorize investments in
various securities, obligations, and other financial instruments,
including direct obligations of the United States Treasury or any
other obligation guaranteed as to principal and interest by the
United States government, bonds, notes, debentures, or other
obligations of, or securities issued by, any federal government
agency, instrumentality, or government-sponsored enterprise, and
state treasury notes, bonds, or registered state warrants.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 53601.7 is added to the Government Code, to
read:
53601.7. Notwithstanding the investment parameters of Sections
53601 and 53635, a local agency that is a county or a city and county
may invest any portion of the funds that it deems wise or expedient,
using the following criteria:
(a) No investment shall be made in any security, other than a
security underlying a repurchase or reverse purchase agreement, that,
at the time of purchase, has a term remaining to maturity in excess
of 397 days, and that would cause the dollar-weighted average
maturity of the funds in the investment pool to exceed 90 days.
(b) All corporate and depository institution investments shall
meet or exceed the following credit rating criteria at time of
purchase:
(1) Short-term debt shall be rated at least "A-1" by Standard &
Poor's Corporation, "P-1" by Moody's Investors Service, Inc., or "F-1"
by Fitch Ratings. If the issuer of short-term debt has also issued
long-term debt, this long-term debt rating shall be rated at least
"A," without regard to +/- or 1, 2, 3 modifiers, by Standard & Poor's
Corporation, Moody's Investors Service, Inc., or Fitch Ratings.
(2) Long-term debt shall be rated at least "A," without regard to
+/-or 1, 2, 3 modifiers, by Standard & Poor's Corporation, Moody's
Investors Service, Inc., or Fitch Ratings.
(c) No more than 5 percent of the total assets of the investments
held by a local agency may be invested in the securities of any one
issuer, except the obligations of the United States government,
United States government agencies, and United States
government-sponsored enterprises. No more than 10 percent may be
invested in any one mutual fund.
(d) Where this section specifies a percentage limitation for a
particular category of investment, that percentage is applicable only
at the date of purchase. A later increase or decrease in a
percentage resulting from a change in values or assets shall not
constitute a violation of that restriction. If subsequent to
purchase, securities are downgraded below the minimum acceptable
rating level, the securities shall be reviewed for possible sale
within a reasonable amount of time after the downgrade.
(e) Within the limitations set forth in this section, a local
agency electing to invest its funds pursuant to this section may
invest in the following securities:
(1) Direct obligations of the United States Treasury or any other
obligation guaranteed as to principal and interest by the United
States government.
(2) Bonds, notes, debentures, or any other obligations of, or
securities issued by, any federal government agency, instrumentality,
or government-sponsored enterprise.
(3) Registered state warrants or treasury notes or bonds of this
state, including bonds payable solely out of the revenues from a
revenue-producing property owned, controlled, or operated by the
state or by a department, board, agency, or other entity of the
state.
(4) Bonds, notes, warrants, or other indebtedness of the local
agency, or any local agency within this state, including bonds
payable solely out of the revenues from a revenue-producing property
owned, controlled, or operated by the local agency, or by a
department, board, agency, or authority of the local agency.
(5) Bankers Acceptance, otherwise known as bills of exchange or
time drafts drawn on and accepted by a commercial bank, primarily
used to finance international trade. Purchases of bankers
acceptances may not exceed 180 days to maturity.
(6) Short-term unsecured promissory notes issued by corporations
for maturities of 270 days or less. Eligible commercial paper is
further limited to the following:
(A) Issuing corporations that are organized and operating within
the United States, having total assets in excess of five hundred
million dollars ($500,000,000).
(B) Maturities for eligible commercial paper that may not exceed
270 days and may not represent more than 10 percent of the
outstanding paper of an issuing corporation.
(7) A certificate representing a deposit of funds at a commercial
bank for a specified period of time and for a specified return at
maturity. Eligible certificates of deposit shall be issued by a
nationally or state-chartered bank or a state or federal association,
as defined in Section 5102 of the Financial Code, or by a
state-licensed branch of a foreign bank. For purposes of this
subdivision, certificates of deposits shall not come within Article 2
(commencing with Section 53630), except that the amount so invested
shall be subject to the limitations of Section 53638. The
legislative body of a local agency and the treasurer or other
official of the local agency having legal custody of the money may
not invest local agency funds, or funds in the custody of the local
agency, in negotiable certificates of deposit issued by a state or
federal credit union if a member of the legislative body of the local
agency, or any person with investment decisionmaking authority in
the administrative office, manager's office, budget office,
auditor-controller's office, or treasurer's office of the local
agency also serves on the board of directors, or any committee
appointed by the board of directors, other credit committee or the
supervisory committee of the state or federal credit union issuing
the negotiable certificate of deposit.
(8) Repurchase agreements, reverse repurchase agreements, or
securities lending agreements of any securities authorized by this
section, if the agreements meet the requirements of this paragraph
and the delivery requirements specified in Section 53601.
Investments in repurchase agreements may be made, on any investment
authorized by this section, when the term of the agreement does not
exceed one year. The market value of the securities that underlay a
repurchase agreement shall be valued at 102 percent or greater of the
funds borrowed against those securities, and the value shall be
adjusted no less than quarterly. Because the market value of the
underlying securities is subject to daily market fluctuations, the
investments in repurchase agreements shall be in compliance with this
section if the value of the underlying securities is brought back to
102 percent no later than the next business day. Reverse repurchase
agreements may be utilized only when all of the following criteria
are met:
(A) The security being sold on reverse repurchase agreement or
securities lending agreement has been owned and fully paid for by the
local agency for a minimum of 30 days prior to the sale.
