BILL ANALYSIS                                                                                                                                                                                                    




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  AB 1933                     HEARING:  6/11/14
          AUTHOR:  Levine                       FISCAL:  No
          VERSION:  4/24/14                     TAX LEVY:  No
          CONSULTANT:  Weinberger               

                            LOCAL AGENCY INVESTMENTS
          

          Allows local agencies to invest surplus funds in specified  
          obligations issued by the World Bank, the International  
          Finance Corporation, or the Inter-American Development  
          Bank. 


                           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.  State law originally  
          limited these local investments to government bonds, but  
          over time legislators  
          expanded the list to include numerous additional financial  
          instruments. 

          Multilateral lending institutions - also known as  
          "supranationals" - provide development financing, advisory  
          services and other financial services to their member  
          countries to promote improved living standards through  
          sustainable economic growth.  Three of these supranationals  
          are headquartered in the United States and issue  
          highly-rated bonds that are denominated in U.S. currency:
                 Founded in 1959, the Inter-American Development  
               Bank (IADB) has 48 country members: 26 borrowing  
               member countries in Latin America and the Caribbean  
               and 22 nonborrowing members, including the U.S.,  
               Canada, and 20 nonregional countries.  The bank lends  
               mostly to central governments in Latin America and the  
               Caribbean to promote economic development and to  
               expand opportunities for the poor.
                 With 188 member countries, the International Bank  
               for Reconstruction and Development (IBRD) is the  
               largest component of the World Bank Group.  Operating  
               since 1946, the IBRD seeks to reduce poverty by  
               promoting sustainable economic development via loans,  




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               guarantees, and related assistance for projects and  
               programs in its developing member countries.
                 Established in 1956 to complement the activities of  
               the IBRD, the International Finance Corporation (IFC)  
               is the second-largest component of the World Bank  
               Group, with 184 member countries.  The IFC provides  
               loans, makes investments, and provides other financial  
               services to encourage the growth and development of  
               the private sector in developing member countries.

          State law allows the State Treasurer to invest surplus  
          funds in bonds issued by specified supranational  
          organizations, including the IADB, IBRD, and the IFC (SB  
          1776, Greene, 1978 and SB 1015, Calderon, 1991).  State law  
          also allows state or local public retirement systems to  
          invest in bonds issued by supranational organizations,  
          including the IADB, IBRD, and the IFC (SB 1459, Watson,  
          1994).  

          Local finance officials want the Legislature to grant them  
          the same authority to invest surplus funds in  
          supranationals' bonds that state law already grants for  
          state surplus funds and state and local pension funds.


                                   Proposed Law  

          Assembly Bill 1963 expands the list of financial instrument  
          in which local agencies may invest surplus funds to include  
          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.  AB 1963 specifies that  
          those investments must:
                 Have a maximum remaining maturity of five years or  
               less, 
                 Be eligible for purchase and sale within the United  
               States,
                 Be rated "AA" or better by a nationally recognized  
               statistical rating organization (NRSRO),
                 Not exceed 30% of the agency's surplus funds that  
               may be invested pursuant to state law.


                               State Revenue Impact





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          No estimate.


                                     Comment  

           Purpose of the bill  .   In response to a recent decrease in  
          the supply of debt issued by government sponsored  
          enterprises, like mortgage-related securities issued by  
          Fannie Mae and Freddie Mac, local investment officers are  
          seeking other highly-rated, medium-term financial  
          instruments in which to invest public funds.  State law  
          already allows state surplus funds and state and local  
          pension funds to be invested in supranational  
          organizations' bonds.  The State Treasurer's Pooled Money  
          Investment Account, which includes funds from some local  
          agencies, invests a portion of its portfolio in debt  
          instruments issued by supranationals.  Allowing local  
          agencies' surplus funds to be invested directly in debt  
          issued by three supranational finance organizations will  
          give local finance officers access to a wider pool of  
          secure investment options that provide better returns than  
          U.S. Treasury securities and will help to diversify local  
          investment portfolios.
                                 Assembly Actions  

          Assembly Local Government Committee:  9-0
          Assembly Banking & Financial Institutions Committee:10-0
          Assembly Floor:                              75-0


                         Support and Opposition  (6/5/14)

           Support  :  California Association of County Treasurers and  
          Tax Collectors.

           Opposition  :  Unknown.