BILL ANALYSIS
AB 1156
Page 1
Date of Hearing: April 20, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
AB 1156 (Nava) - As Amended: March 27, 2009
SUBJECT : Surplus funds: local agencies: investments.
SUMMARY : Provides that community banks shall be given first
priority for the investment of state surplus funds and the
investment of surplus funds in certificates of deposit (CDs) by
local agencies. Specifically, this bill :
1)Provides that an "eligible community bank" means a state or
national bank located in this state that meets the following
requirements and conditions:
a) Has five billion dollars or less in assets;
b) The bank is selected by the Treasurer for the
safekeeping of money belonging to or in the custody of the
state; and,
c) The bank has received an overall rating of not less than
"satisfactory" in its most recent evaluation by the
appropriate federal financial supervisory agency of the
bank's record of meeting the credit needs of the state's
communities.
2)Specifies that the first priority for the investment of
surplus moneys shall be, to the extent consistent with
liquidity requirements and prudent management of surplus
moneys, shall be in time deposits of community banks.
3)Specifies that when a local agency invests surplus moneys in
CDs at financial insititions, that first priority shall be
given to community banks.
EXISTING LAW
1)Provides that eligible securities for the investment of state
surplus moneys include any of the following:
a) Bonds or interest-bearing notes or obligations of the
United States, or those for which the faith and credit of
the United States are pledged for the payment of principal
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and interest;
b) Bonds or interest-bearing notes on obligations that are
guaranteed as to principal and interest by a federal agency
of the United States;
c) Bonds and notes of this state, or those for which the
faith and credit of this state are pledged for the payment
of principal and interest;
d) Bonds or warrants, including, but not limited to,
revenue warrants, of any county, city, metropolitan water
district, California water district, California water
storage district, irrigation district in the state,
municipal utility district, or school district of this
state;
e) Bonds, consolidated bonds, collateral trust debentures,
consolidated debentures, or other obligations issued by
federal land banks or federal intermediate credit banks
established under the Federal Farm Loan Act, as amended, in
debentures and consolidated debentures issued by the
Central Bank for Cooperatives and banks for cooperatives
established under the Farm Credit Act of 1933, as amended,
in bonds or debentures of the Federal Home Loan Bank Board
established under the Federal Home Loan Bank Act, in stock,
bonds, debentures and other obligations of the Federal
National Mortgage Association established under the
National Housing Act as amended, and in the bonds of any
federal home loan bank established under that act,
obligations of the Federal Home Loan Mortgage Corporation,
in bonds, notes, and other obligations issued by the
Tennessee Valley Authority under the Tennessee Valley
Authority Act as amended, and bonds, notes, and other
obligations guaranteed by the Commodity Credit Corporation
for the export of California agricultural products under
the Commodity Credit Corporation Charter Act as amended;
f) Commercial paper of "prime" quality as defined by a
nationally recognized organization that rates these
securities;
g) Bills of exchange or time drafts drawn on and accepted
by a commercial bank, otherwise known as bankers
acceptances, which are eligible for purchase by the Federal
Reserve System;
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h) Negotiable certificates of deposits issued by a
federally or state-chartered bank or savings and loan
association, a state-licensed branch of a foreign bank, or
a federally or state-chartered credit union;
i) The portion of bank loans and obligations guaranteed by
the United States Small Business Administration or the
United States Farmers Home Administration. Bank loans and
obligations guaranteed by the Export-Import Bank of the
United States;
j) Student loan notes insured under the Guaranteed Student
Loan Program established pursuant to the Higher Education
Act of 1965, as amended (20 U.S.C. Sec. 1001 and following)
and eligible for resale to the Student Loan Marketing
Association established pursuant to Section 133 of the
Education Amendments of 1972, as amended (20 U.S.C. Sec.
1087-2);
aa) Obligations issued, assumed, or guaranteed by the
International Bank for Reconstruction and Development, the
Inter-American Development Bank, the Asian Development
Bank, the African Development Bank, the International
Finance Corporation, or the Government Development Bank of
Puerto Rico; or,
bb) Bonds, debentures, and notes issued by corporations
organized and operating within the United States.
