Amended in Assembly April 24, 2014

California Legislature—2013–14 Regular Session

Assembly Bill No. 1933

Introduced by Assembly Member Levine

February 19, 2014

An act to amend Section 53601 of the Government Code, relating to local government.

LEGISLATIVE COUNSEL’S DIGEST

AB 1933, as amended, Levine. Local government: investments.

Existing law authorizes the legislative body of a local agency having money in a sinking fund or money in its treasury not required for immediate needs to invest any portion of the money that it deems wise or expedient in specified securities and financial instruments.

This bill would authorize the legislative body of a local agency to also invest in United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by certain banks, as specified, and would require these investments to be rated “AA” or better and to not exceed 30% of the agency’s moneys that may be invested.

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 53601 of the Government Code is
amended to read:

53601.  

This section shall apply to a local agency that is a city,
a district, or other local agency that does not pool money in
deposits or investments with other local agencies, other than local
agencies that have the same governing body. However, Section
53635 shall apply to all local agencies that pool money in deposits
or investments with other local agencies that have separate
governing bodies. The legislative body of a local agency having
moneys in a sinking fund or moneys in its treasury not required
for the immediate needs of the local agency may invest any portion
of the moneys that it deems wise or expedient in those investments
set forth below. A local agency purchasing or obtaining any
securities prescribed in this section, in a negotiable, bearer,
registered, or nonregistered format, shall require delivery of the
securities to the local agency, including those purchased for the
agency by financial advisers, consultants, or managers using the
agency’s funds, by book entry, physical delivery, or by third-party
custodial agreement. The transfer of securities to the counterparty
bank’s customer book entry account may be used for book entry
delivery.

For purposes of this section, “counterparty” means the other
party to the transaction. A counterparty bank’s trust department
or separate safekeeping department may be used for the physical
delivery of the security if the security is held in the name of the
local agency. Where this section specifies a percentage limitation
for a particular category of investment, that percentage is applicable
only at the date of purchase. Where this section does not specify
a limitation on the term or remaining maturity at the time of the
investment, no investment shall be made in any security, other
than a security underlying a repurchase or reverse repurchase
agreement or securities lending agreement authorized by this
section, that at the time of the investment has a term remaining to
maturity in excess of five years, unless the legislative body has
granted express authority to make that investment either
specifically or as a part of an investment program approved by the
legislative body no less than three months prior to the investment:

(a) Bonds issued by the local agency, including bonds payable
solely out of the revenues from a revenue-producing property
owned, controlled, or operated by the local agency or by a
department, board, agency, or authority of the local agency.

(b) United States Treasury notes, bonds, bills, or certificates of
indebtedness, or those for which the faith and credit of the United
States are pledged for the payment of principal and interest.

(c) Registered state warrants or treasury notes or bonds of this
state, including bonds payable solely out of the revenues from a
revenue-producing property owned, controlled, or operated by the
state or by a department, board, agency, or authority of the state.

(d) Registered treasury notes or bonds of any of the other 49
states in addition to California, including bonds payable solely out
of the revenues from a revenue-producing property owned,
controlled, or operated by a state or by a department, board, agency,
or authority of any of the other 49 states, in addition to California.

(e) Bonds, notes, warrants, or other evidences of indebtedness
of a local agency within this state, including bonds payable solely
out of the revenues from a revenue-producing property owned,
controlled, or operated by the local agency, or by a department,
board, agency, or authority of the local agency.

(f) Federal agency or United States government-sponsored
enterprise obligations, participations, or other instruments,
including those issued by or fully guaranteed as to principal and
interest by federal agencies or United States government-sponsored
enterprises.

(g) Bankers’ acceptances otherwise known as bills of exchange
or time drafts that are drawn on and accepted by a commercial
bank. Purchases of bankers’ acceptances shall not exceed 180
days’ maturity or 40 percent of the agency’s moneys that may be
invested pursuant to this section. However, no more than 30 percent
of the agency’s moneys may be invested in the bankers’
acceptances of any one commercial bank pursuant to this section.

