BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Isadore Hall, III
Chair
2015 - 2016 Regular
Bill No: AB 2638 Hearing Date: 6/28/2016
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|Author: |Gatto |
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|Version: |6/21/2016 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Arthur Terzakis |
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SUBJECT: Government finance: investment
DIGEST: This bill extends the term of each of the appointed
members of the Local Investment Advisory Board (LIAB), within
the State Treasurer's Office, from two years to three years.
Additionally, this bill creates the Intermediate and Long Term
Investment Fund (ILTIF) within the Treasurer's Office, to be
administered by the Intermediate and Long Term Investment Board
(ILTIB), also created by this bill.
ANALYSIS:
Existing law:
1)Establishes the Local Agency Investment Fund (LAIF), a trust
fund in the custody of the State Treasurer, in which local
governments and other governmental entities may deposit, for
investment, moneys that are not required for immediate needs.
2)Creates the LIAB and authorizes the Treasurer, with the advice
of the LIAB, to invest moneys in the LAIF. The LIAB consists
of the Treasurer (chair) and four additional members appointed
by the Treasurer, two of whom are qualified by training and
experience in the field of investment or finance, and two
members who are treasurers, finance or fiscal officers or
business managers employed by any county, city or local
district or municipal corporation.
AB 2638 (Gatto) Page 2 of ?
3)Provides that the term of each LIAB member is two years and
each appointed member serves at the pleasure of the Treasurer.
LIAB members who are not state officers or employees shall
not receive a salary but are entitled to a per diem of $50 for
each day's attendance at an LIAB meeting, not to exceed $300
in any month.
4)Stipulates that the LIAB's primary purpose shall be to advise
the Treasurer in formulating the investment and reinvestment
of moneys in the Fund, and the acquisition, retention,
management, and disposition of investments of the LAIF.
This bill:
1)Extends the term of each of the appointed members of the LIAB
from two years to three years and also makes minor technical
and code maintenance changes to existing provisions of law
that establish the LIAB.
2)Creates the ILTIF, within the Treasurer's Office, to receive
voluntary deposit of funds by a governmental entity so that
those funds may benefit from the intermediate or long-term
investments authorized by this bill.
3)Requires the State Treasurer to administer the ILTIF and
maintain a separate account within the ILTIF for each
governmental entity having deposits in the ILTIF.
4)Stipulates that moneys deposited into the ILTIF shall be
subject to existing provisions pertaining to eligible
securities for the investment of surplus moneys, as specified.
Also, authorizes the investment of moneys in long-term
corporate and government bonds, in gold, and in convertible
securities.
5)Stipulates that money in the ILTIF shall be invested to
achieve the objective of the ILTIF, which is to realize the
maximum return consistent with safe and prudent management.
6)Provides that the Treasurer may refuse to accept deposits into
the ILTIF if the deposit would adversely affect the state's
portfolio.
7)Provides that at the conclusion of each calendar quarter, all
interest earned and other increment derived from investments
AB 2638 (Gatto) Page 3 of ?
must be distributed by the State Controller to the
contributing governmental units or trustees or fiscal agents,
nonprofit corporations, and quasi-governmental agencies in
amounts directly proportionate to the respective amounts
deposited in the ILTIF and the length of time the amounts
remained therein.
8)Stipulates that an amount not to exceed a maximum of 5% of the
earnings of the ILTIF and not to exceed the amount
appropriated in the annual Budget Act for this function shall
be deducted from the earnings prior to distribution for
reasonable costs incurred by the Treasurer, Controller, and
Director of Finance.
9)Establishes the 5-member ILTIB consisting of the Treasurer
(chair) and four additional members appointed by the
Treasurer, two of whom are qualified by training and
experience in the field of investment or finance, and two
members who are treasurers, finance or fiscal officers or
business managers employed by any county, city or local
district or municipal corporation.
10)Provides that the term of each ILTIB member is two years and
each appointed member serves at the pleasure of the
Treasurer. ILTIB members who are not state officers or
employees shall not receive a salary but are entitled to a
per diem of $50 for each day's attendance at a board meeting,
not to exceed $300 in any month.
11)Stipulates that the ILTIB's primary purpose shall be to
advise the Treasurer in formulating the investment and
reinvestment of moneys in the ILTIF, and the acquisition,
retention, management, and disposition of investments of the
ILTIF. Also, requires the ILTIB to submit quarterly and
annual reports regarding the performance of the investments
in the ILTIF to the Legislature and to the Department of
Finance.
Background
The Local Agency Investment Fund (LAIF) is a voluntary program
that was created in 1977 as an investment alternative for
California's local governments and special districts. The
program offers local agencies the opportunity to participate in
a major portfolio, which invests hundreds of millions of
AB 2638 (Gatto) Page 4 of ?
dollars, using the investment expertise of the Treasurer's
Office at no additional cost to the taxpayer. The LAIF is part
of the Pooled Money Investment Account (PMIA) which is overseen
by the Pooled Money Investment Board (PMIB) consisting of the
Treasurer, the Controller, and the Director of Finance.
The PMIA's primary investment objectives are safety, liquidity
and yield and staff invest PMIA funds in a wide range of
securities, using more than 100 brokers, dealers, banks and
direct issuers of commercial paper and corporate debt. By law,
PMIA moneys can be invested only in the following categories:
U.S. government securities, securities of federally-sponsored
agencies, domestic corporate bonds, interest-bearing time
deposits in California banks, savings and loan associations and
credit unions, prime-rated commercial paper, repurchase and
reverse repurchase agreements, security loans, banker's
acceptances, negotiable certificates of deposit and loans to
various bond funds. As of May, 2016, the PMIA's balance was
$70.1 billion.
The LAIF has its own board, the Local Investment Advisory Board
(LIAB). The primary purpose of the LIAB is to advise and assist
the Treasurer in formulating the investment and reinvestment of
moneys in the LAIF which has grown from 293 participants and
$468 million in 1977 to 2,469 participants and $21.1 billion at
the end of March 2016.
Purpose of AB 2638. The author's office notes that since
inception, the LAIF has had successful yields but recent returns
have not measured up to prior year investments. The author's
office states that allowing members of the LIAB to serve longer
terms provides the Treasurer a valuable resource to explore
investment strategies that may provide higher returns for local
governments in the long run. Additionally, the author's office
states that this bill creates a new ILTIF and ILTIB to mirror
the LAIF and LIAB structure to provide government entities the
ability to augment funds by placing them in longer term
investments in an effort to yield higher returns.
Staff comments. It is unclear why the author has chosen to
extend the term of each of the appointed members of the LIAB
from two years to three years, yet the term of the newly created
ILTIB members is two years.
AB 2638 (Gatto) Page 5 of ?
Prior/Related Legislation
SB 797 (Governmental Organization Committee, Chapter 249,
Statutes of 2015) added prime-rated commercial paper, issued by
a federally or state-chartered bank or a state-licensed branch
of a foreign bank that is approved by the PMIB, to the list of
eligible securities for investment of funds in the PMIA. The
bill also made clarifying amendments and deleted obsolete
language relating to various bond acts.
SB 826 (Governmental Organization Committee, Chapter 205,
Statutes of 2009) made a number of technical changes to the
General Obligation Bond Law to clarify the way the law applies
to negotiated sales of bonds.
FISCAL EFFECT: Appropriation: No Fiscal
Com.: Yes Local: No
SUPPORT:
None received
OPPOSITION:
None received