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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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