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 SB 1344 -- 4/5/10 -- Page 2 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 SB 1344 -- 4/5/10 -- Page 3 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 SB 1344 -- 4/5/10 -- Page 4 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.