(B) The total of all reverse repurchase agreements on investments
owned by the local agency not purchased or committed to purchase does
not exceed 20 percent of the market value of the portfolio.
(C) The agreement does not exceed a term of 92 days, unless the
agreement includes a written codicil guaranteeing a minimum earning
or spread for the entire period between the sale of a security using
a reverse repurchase agreement and the final maturity date of the
same security.
(D) Funds obtained or funds within the pool of an equivalent
amount to that obtained from selling a security to a counterparty by
way of a reverse repurchase agreement or securities lending
agreement, may not be used to purchase another security with a
maturity longer than 92 days from the initial settlement date of the
reverse repurchase agreement or securities lending agreement, unless
the agreement includes a written codicil guaranteeing a minimum
earning or spread for the entire period between the sale of a
security using a reverse repurchase agreement or securities lending
agreement and the final maturity date of the same security.
(E) Investments in reverse repurchase agreements or similar
investments in which the local agency sells securities prior to
purchase with a simultaneous agreement to repurchase the security,
shall only be made with prior approval of the governing body of the
local agency and shall only be made with primary dealers of the
Federal Reserve Bank of New York or with a nationally or
state-chartered bank that has or has had a significant banking
relationship with a local agency.
"Securities," for purposes of this paragraph, means securities of
the same issuer, description, issue date, and maturity.
(9) All debt securities issued by a corporation or depository
institution with a remaining maturity of not more than 397 days,
including securities specified as "medium-term notes," as well as
other debt instruments originally issued with maturities longer than
397 days, but which, at time of purchase, have a final maturity of
397 days or less. Eligible medium-term notes shall be issued by
corporations organized and operating within the United States or by
depository institutions licensed by the United States or any state
and operating within the United States.
(10) (A) Shares of beneficial interest issued by diversified
management companies that invest in the securities and obligations
described in this subdivision and that comply with the investment
restrictions of this section. However, notwithstanding these
restrictions, a counterparty to a reverse repurchase agreement shall
not be required to be a primary dealer of the Federal Reserve Bank of
New York if the company's board of directors finds that the
counterparty presents a minimal risk of default. The value of the
securities underlying a repurchase agreement may be 100 percent of
the sales price if the securities are marked to market daily.
(B) Shares of beneficial interest issued by diversified management
companies that are money market funds registered with the Securities
and Exchange Commission under the federal Investment Company Act of
1940 (15 U.S.C. Sec. 80a-1 and following).
(C) All shares of beneficial interest described in this paragraph
shall have met either of the following criteria:
(i) Attained the highest ranking or the highest letter and
numerical rating provided by not less than two nationally recognized
statistical rating organizations.
(ii) Retained an investment adviser registered or exempt from
registration with the Securities and Exchange Commission and who has
not less than five years' experience investing in money market
instruments and with assets under management in excess of five
hundred million dollars ($500,000,000).
(11) Any mortgage passthrough security, collateralized mortgage
obligation, mortgage-backed or other pay-through bond, equipment
lease-backed certificate, consumer receivable passthrough
certificate, or consumer receivable-backed bond.
Securities eligible for investment under this paragraph shall be
issued by an issuer having an "A" or higher rating from the issuer's
debt as provided by a nationally recognized rating service and rated
in a rating category of "AA" or its equivalent or better by a
national recognized rating.
(12) Contracts issued by insurance companies that provide the
policyholder with the right to receive a fixed or variable rate of
interest and the full return of principal at the maturity date.
(13) Any investments that would qualify under SEC Rule 2a-7 of the
Investment Company Act of 1940 guidelines. These investments shall
also meet the limitations detailed in this section.
(f) For purposes of this section, all of the following definitions
shall apply:
(1) "Repurchase agreement" means a purchase of securities pursuant
to an agreement by which the counterparty seller will repurchase the
securities on or before a specified date and for a specified amount
and the counterparty will deliver the underlying securities to the
local agency by book entry, physical delivery, or by third-party
custodial agreement.
(2) "Significant banking relationship" means any of the following
activities of a bank:
(A) Involvement in the creation, sale, purchase, or retirement of
a local agency's bands, warrants, notes or other evidence of
indebtedness.
(B) Financing of a local agency's securities or funds as deposits.
(C) Acceptance of a local agency's securities or funds as
deposits.
(3) "Reverse repurchase agreement" means a sale of securities by
the local agency pursuant to an agreement by which the local agency
will repurchase the securities on or before a specified date and
includes other comparable agreements.
(4) "Securities lending agreement" means an agreement with a local
agency that agrees to transfer securities to a borrower who, in turn
agrees to provide collateral to the local agency. During the term
of the agreement, both the securities and the collateral are held by
a third party. At the conclusion of the agreement, the securities
are transferred back to the local agency in return for the
collateral.
(5) "Local agency" means a county or city and county.
(g) For purposes of this section, the base value of the local
agency's pool portfolio shall be that dollar amount obtained by
totaling all cash balances placed in the pool by all pool
participants, excluding any amounts obtained through selling
securities by way of reverse repurchase agreements, or other similar
borrowing methods.
(h) For purposes of this section, the spread is the difference
between the cost of funds obtained using the reverse repurchase
agreement and the earnings obtained on the reinvestment of the funds.
(i) This section shall remain in effect only until January 1,
2007, and as of that date is repealed, unless a later enacted
statute, that is enacted before January 1, 2007, deletes or extends
that date.