BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Marty Block, Chair
2015 - 2016 Regular
Bill No: AB 283 Hearing Date: June 17,
2015
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|Author: |Dababneh |
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|Version: |February 11, 2015 Introduced |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Eileen Newhall |
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Subject: Financial affairs.
SUMMARY Deletes the provision of existing law, which states that no
more than 10% of an agency's surplus funds that are invested in
deposits other than certificates of deposit may be submitted to
any one private sector entity that assists in the placement of
deposits, and deletes the sunset date on the provision
authorizing these types of deposits.
DESCRIPTION
1. Deletes the provision of existing law, which states that no
more than 10% of an agency's surplus funds that are invested
in deposits other than certificates of deposit may be
submitted to any one private sector entity that assists in
the placement of deposits.
2. Deletes the sunset date on the provision of existing law
granting local agencies the authority to invest surplus
funds in deposits other than certificates of deposit at
depository institutions that use a private sector entity to
assist in the placement of deposits.
EXISTING LAW
3. Defines a local agency as a county, city, city and county,
school district, community college district, public district,
county board of education, county superintendent of schools, or
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any public or municipal corporation (Government Code Section
53600).
4. Authorizes local agencies that do not pool their money in
deposits or investments with other local agencies with separate
governing bodies, and that have money in their treasuries that
is not required for their immediate needs, to invest any portion
of the money they deem wise or expedient in selected investments
specified in law, and places limitations on the percentage of a
local agency's surplus that may be invested in some of those
investments (Government Code Section 53601).
5. Includes negotiable certificates of deposit (CDs) among
allowable investments, provided they are issued by a state- or
nationally-chartered depository institution, and the local
agency's investment in the CDs does not exceed 30% of the
agency's surplus (Government Code Section 53601).
6. Authorizes local agencies that have the authority to invest
surplus funds at their discretion to invest up to 30% of
those funds in deposits at a commercial bank, savings bank,
savings and loan association, or credit union that uses a
private sector entity which assists in the placement of
deposits (Government Code Sections 53601.8 and 53635.8).
This authority applies to investments in two different types
of deposits, as follows:
a. The full 30% of an agency's surplus funds may be
invested in CDs at depository institutions that use a
private sector entity which assists in the placement of
deposits. This authority does not sunset.
b. No more than 10% of an agency's surplus funds that
are invested in deposits other than CDs may be submitted
to any single private sector entity that assists in the
placement of deposits. Authority to invest in deposits
other than certificates of deposit sunsets on January 1,
2017.
7. Places several restrictions on the local agencies and
depository institutions that take advantage of the authority
described in Existing Law Number 4 above, as follows:
a. The local agency must use a nationally or
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state-chartered commercial bank, savings bank, savings
and loan association, or credit union in California to
invest its funds.
b. The depository institution used by the local agency
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 in the United States, which are within the network
used by the private sector entity.
c. Any private sector entity used by a depository
institution to help place its local agency deposits must
maintain policies and procedures requiring both of the
following:
i. The full amount of each deposit placed
using the private sector entity and the interest that
may accrue on each deposit must at all times be
insured by the Federal Deposit Insurance Corporation
(FDIC) or National Credit Union Administration
(NCUA).
ii. Every depository institution where funds
are placed must be capitalized at a level that is
sufficient, and be otherwise eligible to receive such
deposits pursuant to FDIC or NCUA regulations.
d. On the same date the local agency's funds are placed
by the private sector entity, the depository institution
used by the local agency must receive an amount of
insured deposits from other financial institutions that,
in total, are equal to or greater than the full amount of
the principal the local agency initially deposited with
that institution.
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COMMENTS
1. Purpose: AB 283 is co-sponsored by the California
Independent Bankers (CIB) and the California Bankers
Association (CBA) to increase banks' access to local agency
deposits.
2. Background: This bill builds upon authority first granted
to local agencies in California in 2006 (AB 2011 (Vargas),
Chapter 459, Statutes of 2006). In 2006, CIB sponsored
legislation intended to help community banks attract
deposits from local government agencies. Prior to the 2006
legislation, community banks struggled to attract local
agency deposits, because of the requirement that local
agency deposits above the FDIC deposit insurance limit be
fully collateralized. Unlike their larger counterparts,
small banks lack the necessary collateral to accept large
deposits.
Recognizing that smaller banks would benefit from the ability to
accept multiple deposits in increments up to, but not
exceeding the FDIC deposit insurance limit, a private sector
entity (Promontory Interfinancial LLC) created a CD
placement service. Promontory's CD placement service is
based upon the premise that FDIC insurance is
institution-based, and not depositor-based. Thus, if a
local agency with $2 million to deposit places that money in
a single depository institution, only $250,000 of that
deposit is insured by the FDIC. However, if that local
agency splits up its $2 million into eight slices of
$250,000 each, and deposits each of those eight $250,000
slices into a different depository institution, the whole $2
million will be insured. Promontory devised a way to save
local agencies the need to manually split their deposits
into slices up to, but not exceeding the FDIC insurance
limit, while simultaneously giving relatively small banks an
opportunity to receive public funds in insured increments of
$250,000 or less.
