BILL ANALYSIS                                                                                                                                                                                                    



                                        
                       SENATE LOCAL GOVERNMENT COMMITTEE
                            Senator Dave Cox, Chair


          BILL NO:  SB 1344                    HEARING:  4/7/10
          AUTHOR:  Kehoe                       FISCAL:  No
          VERSION:  4/5/10                     CONSULTANT:   
          Weinberger
          
                          INVESTMENT OF SURPLUS FUNDS

                           Background and Existing Law  

          Since 1913, state law has authorized local officials to  
          invest a portion of their temporarily idle funds in a  
          variety of financial instruments.  Originally, state law  
          limited the instruments to government bonds, but over time  
          the laws governing local agency investments have been  
          amended to keep pace with changing investment opportunities  
          and current market offerings.  

          California law allows local officials to deposit money in  
          state or national banks, savings associations, federal  
          associations, credit unions, or federally insured  
          industrial loan companies in the State of California.   
          These public deposits, which include funds placed into  
          certificates of deposit (CDs), are subject to restrictions,  
          including a requirement that deposits must be insured by  
          the Federal Deposit Insurance Corporation (FDIC) or, to the  
          extent not insured, collateralized with certain types of  
          securities in specified amounts.

          FDIC insurance usually covers only $100,000 per depositor  
          per institution.  As a result, to secure large public  
          deposits, depository institutions must hold significant  
          amounts of collateral.  

          In 2006, the Legislature authorized local agencies to  
          invest a portion of their surplus funds in certificates of  
          deposit issued through a private sector deposit placement  
          service (AB 2011, Vargas, 2006).  A deposit placement  
          service splits the funds deposited at a single financial  
          institution into less than $100,000 increments and trades  
          deposits through a network of participating institutions.   
          Network members provide simultaneous reciprocal deposits on  
          a dollar-for-dollar basis, so that the equivalent of the  
          original deposit comes back to the bank that received the  
          original deposit.  The deposits are in increments of less  




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          than $100,000 to ensure that both the principal and  
          interest are eligible for full FDIC insurance, thereby  
          eliminating the need for collateralization.  

          AB 2011 included a number of restrictions, including:

           No more than 30% of the agency's surplus funds can be  
            invested in any combination of certificates of deposit  
            issued through a private sector deposit placement service  
            and negotiated certificates of deposit.

           Public funds must be invested in a deposit placement  
            service through an "originating bank," which must be a  
            nationally or state chartered bank or savings and loan  
            association in California that is a member of a placement  
            service.

           The originating bank must submit the funds for placement  
            as CDs issued by one or more members of the placement  
            service located in the United States, for the local  
            agency's account.

           The full amount of the principal and the interest that  
            may accrue during the maximum term of each CD that is  
            issued through the placement service must be insured by  
            the FDIC.

           The originating bank must serve as a custodian for each  
            CD that is issued through the placement service for the  
            local agency's account.

           At the same time that the local agency's funds are  
            deposited and certificates of deposit are issued, the  
            originating bank must receive, from the other members of  
            the placement service, reciprocal deposits that are equal  
            to, or greater than, the full amount of the principal  
            that the local agency initially deposited through the  
            originating bank.

          When AB 2011 became law, only one national network, the  
          Certificate of Deposit Account Registry Service (CDARS)  
          established by Promontory Interfinancial Network, LLC,  
          offered a qualifying CD placement service.  AB 2011  
          declared that it was not intended to restrict competition  
          among private sector entities that provide CD placement  
          services.  However, CDARS is still the only such CD  





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          placement network that exists.  Since 2006, 55 community  
          banks in California have invested over $2.2 billion of  
          local agency deposits from counties, cities, special  
          districts, and other agencies through the CDARS network.   
          The statutes authorizing the use of CD placement services  
          sunset on January 1, 2012.


                                   Proposed Law  

          Senate Bill 1344 deletes the January 1, 2012 sunset date on  
          the statutes authorizing local agencies to invest in  
          certificates of deposit at a commercial bank, savings bank,  
          savings and loan association, or credit union that uses a  
          private sector entity that assists in the placement of  
          certificates of deposit, making the statutes permanent.

          SB 1344 provides that only an agency which has authority  
          under another provision of law to invest funds may invest  
          surplus funds in certificates of deposit at a commercial  
          bank, savings bank, savings and loan association, or credit  
          union that uses a private sector entity that assists in the  
          placement of certificates of deposit. 

                                     Comments  

          1.   Win, win  .  Statutory collateralization requirements  
          limit small community banks' capacity to accept large  
          public deposits.  Many local agencies' treasurers want to  
          be able to make deposits with community banks, but don't  
          want the administrative and monitoring burdens of  
          maintaining multiple $100,000 deposits at separate  
          institutions to ensure FDIC insurance coverage.   
          Certificate of deposit placement services address both of  
          these concerns.  By eliminating the sunset clause on the  
          statutory authorization to use certificate of deposit  
          placement service, SB 1344 allows local officials to  
          continue investing funds in this useful financial  
          instrument that benefits public agencies and local  
          communities.
           
           2.   Let's be clear  .  SB 1344 clarifies that the statutes  
          authorizing investments that use certificate of deposit  
          placement services do not grant investment authority to  
          agencies that did not previously have such authority under  
          another statute.  This provision responds to a recent  





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          Attorney General's opinion which found that when a county  
          treasurer serves as treasurer of a fire protection district  
          that has not appointed its own treasurer, that district may  
          invest its surplus funds outside of the county treasury  
          without the county treasurer's approval.  The decision  
          cited the statute enacted by the 2006 Vargas bill to  
          support this conclusion.
           
           3.   Double-referral  .  Because SB 1344 affects local  
          governments' deposits of surplus funds at banks, savings  
          and loans, and credit unions the Senate Rules Committee has  
          ordered a double-referral of the bill --- first to the  
          Senate Local Government Committee which has policy  
          jurisdiction over the statutes governing local agencies'  
          investment, and then to the Senate Banking, Finance, and  
          Insurance Committee, which has jurisdiction over banking  
          bills.  
           

                        Support and Opposition  (4/1/10)

           Support  :  California Independent Bankers, California  
          Bankers Association, California Municipal Treasurers  
          Association, City of Santa Rosa.

           Opposition  :  Unknown.