BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     AB 283


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          Date of Hearing:   April 13, 2015


                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE


                               Matthew Dababneh, Chair


          AB 283  
          (Dababneh) - As Introduced February 11, 2015


          SUBJECT:  Financial affairs


          SUMMARY:  Makes permanent, provisions of law that expands the  
          authority granted to local agencies to use a private sector  
          deposit placement service to invest up to 30% of surplus funds  
          into deposits other than certificates of deposits (CDs).   
          Specifically, this bill:  


          1)Deletes the January 1, 2017 sunset date that allows a local  
            agency to invest up to 30% of surplus funds in deposits other  
            than CDs at a commercial bank, savings bank, savings and loan  
            association, or credit union that uses a private sector entity  
            to assist in the placement of deposits.  


          2)Repeals a code section that prohibits a local agency from  
            investing more than 10% of its surplus funds in any one  
            private sector entity that assists in non-CD deposit placement  
            service, thereby allowing a local agency to invest up to 30%  
            of surplus funds in one private sector entity that provides  
            deposit placement service.  


          EXISTING LAW:  








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          1)Authorizes a local agency, until January 1, 2017, to invest a  
            portion of its surplus funds in deposits at a commercial bank,  
            savings bank, savings and loan association, or credit union  
            that uses a private sector entity that assists in the  
            placement of non-CD deposits, provided that the purchases of  
            deposits, in total, do not exceed 30% of the agency's funds.   
            (Government Code, Sections 53601.8 & 53635.8)

          2)Prohibits a local agency from investing more than 10% of its  
            surplus funds in any single non-CD placement service.  

          3)Provides that the following conditions apply for a local  
            agency to invest its surplus funds in deposits:

             a)   The local agency shall choose a nationally or state  
               chartered commercial bank, savings bank, savings and loan  
               association, or credit union in California to invest the  
               funds, which shall be known as the "selected" depository  
               institution;  

             b)   The selected depository institution may use a private  
               sector entity to help place local agency deposits with one  
               or more commercial banks, savings banks, savings and loan  
               associations, or credit unions that are located in the  
               United States and within the network used by the private  
               sector entity for this purpose;

             c)   Any private sector entity used by a selected depository  
               institution to help place its local agency deposits shall  
               maintain policies and procedures that require the  
               following:


               i)     The full amount of each deposit placed, including  
                 interest, shall at all times be insured by the Federal  
                 Deposit Insurance Corporation (FDIC) or the National  
                 Credit Union Administration (NCUA); and,








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               ii)    Every depository institution where funds are placed  
                 shall be capitalized at a sufficient level to receive  
                 deposits pursuant to FDIC or NCUA.

             d)   The selected depository institution shall serve as a  
               custodian for each deposit; and,

             e)   At the same time the local agency's funds are deposited,  
               the selected depository institution shall receive an amount  
               of insured deposits from other commercial banks, savings  
               banks, savings and loan associations, or credit unions  
               that, in total, are equal to, or greater than, the full  
               amount of the principal that the local agency initially  
               deposited through the selected depository institution for  
               investment.

          4)Authorizes a local agency to invest a portion of its surplus  
            funds in CDs at a commercial bank, savings bank, savings and  
            loan association, or credit union that uses a private sector  
            entity that assists in the placement of CDs, provided that the  
            purchases of CDs, in total, do not exceed 30% of the agency's  
            funds.  

          FISCAL EFFECT:  None.


          COMMENTS:  


          Background 


          The authorization for local agencies to invest surplus funds in  
          CDs was put into place by AB 2011 (Vargas), Chapter 459,  
          Statutes of 2006.  Existing law requires local agency funds to  
          either be protected by federal deposit insurance or secured by  
          collateral.  Prior to the bill, if a local agency wanted to make  
          a deposit of over $100,000, the FDIC insurance limit at the  








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          time, the bank had to pledge collateral to secure the deposit.   
          This collateralization requirement was a barrier to most small  
          community banks accepting deposits of local agency funds, which  
          were generally in amounts much greater than $100,000.  


          AB 2011 (Vargas) allowed local agencies to use a deposit  
          placement service which takes a bank customer's large deposit  
          and breaks it into amounts of less than the $100,000 FDIC  
          insurance limit.  These amounts are then placed in CDs at other  
          banks within its network, ensuring FDIC protection on the  
          customer's full deposit.  The other banks then simultaneously  
          send an equal amount of funds back to the original bank,  
          enabling it to have the full amount of the original deposit  
          available for lending or other purposes.  SB 1344 (Kehoe),  
          Chapter 112, Statutes of 2010, eliminated the sunset date  
          contained in AB 2011 (Vargas) and permanently authorized local  
          agencies to use a deposit placement service.  


          (On July 21, 2010, President Barack Obama signed the Dodd-Frank  
          Wall Street Reform and Consumer Protection Act, which, in part,  
          permanently raises the current standard maximum deposit  
          insurance amount to $250,000. The standard maximum insurance  
          amount of $100,000 had been temporarily raised to $250,000 until  
          December 31, 2013. The FDIC insurance coverage limit applies per  
          depositor, per insured depository institution for each account  
          ownership category.)