Securities eligible for investment under this subdivision
shall be within the top three ratings of a nationally
recognized rating service. (Government Code, Section
16430. All further references are to the Government Code).
2)Allows a local agency, at its discretion, to invest a portion
of its surplus funds in certificates of deposit 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 certificates of deposit with the following
conditions:
a) The local agency shall choose a nationally or state
chartered commercial bank, savings bank, savings and loan
association, or credit union in this state to invest the
funds, which shall be known as the "selected" depository
institution;
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b) The selected depository institution may submit the funds
to a private sector entity that assists in the placement of
certificates of deposit with one or more commercial banks,
savings banks, savings and loan associations, or credit
unions that are located in the United States, for the local
agency's account;
c) The full amount of the principal and the interest that
may be accrued during the maximum term of each certificate
of deposit shall at all times be insured by the Federal
Deposit Insurance Corporation or the National Credit Union
Administration;
d) The selected depository institution shall serve as a
custodian for each certificate of deposit that is issued
with the placement service for the local agency's account;
e) At the same time the local agency's funds are deposited
and the certificates of deposit are issued, the selected
depository institution shall receive an amount of 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;
f) A local agency may not invest surplus funds with a
selected depository institution for placement as
certificates of deposit pursuant to this section on or
after January 1, 2012. A local agency's surplus funds,
invested pursuant to this section before January 1, 2012,
may remain invested in certificates of deposit issued
through a private sector entity for the full term of each
certificate of deposit;
g) Notwithstanding subdivisions (a) to (f), inclusive, no
credit union may act as a selected depository institution
under this section or Section 53635.8 unless both of the
following conditions are satisfied;
h) The credit union offers federal depository insurance
through the National Credit Union Administration; and,
i) The credit union is in possession of written guidance or
other written communication from the National Credit Union
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Administration authorizing participation of
federally-insured credit unions in one or more certificate
of deposit placement services and affirming that the moneys
held by those credit unions while participating in a
deposit placement service will at all times be insured by
the federal government. (Section 53601).
FISCAL EFFECT : Unknown
COMMENTS :
Current law provides that the State Treasurer or a local agency
may invest surplus funds into multiple types of investments and
products. Among the many choices available for investment are
CDs issued by financial institutions. State law outlines the
parameters and guidelines for investments in these instruments.
All financial institutions are eligible so long as they meet
safety and soundness requirements and meet the necessary
collateral provisions. This bill is intended to provide
confidence in California community banks by requiring that, when
all other factors are equal, California community banks are
first priority for the investment of state and local surplus
funds. Currently, a bank that is not organized in the state may
receive investments under the provisions of current law. While
overall rates of return may make it a prudent financial decision
to invest in non-California banks, the first priority of state
moneys should be to achieve the highest rate of return with
California institutions. It is the author's intent to bring
together all stakeholders to design this legislation so that
confidence is restored to the banking sector in California and
that customers will see the State of California leading by
example, in expressing confidence in community commercial banks.
It is clear that many community banks have maintained sound
loan underwriting practices, as well as, community investment,
but have been hit with challenges and difficulties that face the
financial markets as a whole, but have had little to do with the
cause of the market chaos. The same may also be said of
California credit unions.
An article appearing in The Washington Monthly , Too Small to
Fail (December 2008) detailed the stability and soundness of the
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community bank model. The findings concluded that small banks
are holding steady through much of the current economic crisis.
For example, the failure rate among big banks (those with $1
billion or more) is seven times greater than among smaller
banks. The article goes on to say, "One reason community banks
are doing so well right now is simply that they never became too
clever for their own good." Additionally, because most
community banks did not sell off large portions of their lending
portfolios to investors, and in such, retained the risk, they
were more likely to have made the determination that customers
could actually repay the loans that had been given to them.
Finally, "When savers, borrowers, and lenders all live in the
same community, lenders don't write loans that amount to
financial crack. They know their business depends on their good
reputation."
Proposed Amendments:
As credit unions are also eligible under current law for the
investment of state and local surplus funds, the author believes
it is appropriate to add an authorization that credit unions
many also be included in this new program. In order to
accomplish this, the committee recommends the following
amendment:
1)Language should be added to the bill to expand priority beyond
community banks, to also include credit unions.
In addition to the aforementioned amendment proposal, the bill
requires a technical amendment to clarify its application to
investments in CDs at financial institutions. In order to
clarify the intent of the bill the following amendments is
necessary:
2)Page 2, line 5 after "moneys" insert "under section 164309(h)
REGISTERED SUPPORT / OPPOSITION :
Support
California Independent Bankers
Opposition
AB 1156
Page 7
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081