BILL ANALYSIS
AB 1156
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Date of Hearing: May 13, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 1156 (Nava) - As Amended: April 23, 2009
Policy Committee: Banking and
Finance Vote: 10-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill provides that community banks and credit unions 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. The bill also:
1)Specifies that the first priority for the investment of
surplus moneys, to the extent consistent with liquidity
requirements and prudent management of surplus moneys, shall
be in time deposits of community banks and credit unions.
2)Specifies that when a local agency invests surplus moneys in
CDs at financial institutions, that first priority shall be
given to community banks.
FISCAL EFFECT
1)Unknown, as the bill does not contain a precise standard for
determining when community banks and credit unions would
receive priority over other institutions.
a) If the standard were all else being exactly equal in
terms of a risk-adjusted rate of return, then the fiscal
effect would be minor.
b) However, if the standard were interpreted to be less
rigid and the redirection of funds to community banks
and/or credit unions results in an even minor reduction in
the yield earned on investments in certificates of
deposits, the cost to the state, in terms of forgone
interest earnings, could run into the millions of dollars
AB 1156
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annually.
COMMENTS :
1)Background. 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.
2)Rationale . According to the author, the bill is intended to
provide confidence in California community banks and credit
unions by requiring that these entities receive first priority
for the investment of state and local surplus funds.
3)Issues . The treasurer currently has a program in place for
placement of state funds in CDs of community banks. The amount
of these investments take into account numerous factors,
including soundness of the banks, and the state's needs for
liquidity. A key consideration is whether placing such a
priority in statute will hamper the treasurer's ability to
focus on his main responsibilities related to prudently
investing state funds and managing the state's cash-flow
needs during the current difficult financial circumstances.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081