BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 1344|
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THIRD READING
Bill No: SB 1344
Author: Kehoe (D)
Amended: 4/5/10
Vote: 21
SENATE LOCAL GOVERNMENT COMMITTEE : 5-0, 4/7/10
AYES: Cox, Aanestad, Kehoe, DeSaulnier, Price
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 9-0, 4/21/10
AYES: Calderon, Cogdill, Correa, Florez, Kehoe, Lowenthal,
Padilla, Price, Runner
NO VOTE RECORDED: Cox, Liu
SUBJECT : Local agency investments
SOURCE : California Independent Bankers
DIGEST : This bill deletes the sunset date on a provision
of law that allows local agencies to invest up to 30
percent of their surplus funds in certificates of deposit
at depository institutions, in such a way that the full
amount of each local agency deposit is federally-insured.
ANALYSIS :
Existing law:
1. Defines a local agency as a county, city, city and
county, school district, community college district,
public district, county board of education, county
CONTINUED
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superintendent of schools, or any public or municipal
corporation (Section 53600 of the Government Code).
2. Authorizes local agencies that do not pool their money
in deposits or investments with other local agencies
with separate governing bodies, and that have money in
their treasuries that is not required for their
immediate needs, to invest any portion of the money they
deem wise or expedient in selected investments specified
in law, and places limitations on the percentage of a
local agency's surplus that may be invested in some of
those investments (Section 53601 of the Government
Code).
3. Includes negotiable certificates of deposit (CDs) among
allowable investments, provided they are issued by a
state- or nationally-chartered depository institution,
and the local agency's investment in the CDs does not
exceed 30 percent of the agency's surplus (Section 53601
of the Government Code).
4. Until January 1, 2012, authorizes local agencies to
invest up to 30 percent of their surplus funds in CDs at
depository institutions that use a private sector
entity, which assists in the placement of CDs, as long
as the full amount of the principal and interest that
may be accrued during the maximum term of each CD is
insured at all times by either the Federal Deposit
Insurance Corporation (FDIC) or the National Credit
Union Administration (NCUA) (Sections 53601.8 and
53635.8 of the Government Code). Additional
requirements are as follows:
A. The depository institution which receives the
funds from the local agency is called the "selected"
depository institution.
B. The selected depository institution is required to
serve as a custodian for each CD that is issued with
the placement service.
C. At the same time the local agency's funds are
deposited, and CDs are issued, the selected
depository institution must receive deposits from
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other depository institutions in an amount that is
equal to or greater than the amount of principal that
the local agency initially deposited through the
selected depository institution for investment.
This bill 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.
This bill 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.
Background
The CD placement service that is at the heart of this bill
works, because of FDIC insurance. The FDIC currently
insures all depository accounts of the same person at the
same depository institution, up to $250,000. There is no
limit to the number of different institutions into which a
person can deposit funds that are eligible for FDIC
insurance; each depositor is eligible to obtain up to
$250,000 in FDIC insurance at every different bank into
which it deposits money. However, all of the accounts of
the same depositor at the same bank, including all branch
offices of the bank, are added together, to count toward
the $250,000. Thus, if an insured bank has branch offices,
a depositor cannot increase its insurance coverage by
placing deposits at different branches of the same insured
bank. Similarly, deposits held by the Internet division of
an insured bank are lumped together with funds deposited
with the "brick and mortar" branches of the bank for FDIC
insurance purposes, even if the Internet division uses a
different name.
Under the provisions of AB 2011 (Vargas), Chapter 459,
Statutes of 2006, (the bill whose sunset date this bill
would eliminate), a local agency with more than $250,000 to
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invest may go to a bank (the "selected" bank), which
belongs to a CD placement service. At the request of the
selected bank, the CD placement service splits up the local
agency's deposit into chunks, each of which is valued at
$250,000 or less. Each of these chunks is then parceled
out to banks throughout the country, which are members of
the placement service, and which issue CDs. In that way,
the full amount of the local agency's deposit is
FDIC-insured.
One of the unique aspects of the CD placement service whose
use is authorized by this bill is its reciprocity element.
At the same time the local agency's funds are deposited
with the selected bank, and then parceled out to member
banks within the CD placement network in amounts of
$250,000 or less, the selected bank must receive deposits
from other members of the placement service, which are
equal to, or greater than, the full amount of the principal
the local agency initially deposited with the selected
bank. Thus, the selected bank ends up with the same amount
of money on deposit that it received from the local agency;
however, the full value of the money is insured, because it
is held in increments of $250,000 or less for depositors
that originally deposited their money with other selected
banks.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 4/22/10)
California Independent Bankers (source)
Borrego Springs Bank
California Bankers Association
California Credit Union League
California Municipal Treasurers Association
City of Santa Rosa
Community Bank of the Bay
Mission Valley Bank
ARGUMENTS IN SUPPORT : This bill is sponsored by the
California Independent Bankers (CIB), the same organization
which sponsored AB 2011 (Vargas). CIB observes that AB
2011 gave California community banks an alternative to
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collateralization requirements, by allowing the use of a
private sector CD placement service. Prior to enactment of
AB 2011, the collateralization requirements made it
difficult for community banks to compete with larger
institutions for local agency deposits. The Independent
Bankers note that, to date, 55 community banks in
California have received over $2.2 billion in deposits from
cities, counties, water districts, and other agencies.
Community banks use these deposits to make loans to small
and medium sized businesses, which ultimately benefits
California's economy, by helping these businesses grow and
create jobs. CIB's support of the bill was also echoed by
a number of community banks, and by the California Bankers
Association.
The California Credit Union League also supports the bill,
and believes that giving local agencies the option to
deposit funds in a local credit union or community bank
helps spur more local investment and local lending. (Staff
notes that, while a private sector CD placement service is
not yet currently available to help distribute deposits to
credit unions, the credit unions are hopeful that one or
more options of this type will become available).
The California Municipal Treasurers Association states that
public agencies appreciate and benefit from the ability to
invest surplus funds in this manner, and would like to have
the option continued permanently.
AGB:mw 4/23/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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