This subdivision does not preclude a municipal utility district
from investing moneys in its treasury in a manner authorized by
the Municipal Utility District Act (Division 6 (commencing with
Section 11501) of the Public Utilities Code).

(h) Commercial paper of “prime” quality of the highest ranking
or of the highest letter and number rating as provided for by a
nationally recognized statistical rating organization (NRSRO).
The entity that issues the commercial paper shall meet all of the
following conditions in either paragraph (1) or (2):

(1) The entity meets the following criteria:

(A) Is organized and operating in the United States as a general
corporation.

(B) Has total assets in excess of five hundred million dollars
($500,000,000).

(C) Has debt other than commercial paper, if any, that is rated
“A” or higher by an NRSRO.

(2) The entity meets the following criteria:

(A) Is organized within the United States as a special purpose
corporation, trust, or limited liability company.

(B) Has programwide credit enhancements including, but not
limited to, overcollateralization, letters of credit, or a surety bond.

(C) Has commercial paper that is rated “A-1” or higher, or the
equivalent, by an NRSRO.

Eligible commercial paper shall have a maximum maturity of
270 days or less. Local agencies, other than counties or a city and
county, may invest no more than 25 percent of their moneys in
eligible commercial paper. Local agencies, other than counties or
a city and county, may purchase no more than 10 percent of the
outstanding commercial paper of any single issuer. Counties or a
city and county may invest in commercial paper pursuant to the
concentration limits in subdivision (a) of Section 53635.

(i) Negotiable certificates of deposit issued by a nationally or
state-chartered bank, a savings association or a federal association
(as defined by Section 5102 of the Financial Code), a state or
federal credit union, or by a federally licensed or state-licensed
branch of a foreign bank. Purchases of negotiable certificates of
deposit shall not exceed 30 percent of the agency’s moneys that
may be invested pursuant to this section. For purposes of this
section, negotiable certificates of deposit do not come within
Article 2 (commencing with Section 53630), except that the amount
so invested shall be subject to the limitations of Section 53638.
The legislative body of a local agency and the treasurer or other
official of the local agency having legal custody of the moneys
are prohibited from investing local agency funds, or funds in the
custody of the local agency, in negotiable certificates of deposit
issued by a state or federal credit union if a member of the
legislative body of the local agency, or a person with investment
decisionmaking authority in the administrative office manager’s
office, budget office, auditor-controller’s office, or treasurer’s
office of the local agency also serves on the board of directors, or
any committee appointed by the board of directors, or the credit
committee or the supervisory committee of the state or federal
credit union issuing the negotiable certificates of deposit.

(j) (1) Investments in repurchase agreements or reverse
repurchase agreements or securities lending agreements of
securities authorized by this section, as long as the agreements are
subject to this subdivision, including the delivery requirements
specified in this section.

(2) Investments in repurchase agreements may be made, on an
investment authorized in this section, when the term of the
agreement does not exceed one year. The market value of securities
that underlie a repurchase agreement shall be valued at 102 percent
or greater of the funds borrowed against those securities and the
value shall be adjusted no less than quarterly. Since the market
value of the underlying securities is subject to daily market
fluctuations, the investments in repurchase agreements shall be in
compliance if the value of the underlying securities is brought back
up to 102 percent no later than the next business day.

(3) Reverse repurchase agreements or securities lending
agreements may be utilized only when all of the following
conditions are met:

(A) The security to be sold using a reverse repurchase agreement
or securities lending agreement has been owned and fully paid for
by the local agency for a minimum of 30 days prior to sale.

(B) The total of all reverse repurchase agreements and securities
lending agreements on investments owned by the local agency
does not exceed 20 percent of the base value of the portfolio.

(C) The agreement does not exceed a term of 92 days, unless
the agreement includes a written codicil guaranteeing a minimum
earning or spread for the entire period between the sale of a security
using a reverse repurchase agreement or securities lending
agreement and the final maturity date of the same security.

