BILL ANALYSIS �
AB 1617
Page 1
Date of Hearing: April 16, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 1617 (Dickinson) - As Amended: April 9, 2012
SUBJECT : State treasury: community banks.
SUMMARY : Provides that under certain circumstances, the
Treasurer shall invest an average of 30% of surplus moneys that
are in the Pooled Money Investment Account (PMIA) in time
deposits in community banks or credit unions. Specifically,
this bill :
1)Specifies that, under certain conditions, the Treasurer shall
invest an average of 30%, as averaged over a twelve month
period, of surplus PMIA moneys, into community banks and
credit unions.
2)Requires the Treasurer, when choosing which community banks
and credit unions to use for investment, to take into
consideration the following:
a) The extent to which institution serves a community with
an unemployment rate that exceeds the statewide average;
b) Whether the institution services a low or moderate
income community;
c) Whether the institution offers small business loans in
the communities they serve;
d) Whether the institution is an "eligible bank" as defined
under current requirements regarding state investments; and
e) Whether the institution is headquartered in this state.
3)Defines "community bank" as a bank or savings institution in
California with aggregate assets of less than ten-billion
dollars.
4)Defines that for purposes of investments as required under
this section that "surplus moneys" means those funds in the
PMIA exclusive of money from the Local Agency Investment Fund
and Money allocated for internal state borrowing.
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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
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
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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;
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); and,
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, 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)For purposes of bank deposits by the Treasurer defines
"eligible bank" as a state or national bank located in this
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state, selected by the Treasurer for the safekeeping of money
belonging to or in the custody of the state, that 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, including low- and
moderate-income neighborhoods, pursuant to Section 2906 of
Title 12 of the United States Code. (Section 16500).
3)Allows the Treasurer with approval of the Director of Finance
to deposit money in banks outside the state when the banks are
fiscal agents of the state or custodians of securities owned
by the state. (Section 16501).
4)Allows the Treasurer to determine what amounts of money shall
be deposited in banks as time deposits and demand deposits.
(Section 16503).
5)Provides that deposits in any bank shall exceed the total of
its net worth. (Section 16505).
FISCAL EFFECT : Unknown impact to PMIA.
COMMENTS :
According to information provided by the author's office, the
need for this bill is stated as the following:
Under current law, the State Treasurer invests temporarily
idle state and local funds from the Pooled Money Investment
Account (PMIA) into a variety of investments and products,
including time deposits, offered by financial institutions
that meet certain statutory requirements concerning safety and
soundness. According to information on the Treasurer's
website, there are 13 large domestic banks certified to
receive PMIA funds. B of A, Wells Fargo, Chase and Citibank
are among the large domestic banks certified to receive PMIA
deposits.
Unfortunately, many, if not all of the certified domestic
banks have participated in the type of highly leveraged
activities that brought the national and state economies to
the brink of disaster. Further, many of these same
institutions became so financially unstable as a result of
their own extremely risky financial activity, the federal
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government had to bail them out using taxpayer funds. Many of
these institutions have also been responsible for residential
lending practices that led to the housing meltdown, which
resulted in families losing their homes, growing joblessness
and even homelessness. Finally, in the midst of all the
economic upheaval caused by these banks, these very same
institutions have severely restricted the availability of
credit to individuals and small businesses, thus retarding any
economic recovery from what has become known as the Great
Recession.
Smaller, community banks, however, which did not participate
in the unsound, risky financial transactions of the last
decade, have remained relatively stable, and have continued to
offer financial services and credit to individuals and small
businesses in the local communities in which they are located
and operate. However, the Treasurer deposits a relatively
small share of state surplus funds in community banks, when
compared to deposits in the large national banks. In January
2012, time deposits, which are the typical community
bank/credit union investment, amounted to only 6.3% of the $66
billion in the PMIA at that time. This circumstance is
problematic in a couple of ways. First, community banks have
less access to capital that is derived from taxpayer funds.
These are California dollars that could otherwise be put to
good work in underserved California communities, helping to
create jobs and stimulate economic growth in areas of high
unemployment in this state. Second, the current situation of
investing most state resources in large national banks,
perversely rewards the very institutions that have hurt so
many California taxpayers who themselves cannot access credit
or services from these same big banks.
As stated in the Banking Committee's analysis of AB 1156 from
2009, an article appearing in The Washington Monthly, Too
Small to Fail (December 2008) , detailed the stability and
soundness of the 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
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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."
Understandably, the Treasurer is focused on obtaining the
highest rate of return on the investment of state funds for
the taxpayer. However, by investing a proportionately larger
share of state surplus money in community banks and credit
unions the state could assist in generating other economic
benefits for taxpayers, especially in distressed California
communities, that are equal to or greater than a strict
maximization of monetary return, while still, adhering to safe
and soundness standards.
