BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 279 HEARING: 6/5/13
AUTHOR: Dickinson FISCAL: No
VERSION: 5/29/13 TAX LEVY: No
CONSULTANT: Weinberger
INVESTMENT OF SURPLUS FUNDS
Expands local governments' authority to invest surplus
funds through a private sector deposit placement service.
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 $250,000 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). Subsequent legislation
deleted a sunset date from the statutes authorizing local
agencies to use a deposit placement service (SB 1344,
Kehoe, 2010).
AB 279 -- 5/29/13 -- Page 2
A deposit placement service splits the funds deposited at a
single financial institution into increments of less than
$250,000 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. Each
of the incremental deposits is less than $250,000 to ensure
that both the principal and interest are fully insured by
the FDIC, eliminating the need for collateralization.
State law imposes the following restrictions on local
agencies' authority to invest surplus funds in certificates
of deposit through a deposit placement service:
An agency cannot invest more than 30% of its
surplus funds 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 a "selected depository
institution," which must be a nationally or state
chartered bank or savings and loan association in
California.
The selected depository institution may submit the
funds for placement as CDs with commercial banks,
savings banks, savings and loan associations, or
credit unions in the United States, for the local
agency's account.
The "selected depository institution" must serve as
a custodian for each CD issued through the placement
service for the local agency's account.
The full amount of principal and interest that may
accrue during the maximum term of each CD issued
through the placement service must be insured by the
FDIC or the National Credit Union Administration
(NCUA).
At the same time that the local agency's funds are
deposited and certificates of deposit are issued, the
"selected depository institution" must receive, from
other commercial banks, savings banks, savings and
loan associations, or credit unions, reciprocal
deposits that are equal to, or greater than, the full
amount of the principal that the local agency
initially deposited through the "selected depository
institution."
A credit union cannot act as a "selected
AB 279 -- 5/29/13 -- Page 3
depository institution" unless it:
o Offers federal depository insurance
through the NCUA.
o Possesses written communication from the
NCUA authorizing federally insured credit unions
to participate in certificate of deposit
placement services and affirming that the moneys
held by participating credit unions will be
federally insured at all times.
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. While some other financial services companies
now offer similar deposit placement products, CDARS is
still the dominant CD placement network. In California,
162 banks participate in CDARS. Currently, 95 California
local agency customers have approximately $500 million in
CDs deposited through CDARS.
In 2010, Promontory Interfinancial introduced its Insured
Cash Sweep (ICS) service, which resembles CDARS, but allows
for more liquid types of deposits to be disbursed, in
amounts that qualify for FDIC coverage, into money market
deposit accounts at banks that provide reciprocal deposits.
Local officials and community bankers want the Legislature
to expand local governments' statutory authority to invest
surplus funds through a deposit placement service to allow
surplus funds to be placed not just in CDs but also in
other types of deposits.
Proposed Law
Assembly Bill 279 allows a local agency that has the
authority under law to invest funds, at its discretion, to
invest a portion of its surplus funds in deposits 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 deposits.
AB 279 makes technical and clarifying amendments to the
statutes that impose conditions on a local agency's
authority to invest surplus funds using a private sector
entity that assists in the placement of deposits.
AB 279 -- 5/29/13 -- Page 4
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . 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 $250,000 deposits at
separate institutions to ensure FDIC insurance coverage.
Deposit placement services address both of these concerns.
Laws in 28 states have been amended to allow public funds
to be deposited with a placement service for deposits other
than CDs. AB 279 follows suit by expanding California
statutes that govern local agencies' use of deposit
placement services to include deposits other than
certificates of deposit. AB 279 benefits public agencies
and local communities by giving California local officials
greater flexibility to place public deposits in community
banks without the difficulties of complying with
securitization requirements.
2. Get it in writing . On July 29, 2003, three years
before the Legislature passed AB 2011, the FDIC found, in a
written advisory opinion, that if specified record keeping
and other procedures were followed, then "deposits placed
through the CDARS system would be insured on a pass-through
basis under the FDIC's rules on the insurance coverage of
agency or custodial accounts. " In response to concerns
raised by credit union regulators, AB 2011 required that a
credit union, before it can act as a selected depository
institution, must get written confirmation from the
National Credit Union Administration (NCUA) that the moneys
held by credit unions while participating in a deposit
placement service will at all times be insured by the
federal government. Unlike the CDARS program, no written
confirmation is available from either the FDIC or the NCUA
that funds deposited through the ICE placement service will
be federally insured. Promontory Interfinancial has
obtained a legal opinion that federal deposit insurance
AB 279 -- 5/29/13 -- Page 5
coverage applies to deposits placed through the ICE
service. AB 279's proponents note that the FDIC has not
taken action against the deposit of public funds through
the ICE service in the many states where it is currently
authorized. However, to establish the same standard of
certainty for these new deposit placement services that
applied to CDARS, the Committee may wish to consider
requiring written confirmation from federal regulators
before California public agencies can invest surplus funds
through ICE, or similar services.
Assembly Actions
Assembly Local Government Committee: 9-0
Assembly Banking and Finance Committee:12-0
Assembly Floor: 77-0
Support and Opposition (5/30/13)
Support : California Independent Bankers; California
Bankers Association; California Credit Union League;
Community Business Bank; Five Star Bank; Malaga Bank; The
American Federation of State, County and Municipal
Employees (AFSCME), AFL-CIO; Vibra Bank.
Opposition : Unknown.