BILL ANALYSIS Ó AB 283 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 283 (Dababneh) As Amended June 23, 2015 Majority vote -------------------------------------------------------------------- |ASSEMBLY: | 80-0 | (April 20, |SENATE: |39-0 | (July 9, 2015) | | | |2015) | | | | | | | | | | | | | | | | | | -------------------------------------------------------------------- Original Committee Reference: L. GOV. SUMMARY: Extends the sunset date on 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, and removes the cap on funds that may be invested in any single private sector deposit placement service. The Senate amendments delete the permanent authority for local agencies to use a private sector deposit placement service to invest surplus funds other than certificates of deposits (CDs) granted by this bill, as passed by the Assembly, and instead, extend the authority by four years to sunset on January 1, 2021. EXISTING LAW:1) AB 283 Page 2 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 AB 283 Page 3 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. AS PASSED BY THE ASSEMBLY, this bill: 1)Deleted 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)Repealed 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. AB 283 Page 4 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 AB 2011, 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 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 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 AB 283 Page 5 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 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. Senate amendments reinstated a sunset date, instead of granting the permanent authority, by extending the current sunset date from January 1, 2017, to January 1, 2021. This bill extends 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, until January 1 2021. This bill 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. 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 AB 283 Page 6 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, 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. Analysis Prepared by: Misa Lennox / L. GOV. / (916) 319-3958 FN: 0001155