BILL ANALYSIS Ó AB 1933 Page 1 Date of Hearing: April 2, 2014 ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT K.H. "Katcho" Achadjian, Chair AB 1933 (Levine) - As Introduced: February 19, 2014 SUBJECT : Local government: investments. SUMMARY : Authorizes a local agency to invest in United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Developments, International Finance Corporation, or Inter-American Development Bank, as specified. Specifically, this bill : 1)Expands existing investment options available to local agencies to invest funds not required for the immediate needs of the local agency to include United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Developments (The World Bank), International Finance Corporation (IFC), or Inter-American Development Bank (IADB), with a maximum remaining maturity of five years or less and that are eligible for purchase and sale within the United States. 2)Requires these investments to be rated "AA" or better by an NRSRO (Nationally Recognized Statistical Rating Organization). 3)Prohibits these investments from exceeding 30% of the agency's moneys that may be invested pursuant to this section. EXISTING LAW : 1)Defines, for purposes of this section, a local agency to mean a city, 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. 2)Allows the legislative body of a local agency to invest funds not immediately needed by the agency in a variety of specified financial instruments, including local agency bonds, U.S. Treasury obligations, state obligations, California local agency obligations, U.S. agency obligations, bankers' AB 1933 Page 2 acceptances, commercial paper, negotiable certificates of deposit, CD placement service, repurchase agreements, reverse repurchase agreements and securities lending agreements, medium-term notes, mutual funds and money market mutual funds, collateralized bank deposits, and mortgage pass-through securities. 3)Requires, where the statute specifies a percentage limitation for a particular category of investment, that the percentage is applicable only at the date of purchase. 4)Prohibits, where a limitation on the term or remaining maturity is not specified, an investment in any security 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, as specified. 5)Includes obligations issued, assumed, or guaranteed by The World Bank, IADB, IFC, the Asian Development Bank, the African Development Bank, or the Government Development Bank of Puerto Rico as eligible securities for the investment of surplus state moneys. 6)Authorizes any state or local public retirement system to invest its assets in rated bonds, notes, or other obligations issued, assumed, or unconditionally guaranteed by the African Development Bank, the Asian Development Bank, the Caribbean Development Bank, The World Bank, IFC, IADB, the European Bank for Reconstruction and Development, and any other international financial institution that has met the payments of similar bonds, notes, or other obligations when due and in which the United States is a member. FISCAL EFFECT : None COMMENTS : 1)Purpose of this bill . This bill expands existing investment options available to local agencies to invest funds not required for the immediate needs of the local agency to include United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by The World Bank, IFC, or IADB, with a maximum remaining maturity of five years or less and that are eligible for purchase and sale within the United States. This bill AB 1933 Page 3 does not limit investment to certain types of debt instruments offered by The World Bank, IFC, or IADB which is consistent with current law for state or local retirement systems and the state for surplus funds, but does place specific criteria that the investments must be rated "AA" or better and cannot exceed 30% of the agency's moneys not required for their immediate use. This bill is sponsored by the California Association of County Treasurers and Tax Collectors. 2)Author's statement . According to the author, "Existing law limits the kinds of investments that local agencies can make by delineating what is a permissible investment. These restrictions are rightfully in place to protect the public. The Great Recession, however, dramatically reduced the availability of liquid triple-A bond issuers that local agencies could invest in, and has left local agencies with few opportunities to meet their investment responsibilities. This bill simply extends the same authority to invest in supranationals to local agencies that the state treasurer, state retirement systems, and 1937 Act retirement systems have had for decades." According to the sponsor, "Supranationals are international institutions that provide development financing, advisory services and/or other financial services to their member countries to achieve the overall goal of improving living standards through sustainable economic growth. The World Bank is the largest part of the World Bank Group and finances activities by issuing bonds in the capital markets. Established in 1944, it works with member countries to promote equitable and sustainable economic growth, by providing financing and risk management solutions directly to sovereign governments - globally. IFC, part of the World Bank Group, created in 1956, provides investments and advisory services to build the private sector in developing countries. IADB, established in 1959, supports efforts by Latin America and the Caribbean countries to reduce poverty and inequality. "The supranational, or 'supra' sector is an option for portfolio manager that offers high credit quality and a stable return at spreads above U.S. Treasuries. The Washington Supras, headquartered in Washington, DC, are of interest to U.S. investors with conservative investment strategies. This is because they maintain triple-A credit, the U.S. is their largest shareholder, and because they issue similar products AB 1933 Page 4 to those issued by GSEs, like U.S. benchmark bonds, callables and short-term discount notes." In addition to California, the sponsor points to a number of other states that provide supranationals as an investment option in their state codes, including New York, New Jersey, North Carolina, South Carolina, Colorado, and Texas. There are several ways for individual states to authorize their local governments to invest in supranationals, however, the sponsors identify that local governments in Alaska, Oregon, New Mexico, Ohio, Virginia, Colorado, Georgia, Indiana, Maine, Texas, and Vermont all have this authority. 3)Previous legislation . Since 1913, state law has authorized local officials to invest a portion of their temporarily idle funds in a variety of financial instruments. The Legislature has since expanded this list of investment options available to local agencies to invest funds not required for the immediate needs of the local agency. Most recently SB 194 (Governance and Finance Committee), Chapter 382, Statutes of 2011, added the federally chartered branches of foreign banks to the list of financial institutions whose certificates of deposit are eligible for local agencies' investments, and AB 1745 (Committee on Revenue and Taxation), Chapter 340, Statutes of 2007, added registered treasury notes or bonds, including bonds payable solely out of the revenues from a revenue-producing property owned by a state, department, board, agency or authority. 4)Arguments in support : Supporters argue that the universe of liquid AA and AAA rated bonds available to local agencies has reduced dramatically so county investment officers need the alternative investment options provided by this bill that provide safety and diversification for managed investment pools. 5)Arguments in opposition : None on file. 6)Double-referral . This bill is double referred to the Banking and Finance Committee. REGISTERED SUPPORT / OPPOSITION : Support AB 1933 Page 5 California Association of County Treasurers and Tax Collectors [SPONSOR] Opposition None on file Analysis Prepared by : Misa Yokoi- Shelton / L. GOV. / (916) 319-3958