BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Dave Cox, Chair
BILL NO: SB 1344 HEARING: 4/7/10
AUTHOR: Kehoe FISCAL: No
VERSION: 4/5/10 CONSULTANT:
Weinberger
INVESTMENT OF SURPLUS FUNDS
Background and Existing Law
Since 1913, state law has authorized local officials to
invest a portion of their temporarily idle funds in a
variety of financial instruments. Originally, state law
limited the instruments to government bonds, but over time
the laws governing local agency investments have been
amended to keep pace with changing investment opportunities
and current market offerings.
California law allows local officials to deposit money in
state or national banks, savings associations, federal
associations, credit unions, or federally insured
industrial loan companies in the State of California.
These public deposits, which include funds placed into
certificates of deposit (CDs), are subject to restrictions,
including a requirement that deposits must be insured by
the Federal Deposit Insurance Corporation (FDIC) or, to the
extent not insured, collateralized with certain types of
securities in specified amounts.
FDIC insurance usually covers only $100,000 per depositor
per institution. As a result, to secure large public
deposits, depository institutions must hold significant
amounts of collateral.
In 2006, the Legislature authorized local agencies to
invest a portion of their surplus funds in certificates of
deposit issued through a private sector deposit placement
service (AB 2011, Vargas, 2006). A deposit placement
service splits the funds deposited at a single financial
institution into less than $100,000 increments and trades
deposits through a network of participating institutions.
Network members provide simultaneous reciprocal deposits on
a dollar-for-dollar basis, so that the equivalent of the
original deposit comes back to the bank that received the
original deposit. The deposits are in increments of less
SB 1344 -- 4/5/10 -- Page 2
than $100,000 to ensure that both the principal and
interest are eligible for full FDIC insurance, thereby
eliminating the need for collateralization.
AB 2011 included a number of restrictions, including:
No more than 30% of the agency's surplus funds can be
invested in any combination of certificates of deposit
issued through a private sector deposit placement service
and negotiated certificates of deposit.
Public funds must be invested in a deposit placement
service through an "originating bank," which must be a
nationally or state chartered bank or savings and loan
association in California that is a member of a placement
service.
The originating bank must submit the funds for placement
as CDs issued by one or more members of the placement
service located in the United States, for the local
agency's account.
The full amount of the principal and the interest that
may accrue during the maximum term of each CD that is
issued through the placement service must be insured by
the FDIC.
The originating bank must serve as a custodian for each
CD that is issued through the placement service for the
local agency's account.
At the same time that the local agency's funds are
deposited and certificates of deposit are issued, the
originating bank must receive, from the other members of
the placement service, reciprocal deposits that are equal
to, or greater than, the full amount of the principal
that the local agency initially deposited through the
originating bank.
When AB 2011 became law, only one national network, the
Certificate of Deposit Account Registry Service (CDARS)
established by Promontory Interfinancial Network, LLC,
offered a qualifying CD placement service. AB 2011
declared that it was not intended to restrict competition
among private sector entities that provide CD placement
services. However, CDARS is still the only such CD
SB 1344 -- 4/5/10 -- Page 3
placement network that exists. Since 2006, 55 community
banks in California have invested over $2.2 billion of
local agency deposits from counties, cities, special
districts, and other agencies through the CDARS network.
The statutes authorizing the use of CD placement services
sunset on January 1, 2012.
Proposed Law
Senate Bill 1344 deletes the January 1, 2012 sunset date on
the statutes authorizing local agencies to invest 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, making the statutes permanent.
SB 1344 provides that only an agency which has authority
under another provision of law to invest funds may invest
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.
Comments
1. Win, win . Statutory collateralization requirements
limit small community banks' capacity to accept large
public deposits. Many local agencies' treasurers want to
be able to make deposits with community banks, but don't
want the administrative and monitoring burdens of
maintaining multiple $100,000 deposits at separate
institutions to ensure FDIC insurance coverage.
Certificate of deposit placement services address both of
these concerns. By eliminating the sunset clause on the
statutory authorization to use certificate of deposit
placement service, SB 1344 allows local officials to
continue investing funds in this useful financial
instrument that benefits public agencies and local
communities.
2. Let's be clear . SB 1344 clarifies that the statutes
authorizing investments that use certificate of deposit
placement services do not grant investment authority to
agencies that did not previously have such authority under
another statute. This provision responds to a recent
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Attorney General's opinion which found that when a county
treasurer serves as treasurer of a fire protection district
that has not appointed its own treasurer, that district may
invest its surplus funds outside of the county treasury
without the county treasurer's approval. The decision
cited the statute enacted by the 2006 Vargas bill to
support this conclusion.
3. Double-referral . Because SB 1344 affects local
governments' deposits of surplus funds at banks, savings
and loans, and credit unions the Senate Rules Committee has
ordered a double-referral of the bill --- first to the
Senate Local Government Committee which has policy
jurisdiction over the statutes governing local agencies'
investment, and then to the Senate Banking, Finance, and
Insurance Committee, which has jurisdiction over banking
bills.
Support and Opposition (4/1/10)
Support : California Independent Bankers, California
Bankers Association, California Municipal Treasurers
Association, City of Santa Rosa.
Opposition : Unknown.