(D) Funds obtained or funds within the pool of an equivalent
amount to that obtained from selling a security to a counterparty
using a reverse repurchase agreement or securities lending
agreement shall not be used to purchase another security with a
maturity longer than 92 days from the initial settlement date of the
reverse repurchase agreement or securities lending agreement,
unless the reverse repurchase agreement or securities lending
agreement includes a written codicil guaranteeing a minimum
earning or spread for the entire period between the sale of a security
using a reverse repurchase agreement or securities lending
agreement and the final maturity date of the same security.

(4) (A) Investments in reverse repurchase agreements, securities
lending agreements, or similar investments in which the local
agency sells securities prior to purchase with a simultaneous
agreement to repurchase the security may be made only upon prior
approval of the governing body of the local agency and shall be
made only with primary dealers of the Federal Reserve Bank of
New York or with a nationally or state-chartered bank that has or
has had a significant banking relationship with a local agency.

(B) For purposes of this chapter, “significant banking
relationship” means any of the following activities of a bank:

(i) Involvement in the creation, sale, purchase, or retirement of
a local agency’s bonds, warrants, notes, or other evidence of
indebtedness.

(ii) Financing of a local agency’s activities.

(iii) Acceptance of a local agency’s securities or funds as
deposits.

(5) (A) “Repurchase agreement” means a purchase of securities
by the local agency pursuant to an agreement by which the
counterparty seller will repurchase the securities on or before a
specified date and for a specified amount and the counterparty will
deliver the underlying securities to the local agency by book entry,
physical delivery, or by third-party custodial agreement. The
transfer of underlying securities to the counterparty bank’s
customer book-entry account may be used for book-entry delivery.

(B) “Securities,” for purposes of repurchase under this
subdivision, means securities of the same issuer, description, issue
date, and maturity.

(C) “Reverse repurchase agreement” means a sale of securities
by the local agency pursuant to an agreement by which the local
agency will repurchase the securities on or before a specified date
and includes other comparable agreements.

(D) “Securities lending agreement” means an agreement under
which a local agency agrees to transfer securities to a borrower
who, in turn, agrees to provide collateral to the local agency.
During the term of the agreement, both the securities and the
collateral are held by a third party. At the conclusion of the
agreement, the securities are transferred back to the local agency
in return for the collateral.

(E) For purposes of this section, the base value of the local
agency’s pool portfolio shall be that dollar amount obtained by
totaling all cash balances placed in the pool by all pool participants,
excluding any amounts obtained through selling securities by way
of reverse repurchase agreements, securities lending agreements,
or other similar borrowing methods.

(F) For purposes of this section, the spread is the difference
between the cost of funds obtained using the reverse repurchase
agreement and the earnings obtained on the reinvestment of the
funds.

(k) Medium-term notes, defined as all corporate and depository
institution debt securities with a maximum remaining maturity of
five years or less, issued by corporations organized and operating
within the United States or by depository institutions licensed by
the United States or any state and operating within the United
States. Notes eligible for investment under this subdivision shall
be rated “A” or better by an NRSRO. Purchases of medium-term
notes shall not include other instruments authorized by this section
and shall not exceed 30 percent of the agency’s moneys that may
be invested pursuant to this section.

(l) (1) Shares of beneficial interest issued by diversified
management companies that invest in the securities and obligations
as authorized by subdivisions (a) to (k), inclusive, and subdivisions
(m) to begin delete (o), end delete begin insert (q), end insert inclusive, and that comply with the investment
restrictions of this article and Article 2 (commencing with Section
53630). However, notwithstanding these restrictions, a counterparty
to a reverse repurchase agreement or securities lending agreement
is not required to be a primary dealer of the Federal Reserve Bank
of New York if the company’s board of directors finds that the
counterparty presents a minimal risk of default, and the value of
the securities underlying a repurchase agreement or securities
lending agreement may be 100 percent of the sales price if the
securities are marked to market daily.

(2) Shares of beneficial interest issued by diversified
management companies that are money market funds registered
with the Securities and Exchange Commission under the
Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.).

(3) If investment is in shares issued pursuant to paragraph (1),
the company shall have met either of the following criteria:

(A) Attained the highest ranking or the highest letter and
numerical rating provided by not less than two NRSROs.

