BILL ANALYSIS Ó
AB 279
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Date of Hearing: April 3, 2013
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
K.H. "Katcho" Achadjian, Chair
AB 279 (Dickinson) - As Amended: March 21, 2013
SUBJECT : Financial affairs.
SUMMARY : Expands the types of deposits a local agency can
invest surplus funds into. Specifically, this bill :
1)Allows local agencies to invest surplus funds in deposits, in
the same manner as certificates of deposit (CDs).
2)Exempts deposits received by a selected depository institution
from other financial institutions through a deposit placement
service, if deposits are insured by the Federal Deposit
Insurance Corporation (FDIC) or the National Credit Union
Administration (NCUA), from public funds reporting
requirements in existing law.
3)Makes technical and clarifying changes.
EXISTING LAW :
1)Allows a local agency to invest a portion of its surplus funds
in CDs 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 CDs, provided that the
purchases of CDs, in total, do not exceed 30% of the agency's
funds.
2)Provides that the following conditions apply for a local
agency to invest its surplus funds in CDs:
a) The local agency shall choose a nationally or state
chartered commercial bank, savings bank, savings and loan
association, or credit union in California to invest the
funds, which shall be known as the "selected" depository
institution;
b) The selected depository institution may submit the funds
to a private sector entity that assists in the placement of
CDs with one or more commercial banks, savings banks,
savings and loan associations, or credit unions that are
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located in the United States, for the local agency's
account;
c) The full amount of the principal and the interest that
may be accrued during the maximum term of each CD shall at
all times be insured by the FDIC or the NCUA;
d) The selected depository institution shall serve as a
custodian for each CD that is issued with the placement
service for the local agency's account;
e) At the same time the local agency's funds are deposited
and the CDs are issued, the selected depository institution
shall receive an amount of deposits from other commercial
banks, savings banks, savings and loan associations, or
credit unions that, in total, are equal to, or greater
than, the full amount of the principal that the local
agency initially deposited through the selected depository
institution for investment; and,
f) Notwithstanding subdivisions (a) to (e), inclusive, no
credit union may act as a selected depository institution
unless both of the following conditions are satisfied:
i) The credit union offers federal depository insurance
through the NCUA; and,
ii) The credit union is in possession of written
guidance or other written communication from the NCUA
authorizing participation of federally-insured credit
unions in one or more certificate of deposit placement
services and affirming that the moneys held by those
credit unions while participating in a deposit placement
service will at all times be insured by the federal
government.
FISCAL EFFECT : None
COMMENTS :
1)The authorization for local agencies to invest surplus funds
in CDs was put into place by
AB 2011 (Vargas), Chapter 459, Statutes of 2006. Existing law
requires local agency funds to either be protected by federal
deposit insurance or secured by collateral. Prior to the
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bill, if a local agency wanted to make a deposit of over
$100,000, the FDIC insurance limit at the time, the bank had
to pledge collateral to secure the deposit. This
collateralization requirement was a barrier to most small
community banks accepting deposits of local agency funds,
which were generally in amounts much greater than $100,000.
2)AB 2011 (Vargas) allowed local agencies to use a "deposit
placement service" which takes a bank customer's large deposit
and breaks it into amounts of less than the FDIC insurance
limit, $100,000. These amounts are then placed in CDs at
other banks within its network, ensuring FDIC protection on
the customer's full deposit. The other banks then
simultaneously send an equal amount of funds back to the
original bank, enabling it to have the full amount of the
original deposit available for lending or other purposes.
When
AB 2011 became law, only one national network, the Certificate
of Deposit Account Registry Service (CDARS), Promontory
Interfinancial Network, LLC, offered a qualifying CD placement
service. According to the author, CDARS is still the only
such CD placement network that exists.
3)SB 1344 (Kehoe), Chapter 112, Statutes of 2010, eliminated the
sunset date contained in
AB 2011 (Vargas) and permanently authorized local agencies to
use a deposit placement service. This bill expands the types
of deposits local agencies can invest surplus funds into.
According to the author, this bill further encourages local
agencies to deposit funds into local banks, and may spur more
local investment and local lending. Current law allows local
agencies to invest in CDs, but excludes other types of
deposits that make up a substantial portion of public funds
including money market deposit accounts or demand deposit
accounts that are more accessible for short-term needs. This
bill is co-sponsored by the California Bankers Association and
the California Independent Bankers.
4)The author states "This law has enabled community banks to
attract $4.3 billion dollars in deposits from local agencies.
Those banks, in turn, reinvest those dollars in the
communities they serve. Current law allows the private sector
deposit placement service to cover only certificates of
deposit. Now, there is a service that provides FDIC insurance
for demand deposits as well. 33 other states allow local
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agencies to take advantage of this service to cover demand
deposits."
5)The author argues that this bill is essential because Congress
did not extend the Transaction Account Guarantee Program
(TAGP) which was started during the financial crisis to
provide unlimited insurance for non-interest bearing bank
accounts used by small companies and municipalities. Now that
TAGP has expired, the author and supporters are concerned
because local agencies are once again subject to the FDIC
$250,000 insurance limit. Current law requires local agency
funds to either be protected by federal deposit insurance or
secured by collateral, once again creating a barrier to most
small community banks accepting local agency funds exceeding
$250,000.
6)This bill allows local agencies to invest in deposits,
pursuant to requirements in existing law for CDs, at a
commercial bank, savings bank, saving and loan association, or
credit union that uses a private sector entity that assists in
the placement of deposits. This bill also exempts deposits,
insured by the FDIC or NCUA, that a selected depository
institution receives in exchange for funds placed through the
placement services from public funds reporting requirements.
Supporters argue that this bill provides local agencies with
more flexibility and allows them to continue investing funds
in a financial instrument that benefits both public agencies
and local communities.
7)Support arguments : Supporters argue that community banks may
be limited in their ability to attract a substantial portion
of public funds that are placed in transaction and money
market deposit accounts because current law only applies to
CDs. This bill gives these banks another opportunity to secure
these local agency deposits.
Opposition arguments : None on file
8)This bill is double-referred to the Committee on Banking and
Finance.
REGISTERED SUPPORT / OPPOSITION :
Support
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California Bankers Association [CO-SPONSOR]
California Independent Bankers [CO-SPONSOR]
California Credit Union League
Community Business Bank
Five Star Bank
Malaga Bank
Vibra Bank
Opposition
None on file
Analysis Prepared by : Misa Yokoi-Shelton / L. GOV. / (916)
319-3958