BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     AB 283


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          CONCURRENCE IN SENATE AMENDMENTS


          AB  
          283 (Dababneh)


          As Amended  June 23, 2015


          Majority vote


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          |ASSEMBLY:  | 80-0 | (April 20,    |SENATE: |39-0  | (July 9, 2015)  |
          |           |      |2015)          |        |      |                 |
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          |           |      |               |        |      |                 |
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          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) 








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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  








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                 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.  









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          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  








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            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  








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            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