(B) Retained an investment adviser registered or exempt from
registration with the Securities and Exchange Commission with
not less than five years’ experience investing in the securities and
obligations authorized by subdivisions (a) to (k), inclusive, and
subdivisions (m) to begin delete (o), end delete begin insert (q), end insert inclusive, and with assets under
management in excess of five hundred million dollars
($500,000,000).

(4) If investment is in shares issued pursuant to paragraph (2),
the company shall have met either of the following criteria:

(A) Attained the highest ranking or the highest letter and
numerical rating provided by not less than two NRSROs.

(B) Retained an investment adviser registered or exempt from
registration with the Securities and Exchange Commission with
not less than five years’ experience managing money market
mutual funds with assets under management in excess of five
hundred million dollars ($500,000,000).

(5) The purchase price of shares of beneficial interest purchased
pursuant to this subdivision shall not include commission that the
companies may charge and shall not exceed 20 percent of the
agency’s moneys that may be invested pursuant to this section.
However, no more than 10 percent of the agency’s funds may be
invested in shares of beneficial interest of any one mutual fund
pursuant to paragraph (1).

(m) Moneys held by a trustee or fiscal agent and pledged to the
payment or security of bonds or other indebtedness, or obligations
under a lease, installment sale, or other agreement of a local
agency, or certificates of participation in those bonds, indebtedness,
or lease installment sale, or other agreements, may be invested in
accordance with the statutory provisions governing the issuance
of those bonds, indebtedness, or lease installment sale, or other
agreement, or to the extent not inconsistent therewith or if there
are no specific statutory provisions, in accordance with the
ordinance, resolution, indenture, or agreement of the local agency
providing for the issuance.

(n) Notes, bonds, or other obligations that are at all times secured
by a valid first priority security interest in securities of the types
listed by Section 53651 as eligible securities for the purpose of
securing local agency deposits having a market value at least equal
to that required by Section 53652 for the purpose of securing local
agency deposits. The securities serving as collateral shall be placed
by delivery or book entry into the custody of a trust company or
the trust department of a bank that is not affiliated with the issuer
of the secured obligation, and the security interest shall be perfected
in accordance with the requirements of the Uniform Commercial
Code or federal regulations applicable to the types of securities in
which the security interest is granted.

(o) A mortgage passthrough security, collateralized mortgage
obligation, mortgage-backed or other pay-through bond, equipment
lease-backed certificate, consumer receivable passthrough
certificate, or consumer receivable-backed bond of a maximum of
five years’ maturity. Securities eligible for investment under this
subdivision shall be issued by an issuer having an “A” or higher
rating for the issuer’s debt as provided by an NRSRO and rated in
a rating category of “AA” or its equivalent or better by an NRSRO.
Purchase of securities authorized by this subdivision shall not
exceed 20 percent of the agency’s surplus moneys that may be
invested pursuant to this section.

(p) Shares of beneficial interest issued by a joint powers
authority organized pursuant to Section 6509.7 that invests in the
securities and obligations authorized in subdivisions (a) to begin delete (o), end delete begin insert (q), end insert
inclusive. Each share shall represent an equal proportional interest
in the underlying pool of securities owned by the joint powers
authority. To be eligible under this section, the joint powers
authority issuing the shares shall have retained an investment
adviser that meets all of the following criteria:

(1) The adviser is registered or exempt from registration with
the Securities and Exchange Commission.

(2) The adviser has not less than five years of experience
investing in the securities and obligations authorized in
subdivisions (a) to begin delete (o), end delete begin insert (q), end insert inclusive.

(3) The adviser has assets under management in excess of five
hundred million dollars ($500,000,000).

(q) United States dollar denominated senior unsecured
unsubordinated obligations issued or unconditionally guaranteed
by the International Bank for Reconstruction and Development,
International Finance Corporation, or Inter-American Development
Bank, with a maximum remaining maturity of five years or less,
and eligible for purchase and sale within the United States.
Investments under this subdivision shall be rated “AA” or better
by an NRSRO and shall not exceed 30 percent of the agency’s
moneys that may be invested pursuant to this section.