BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 283 |Hearing | 7/1/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Dababneh |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |6/23/15 |Fiscal: |No | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Weinberger | |: | | ----------------------------------------------------------------- INVESTMENT OF SURPLUS FUNDS Repeals a cap on the share of local agency funds that may be invested through a private sector deposit placement service and extends the sunset date on the statutes authorizing those deposits. Background and Existing Law Since 1913, state law has authorized local officials to invest a portion of local governments' temporarily idle funds in a variety of financial instruments. Originally, state law limited the instruments to government bonds, but over time the laws governing local agency investments have been amended to keep pace with changing investment opportunities and current market offerings. California law allows local officials to deposit money in state or national banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in the State of California. These public deposits, which include funds placed into certificates of deposit (CDs), are subject to restrictions, including a requirement that deposits must be insured by the Federal Deposit Insurance Corporation (FDIC) or, to the extent not insured, collateralized with certain types of securities in specified amounts. FDIC insurance usually covers only $250,000 per depositor per institution. As a result, to AB 283 (Dababneh) 6/23/15 Page 2 of ? secure large public deposits, depository institutions must hold significant amounts of collateral. In 2006, the Legislature authorized local agencies to invest up to 30% of their surplus funds in CDs issued through a private sector deposit placement service (AB 2011, Vargas, 2006). Subsequent legislation deleted a sunset date from the statutes authorizing local agencies to invest in CDs using a deposit placement service (SB 1344, Kehoe, 2010). A deposit placement service splits the funds deposited at a single financial institution into increments of less than $250,000 and trades deposits through a network of participating institutions. Network members provide simultaneous reciprocal deposits on a dollar-for-dollar basis, so that the equivalent of the original deposit comes back to the bank that received the original deposit. Each of the incremental deposits is less than $250,000 to ensure that both the principal and interest are fully insured by the FDIC, eliminating the need for collateralization. In 2013, the Legislature expanded local governments' statutory authority to invest surplus funds through a deposit placement service to allow surplus funds to be placed not just in CDs but also in other types of deposits, including money market accounts and demand deposit accounts (AB 279, Dickinson, 2013). 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. The authority to invest in deposits other than CDs using a deposit placement service sunsets on January 1, 2017. Some California bankers suggest that the 10% cap on investments in deposits other than CDs that was enacted as part of the Dickinson bill in 2013 is too low to allow the new investment authority to be worthwhile for banks and local governments. They want the Legislature to repeal the 10% cap and extend the sunset date on the statutes authorizing those deposits. Proposed Law Assembly Bill 283 deletes a requirement that no more than 10% of an agency's surplus funds that are invested in deposits other AB 283 (Dababneh) 6/23/15 Page 3 of ? than certificates of deposit may be submitted to any one private sector entity that assists in the placement of deposits. AB 283 extends, until January 1, 2021, the sunset date in the statutes 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. AB 283 repeals a requirement that no more than 30% of a local agency's surplus funds can be invested, in total, in negotiable CDs and CDs using a private sector entity that assists in the placement of deposits. State Revenue Impact No estimate. Comments 1. Purpose of the bill . Statutory collateralization requirements limit small community banks' capacity to accept large public deposits. Many local agencies' treasurers want to be able to make deposits with community banks, but don't want the administrative and monitoring burdens of maintaining multiple $250,000 deposits at separate institutions to ensure FDIC insurance coverage. Deposit placement services address both of these concerns. Two years ago, the Legislature sought to expand California statutes that govern local agencies' use of deposit placement services to include deposits other than certificates of deposit. However, the requirement that no more than 10% of an agency's funds can be invested through a particular deposit placement service reportedly is preventing local governments from taking advantage of the new authority granted by AB 279 (Dickinson, 2013). Existing law already requires that no more than 30% of a local agency's surplus funds may be invested in CDs or any other type of deposit through a private sector deposit placement service. AB 283 leaves that cap in place. By repealing the 10% cap, AB 283 benefits public agencies and local communities by giving California local officials greater flexibility to place non-CD deposits in community banks without the difficulties of complying with AB 283 (Dababneh) 6/23/15 Page 4 of ? securitization requirements. 2. Double-referred . The Senate Rules Committee ordered a double-referral of AB 283 --- first to the Senate Banking & Financial Institutions Committee, which has jurisdiction over bills regulating banking activities like deposit placement services, and then to the Senate Governance & Finance Committee, which has jurisdiction over bills relating to local agencies' authority to invest public funds. The Senate Banking & Financial Institutions Committee passed the bill, with amendments, at its June 17 hearing on a 7-0 vote. Assembly Actions Assembly Local Government Committee:9-0 Assembly Banking & Finance Committee:11-0 Assembly Floor: 80-0 Support and Opposition (6/25/15) Support : California Bankers Association; California Independent Bankers. Opposition : Unknown. -- END --