BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1344| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 1344 Author: Kehoe (D) Amended: 4/5/10 Vote: 21 SENATE LOCAL GOVERNMENT COMMITTEE : 5-0, 4/7/10 AYES: Cox, Aanestad, Kehoe, DeSaulnier, Price SENATE BANKING, FINANCE, AND INS. COMMITTEE : 9-0, 4/21/10 AYES: Calderon, Cogdill, Correa, Florez, Kehoe, Lowenthal, Padilla, Price, Runner NO VOTE RECORDED: Cox, Liu SUBJECT : Local agency investments SOURCE : California Independent Bankers DIGEST : This bill deletes the sunset date on a provision of law that allows local agencies to invest up to 30 percent of their surplus funds in certificates of deposit at depository institutions, in such a way that the full amount of each local agency deposit is federally-insured. ANALYSIS : Existing law: 1. Defines a local agency as a county, city, city and county, school district, community college district, public district, county board of education, county CONTINUED SB 1344 Page 2 superintendent of schools, or any public or municipal corporation (Section 53600 of the Government Code). 2. Authorizes local agencies that do not pool their money in deposits or investments with other local agencies with separate governing bodies, and that have money in their treasuries that is not required for their immediate needs, to invest any portion of the money they deem wise or expedient in selected investments specified in law, and places limitations on the percentage of a local agency's surplus that may be invested in some of those investments (Section 53601 of the Government Code). 3. Includes negotiable certificates of deposit (CDs) among allowable investments, provided they are issued by a state- or nationally-chartered depository institution, and the local agency's investment in the CDs does not exceed 30 percent of the agency's surplus (Section 53601 of the Government Code). 4. Until January 1, 2012, authorizes local agencies to invest up to 30 percent of their surplus funds in CDs at depository institutions that use a private sector entity, which assists in the placement of CDs, as long as the full amount of the principal and interest that may be accrued during the maximum term of each CD is insured at all times by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) (Sections 53601.8 and 53635.8 of the Government Code). Additional requirements are as follows: A. The depository institution which receives the funds from the local agency is called the "selected" depository institution. B. The selected depository institution is required to serve as a custodian for each CD that is issued with the placement service. C. At the same time the local agency's funds are deposited, and CDs are issued, the selected depository institution must receive deposits from SB 1344 Page 3 other depository institutions in an amount that is equal to or greater than the amount of principal that the local agency initially deposited through the selected depository institution for investment. This bill 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. This bill 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. Background The CD placement service that is at the heart of this bill works, because of FDIC insurance. The FDIC currently insures all depository accounts of the same person at the same depository institution, up to $250,000. There is no limit to the number of different institutions into which a person can deposit funds that are eligible for FDIC insurance; each depositor is eligible to obtain up to $250,000 in FDIC insurance at every different bank into which it deposits money. However, all of the accounts of the same depositor at the same bank, including all branch offices of the bank, are added together, to count toward the $250,000. Thus, if an insured bank has branch offices, a depositor cannot increase its insurance coverage by placing deposits at different branches of the same insured bank. Similarly, deposits held by the Internet division of an insured bank are lumped together with funds deposited with the "brick and mortar" branches of the bank for FDIC insurance purposes, even if the Internet division uses a different name. Under the provisions of AB 2011 (Vargas), Chapter 459, Statutes of 2006, (the bill whose sunset date this bill would eliminate), a local agency with more than $250,000 to SB 1344 Page 4 invest may go to a bank (the "selected" bank), which belongs to a CD placement service. At the request of the selected bank, the CD placement service splits up the local agency's deposit into chunks, each of which is valued at $250,000 or less. Each of these chunks is then parceled out to banks throughout the country, which are members of the placement service, and which issue CDs. In that way, the full amount of the local agency's deposit is FDIC-insured. One of the unique aspects of the CD placement service whose use is authorized by this bill is its reciprocity element. At the same time the local agency's funds are deposited with the selected bank, and then parceled out to member banks within the CD placement network in amounts of $250,000 or less, the selected bank must receive deposits from other members of the placement service, which are equal to, or greater than, the full amount of the principal the local agency initially deposited with the selected bank. Thus, the selected bank ends up with the same amount of money on deposit that it received from the local agency; however, the full value of the money is insured, because it is held in increments of $250,000 or less for depositors that originally deposited their money with other selected banks. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No SUPPORT : (Verified 4/22/10) California Independent Bankers (source) Borrego Springs Bank California Bankers Association California Credit Union League California Municipal Treasurers Association City of Santa Rosa Community Bank of the Bay Mission Valley Bank ARGUMENTS IN SUPPORT : This bill is sponsored by the California Independent Bankers (CIB), the same organization which sponsored AB 2011 (Vargas). CIB observes that AB 2011 gave California community banks an alternative to SB 1344 Page 5 collateralization requirements, by allowing the use of a private sector CD placement service. Prior to enactment of AB 2011, the collateralization requirements made it difficult for community banks to compete with larger institutions for local agency deposits. The Independent Bankers note that, to date, 55 community banks in California have received over $2.2 billion in deposits from cities, counties, water districts, and other agencies. Community banks use these deposits to make loans to small and medium sized businesses, which ultimately benefits California's economy, by helping these businesses grow and create jobs. CIB's support of the bill was also echoed by a number of community banks, and by the California Bankers Association. The California Credit Union League also supports the bill, and believes that giving local agencies the option to deposit funds in a local credit union or community bank helps spur more local investment and local lending. (Staff notes that, while a private sector CD placement service is not yet currently available to help distribute deposits to credit unions, the credit unions are hopeful that one or more options of this type will become available). The California Municipal Treasurers Association states that public agencies appreciate and benefit from the ability to invest surplus funds in this manner, and would like to have the option continued permanently. AGB:mw 4/23/10 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****