Promontory's CD placement service works, in part because of its
large network of member banks, and in part because of the
FDIC's willingness to insure deposits that are parceled out
by Promontory in amounts up to, but not exceeding the FDIC's
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deposit insurance limit. The service works as follows: a
local agency with an amount of surplus funds to invest that
exceeds the FDIC insurance limit (now $250,000) goes to a
local California bank (the "selected" bank), which belongs
to the CD placement service. At the request of the selected
bank, the CD placement service splits up the local agency's
deposit into slices, each of which is valued at $250,000 or
less. Each of these slices is then parceled out to banks
throughout the country, which are also members of the
placement service, and which issue CDs. In that way, the
full amount of the local agency's deposit is FDIC-insured.
At the same time the local agency's funds are deposited with the
selected bank, and then parceled out to banks across the
country that are members of the CD placement network in
amounts of $250,000 or less, the selected bank receives
deposits from other members of the placement service
network, which are equal to, or greater than, the full
amount of the principal the local agency initially deposited
with the selected bank. Thus, the selected bank ends up
with at least the same amount of money on deposit that it
received from the local agency; however, the full value of
that money is insured, because it is held in increments of
$250,000 or less for depositors that originally deposited
their money with other selected banks.
The CD placement service has proven quite effective to date.
Through the end of Q1 2015, approximately $5.8 billion in
deposits have been made by California local agencies into
depository institutions using a private sector CD placement
service.
In 2013, AB 279 (Dickinson), Chapter 228, Statutes of 2013,
authorized local agencies to invest surplus funds in
deposits other than CDs at depository institutions that use
private sector placement services to distribute those non-CD
deposits. Non-CD deposits include demand deposit accounts
and money market accounts.
The logic behind the non-CD depository authority is identical to
the CD deposit authority (i.e., an amount of money above the
FDIC's deposit insurance limit is deposited with a
California bank, a private sector entity facilitates the
distribution of amounts in excess of the deposit insurance
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limit to other banks in its network, the same private sector
entity facilitates the distribution of money deposited into
those other banks into the California bank in increments up
to, but not exceeding the FDIC's deposit limit). The only
difference between the two different types of authority is
that the money is held in demand deposit accounts or money
market accounts, and not in CDs.
3. Discussion: Unlike the CD placement service, which is only
offered by Promontory, cash sweep services utilizing demand
deposit and money market accounts are offered by multiple
private sector entities. Promontory Interfinancial Network
offers an Insured Cash Sweep product, Anova Financial
Corporation offers a Reciprocal Exchange Deposit program,
Charity Deposits Corporation offers a Money Market Account
Xtra product, and Reich and Tang offers a Demand Deposit
Marketplace. Recognizing the existence of multiple
placement services for non-CD deposits, the Senate
Governance and Finance Committee amended AB 279 to cap, at
10%, the maximum percentage of a local agency's surplus
funds that could be allocated by any single private sector
placement service.
This 10% limitation has proven problematic for depository
institutions and local agencies. Depository institutions
are unwilling to advertise the existence of their non-CD
placement services, because of the relatively small amounts
of money the 10% limit allows them to accept. Most banks
have relationships with only one private sector placement
service due to the cost and expense of vendor management due
diligence; thus, the 10% per private sector placement
service has the effect of being a 10% per depository
institution limit. Because depository institutions are not
advertising the existence of non-CD placement services, no
local agency has used the authority granted under AB 279.
AB 283 seeks to delete the 10% limit, with the aim of
encouraging depository institutions and local agencies to
use the authority granted pursuant to AB 279. If AB 283 is
enacted, the 30% cap that applies to deposits in CDs which
are placed using a private sector placement service will
also apply to non-CD deposits that are placed using a
private sector placement service.
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4. Summary of Arguments in Support: CBA and CIB are sponsoring
AB 283 to remove the 10% cap which has discouraged use of
the non-CD placement services banks would like to offer to
local agencies in California, and to ensure that this non-CD
placement authority is a permanent part of California law.
5. Summary of Arguments in Opposition: None received.
6. Amendments:
a. As noted above, no local agency has utilized the
authority to invest surplus funds in non-CD deposits at
depository institutions that use a private sector
placement service to place those deposits. It would
therefore appear premature to delete the sunset date on
that authority. In lieu of deleting the sunset date on
the non-CD placement service authority, staff suggests
extending the sunset date in existing law, to give the
Legislature the opportunity to see whether deleting the
10% limitation has its desired effect of encouraging
these types of deposits.
Page 3, after line 21, insert the following: (i) This
section shall remain in effect only until January 1,
2021, and as of that date is repealed, unless a later
enacted statute, that is enacted before January 1, 2021,
deletes or extends that date.
Page 6, after line 26, insert the following: (i) This
section shall remain in effect only until January 1,
2021, and as of that date is repealed, unless a later
enacted statute, that is enacted before January 1, 2021,
deletes or extends that date.
7. Prior and Related Legislation:
a. AB 279 (Dickinson), Chapter 228, Statutes of 2013:
Authorized local agencies to invest surplus funds in
deposits other than CDs at depository institutions that
use a private sector entity to assist in the placement of
deposits. This authority sunsets on January 1, 2017.
b. SB 1344 (Kehoe), Chapter 112, Statutes of 2010:
Deleted the sunset date contained in AB 2011, thus
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permanently extending the ability of local agencies to
use private sector, CD placement services.
c. AB 2011 (Vargas), Chapter 459, Statutes of 2006:
Until January 1, 2012, authorized local agencies to
invest surplus funds in a private sector, CD placement
service.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Bankers Association (co-sponsor)
California Independent Bankers (co-sponsor)
Opposition
None received
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