BILL ANALYSIS Ó 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, AB 1933 -- 4/24/14 -- Page 2 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 AB 1933 -- 4/24/14 -- Page 3 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.