BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 283 |Hearing | 7/1/15 |
| | |Date: | |
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|Author: |Dababneh |Tax Levy: |No |
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|Version: |6/23/15 |Fiscal: |No |
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|Consultant|Weinberger |
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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
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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
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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
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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.
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