          When AB 2011 became law, only one national network, the  
          Certificate of Deposit Account Registry Service (CDARS),  
          Promontory Interfinancial Network, LLC, offered a qualifying CD  
          placement service.  In 2010, Promontory Interfinancial  
          introduced Insured Cash Sweep (ICS), similar to CDARS, but  
          allows for more liquid types of deposits like money market  








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          accounts, in amounts that qualify for FDIC insurance.  These  
          cash sweep services utilizing demand deposit and money market  
          accounts are offered by other private sector entities (including  
          Charity Deposits Corporation, Money Market Account Xtra; and  
          Reich and Tang, Demand Deposit Marketplace).


          Most recently, AB 279 (Dickinson), Chapter 228, Statutes of  
          2013, extended a local government's authority to access these  
          types of cash sweep services.  AB 279 expanded the types of  
          deposits local agencies can invest surplus funds into, beyond  
          CDs, to include money market or demand deposit accounts.  AB 279  
          also contains several safeguards to require that a private  
          sector deposit placement service adheres to the federal rules  
          governing FDIC pass-through insurance. 


          Existing law allows, but does not mandate, a local agency to  
          deposit up to 30 % of their overall surplus funds with a  
          depository institution that uses a private sector placement  
          service. These local agency funds may be deposited into a CD or  
          a demand deposit account. Utilization of a placement service  
          allows the depository institution to accept a deposit from a  
          local agency exceeding the FDIC standard insurance limit of  
          $250,000 (per depositor) while maintaining full insurance  
          coverage over the entirety of the local agency's deposit.  
          Typically, depository institutions utilizing a placement service  
          are community banks operating within the geographical region of  
          the local agency. 


          Procedurally, the depository institution selected by the local  
          agency (the "selected depository institution") serves as the  
          custodian of the funds and may use a placement service to place  
          deposits in excess of the FDIC insurance limit with other  
          participating depository institutions within the placement  
          service's network. Existing law mandates that the full amount of  
          each deposit must be insured at all times and that every  
          depository institution where funds are placed must be  








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          sufficiently capitalized. 


          Participating depository institutions receiving a portion of the  
          local agency's deposit from the selected depository institution  
          reciprocate to the selected depository institution deposits  
          equal to that placed with the participating depository  
          institution. This process, memorialized in California statute,  
          provides full insurance coverage for the local agency's surplus  
          funds and allows the local agency to identify one depository  
          institution for which they wish to do business. Without this  
          process, a local agency with surplus funds exceeding the FDIC  
          insurance limit would have the obligation to identify multiple  
          depository institutions to participate out their deposit in  
          order to achieve full FDIC insurance coverage. 


          For CDs, no more than 30 % of the local agency's overall surplus  
          funds may be deposited into a depository institution where a  
          placement service is used relative to the local agency's  
          deposit. However, for demand deposit accounts, existing law  
          limits the deposit of a local agency's overall surplus funds to  
          no more than 10 % of the agency's funds into any one placement  
          service used by a depository institution relative to the local  
          agency's deposit. 





          Need for the Bill:


          The expanded authority granted by AB 279 (Dickinson) contained a  
          January 1, 2017, sunset date and prohibited local agencies from  
          investing more than 10% of the agency's fund to any one private  
          sector entity that assists in deposit placement service.  This  
          bill repeals those two provisions, therefore, permanently  
          extending the authority granted in AB 279 to allow local  








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          agencies to invest up to 30% of surplus funds into non-CD  
          deposits at depository institutions that use a private sector  
          entity that assists in the placement of deposits.  This bill  
          also removes the limitation on investing authority which  
          prohibited local agencies from investing more than 10% of funds  
          to any one private sector entity that assists in deposit  
          placement service.  The overall cap of 30% of surplus funds as  
          well as several other safeguards in current law would not be  
          impacted by this bill. 


          The changes proposed in AB 283 accomplish two goals: aligns the  
          statutory treatment of demand deposit accounts to certificates  
          of deposit relative to the maximum percentage of surplus funds  
          that may be deposited with a depository institution using a  
          placement service so that each deposit product shall not exceed  
          30 % of the local agency's surplus funds and eliminates the  
          sunset provision on the code sections permitting a local  
          agency's deposit into a demand deposit account with a depository  
          institution using a placement service.      


          Previous Legislation:


          AB 279 (Dickinson, Chapter 228, Statutes of 2013) authorized  
          local agencies, until January 1, 2017, to invest up to 30% of  
          their surplus funds through a private sector deposit placement  
          service, as specified.  


          SB 1344 (Kehoe, Chapter 112 Statutes of 2010) deleted the sunset  
          date on current law provisions  that allow local agencies to  
          invest up to 30% of surplus funds in CDs with a commercial bank,  
          savings bank, or credit union. Additionally, provides that only  
          a local agency with existing legal authority to make investments  
          may invest surplus funds in CDs.










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          AB 2011(Vargas, Chapter 459, Statutes of 2006) allowed a local  
          agency to invest specified funds into multiple CDs under certain  
          circumstances.  


          Double Referral:


          This measure previously passed out of the Assembly Local  
          Government Committee on Consent. 


          REGISTERED SUPPORT / OPPOSITION:




          Support


          California Bankers Association (Co-Sponsor)


          California Independent Bankers (CIB)




          Opposition


          None on file.




          Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)  
          319-3081









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