BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1933
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          Date of Hearing:   April 21, 2014

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                               Roger Dickinson, Chair
                 AB 1933 (Levine) - As Introduced:  February 19, 2014
          
          SUBJECT  :   Local government: investments

           SUMMARY  :   Allows a local agency to invest up to 30% of their  
          surplus moneys in obligations, issued by the International Bank  
          for Reconstruction and Development (World Bank), International  
          Finance Corporation (IFC), or Inter-America Development Bank  
          (IADB).  Specifically,  this bill  :  

          1)Provides that investments in specified entities shall be  
            limited to those rated at "AA" or higher credit rating.

          2)Specifies that the investments shall have a maximum maturity  
            of five years or less.

           EXISTING LAW  

          1)Defines, 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.  (Government Code,  
            Section 53600.  All further references are to Government  
            Code.)

          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'  
            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.  (Section 53601)

          3)Allows the state Treasury to invest in obligations issued,  
            assumed, or guaranteed by the World Bank, the IADB, the Asian  
            Development Bank, the African Development Bank, the IFC, or  
            the Government Development Bank of Puerto Rico.  (Section  








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            16430)

          4)Provides state retirement system and 1937 Act retirement  
            systems with authority to invest 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 IADB,  
            the IFC, the World Bank, 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.  (Section 7514.1)

           FISCAL EFFECT  :   Unknown

           

          COMMENTS  :   

          This bill uses the terminology "United States dollar denominated  
          senior unsecured unsubordinated obligations issued or  
          unconditionally guaranteed?" What does this mean?   
          Unsubordinated debt refers to loans and debt securities (e.g.,  
          bonds, CDs, collateralized securities, etc.) for which the  
          repayment priority outranks other debts owed by the same  
          individual entity (called subordinated debt).  Debt in the form  
          of loans or debt securities (e.g. bonds and CDs) are classified  
          as unsubordinated debt if claims on revenues and capital assets  
          by lenders and/or investors take priority over the repayment of  
          other related debt. Related debt with a lower payment priority  
          is called subordinated debt and is, consequently, considered  
          riskier than unsubordinated debt. In most cases, loans are  
          determined to be subordinated or unsubordinated based on the  
          amount and length of time outstanding in comparison with other  
          loans.   In the bond markets, unsubordinated and subordinated  
          debt can best be exemplified by the tranches into which  
          collateralized securities are classified based on value and time  
          to maturity. A security's Class A tranche is considered  
          unsubordinated debt because it takes payment priority over  
          Classes B and C, both of which are subordinated debt. This means  
          that obligations on Class A issues of a security will always be  
          fulfilled before those of Class B and C issues. 

          This bill would allow local agencies to invest in bonds issued,  
          or guaranteed by what are known as "supranationals."   








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          Supranationals are international institutions that provide  
          development financing, advisory services and/or financial  
          services to their member countries to achieve the overall goal  
          of improving living standards through sustainable economic  
          growth.  

          AB 1933 allows investment in instruments issued by three  
          specific entities, known collectively as the "Washington  
          Supras."  These Washington Supras are the following three  
          entities:
           
          1)The World Bank (officially called International Bank for  
            Reconstruction and Development, IBRD) 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. 

          2) IFC, part of the World Bank Group, created in 1956, provides  
            investments and advisory services to build the private sector  
            in developing countries. 

          3) IADB, established in 1959, supports efforts by Latin America  
            and the Caribbean countries to reduce poverty and inequality 

          These entities finance their activities through the issuance of  
          bonds in the capital markets and income received from interest  
          on loans made to other nations or projects.  The World Bank has  
          an AAA credit rating with the current largest shareholder the  
          United States at 15.19%.  

          The California Association of County Treasurers and Tax  
          Collectors, sponsors of AB 1933 write in support of the bill:

               The universe of liquid triple-A bond issuers available to  
               local agencies has reduced dramatically in addition to the  
               diminishing supply of government sponsored enterprises  
               (GSE) such as Fannie and Freddie federal agency securities.  
               Government Investment Officers need alternative investment  
               options that provide safety and diversification for managed  
               investment pools. 

               The triple-A supranational, or "supra" sector is an option  
               for portfolio manager that offers high credit quality and a  








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               stable return at spreads above US Treasuries.  
               Supranationals are international institutions that provide  
               development financing, advisory services and/or other  
               financial services to their member countries to achieve  
               overall goal of improving living standards through  
               sustainable economic growth.

           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.  

           Technical amendments.
          
          Changes proposed via this bill require some additional  
          amendments to correct cross references.

          1)Page 7, line 22 delete "(o)" and insert  "(q)"
           
          2)Page 8, line 5 delete "(o)" and insert  "(q)"  

          3)Page 9, line 20 and line 30: Delete "(o)" and add  "(q)."
           

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          California Association of County Treasurers and Tax Collectors  
          (Sponsor)

           Opposition 
           








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          None on file.
           
          Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081