BILL ANALYSIS Ó
AB 283
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Date of Hearing: April 8, 2015
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Maienschein, Chair
AB
283 (Dababneh) - As Introduced February 11, 2015
SUBJECT: Financial affairs.
SUMMARY: Makes permanent provisions of law that expand 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, as specified.
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 certificates of deposits (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:1)
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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.
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,
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,
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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:
1)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 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
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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.
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
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, extends a local government's authority to access these
types of cash sweep services. AB 279 expands 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.
2)Bill Summary. 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 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
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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.
When this Committee unanimously passed AB 279 (Dickinson) on
April 3, 2013, it did not contain the sunset date or 10% cap,
both of which were subsequently amended into the bill in the
Senate.
This bill is co-sponsored by the California Bankers
Association and the California Independent Bankers.
3)Author's Statement. According to the author, "This bill
accomplishes two goals: 1) 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 percent of the
local agency's surplus funds; and, 2) 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."
4)Arguments in Support. Supporters argue that this bill would
statutorily align the treatment of CDs and other types of
deposits and create more avenues for public fund investments.
Additionally, supporters argue that local agencies can use
placement services for both CDs and demand deposits in more
than 30 states.
5)Arguments in Opposition. None on file.
6)Double-Referral. This bill is double-referred to the Banking
and Finance Committee.
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REGISTERED SUPPORT / OPPOSITION:
Support
California Bankers Association [CO-SPONSOR]
California Independent Bankers [CO-SPONSOR]
Opposition
None on file
Analysis Prepared
by: Misa Lennox / L. GOV./(916) 319-3958
AB 283
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