The Treasurer is also concerned about the liquidity of the
state's investments, particularly to honor potential
withdrawal demands of local agencies investing in the Local
Agency Investment Fund, and to be able to make and repay
internal state loans. AB 1617 recognizes these needs and
excludes LAIF and internal borrowing from the calculation of
surplus moneys that the bill requires to be invested in
community banks and credit unions.
Background .
The PMIA, governed by the Pooled Money Investment Board (PMIB)
has three primary sources of funds: State general fund, special
funds held by state agencies, and moneys deposited by local
jurisdictions in the Local Agency Investment Fund (LAIF).
Moneys in the PMIA can only be invested in 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.
Currently the Treasurer invests some moneys under the PMIA into
banks and credit unions via the time deposit program (TDP). The
TDP often provides a greater return than the yield from Treasury
bills and makes money available to banks at better rates than
they can get from other sources. Deposits in the TDP must be
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collateralized by at least 110% of the funds on deposit.
The Pooled Money Investment Board Report (PMIBR) for February
2012 provides data on the various investments and cash
management strategies conducted by the Treasurer. Under the
existing TDP, for February 2012, $4,233,640,000 (Representing
6.53% of PMIA portfolio) was in time deposits in approximately
65 institutions located across the state. A review of the
institutions in the report reveals a broad range of small,
medium and large sized banks and credit unions that take part in
the TDP. However, a review of the report does not reveal which
banks would be considered community banks under the criteria in
this bill.
This bill seeks to require that over a 12 month period the PMIA,
with some exceptions, should have a 30% investment average in
community banks and credit unions. In making these investments
the Treasurer should consider certain factors such as whether
the institution serves a moderate to low income community.
Questions.
1)Is it appropriate to require a strict percentage of PMIA
investments into one type of investment? California's
Government code provides boundaries on those investments that
are appropriate for investment of state and local funds.
Statute typically provides investment standards that require
investments in quality assets and restrictions in over
investment in one particular type of investment. Statute
typically does not mandate minimum amounts that should be
invested in one vehicle versus the other. Much of the state's
investment strategy that is not in statute is outlined in
non-statutory investment policies. For example, the State
Treasurer maintains an Investment Policy: Pooled Money
Investment Account, July 20, 2011. The key areas of the PMIA
invest policy is below:
The pool will be managed to insure the safety of the
portfolio by investing in high quality securities and by
maintaining a mix of securities that will provide
reasonable assurance that no single investment or class of
investments will have a disproportionate impact on the
total portfolio?
In addition to the safety provided by investing in high
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quality securities, the safety of the portfolio is enhanced
three ways by maintaining a prudent mix (i.e., diversity)
of investments: 1) Spreading investments over different
investment types minimizes the impact any one
industry/investment class can have on the portfolio; 2)
Spreading investments over multiple credits/issuers within
an investment type minimizes the credit exposure of the
portfolio to any single firm/institution; and 3) Spreading
investments over various maturities minimizes the risk of
portfolio depreciation due to a rise in interest rates. An
unforeseen liquidity need allows no options if "all your
eggs are in one basket."
?The portfolio shall contain a sufficient number and
diversity of marketable securities so that a reasonable
portion of the portfolio can be readily converted to cash
without causing a material change in the value of the
portfolio. Limitation and eligibility as to specific
investments are to be determined by the Pooled Money
Investment Board in the case of Commercial Paper, the
Treasurer's Office Investment Committee in cases of new
dealer authorizations and approval of new corporate
investments, and the Treasury Investment Division in all
other matters.
The pool will be managed to ensure that normal cash needs,
as well as scheduled extraordinary cash needs can be met.
Further, adequate liquidity shall be maintained to ensure
the unforeseen cash needs, whether ordinary or
extraordinary.
The pool will maintain a "cash flow generated" portfolio
balance sufficient to cover specifically the one-month
prepared cash forecast, as well as generally the six month
prepared cash forecast. Further, sufficient marketable
treasuries will be maintained to cover unforeseen
withdrawals or delayed deposits.2 July 20, 2011
First priority is given to maintaining specific calendar
liquidity, as dictated by the most recent cash forecast.
Second priority is the maintenance of Treasury Bill
positions adequate to meet unscheduled needs. Final
consideration would be given to "other" investments deemed
appropriate to portfolio maintenance, enhancement, or
restructuring.
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2)Are there community banks and credit unions that wish to
receive deposits from the PMIA and that meet investment
criteria not getting a fair chance to participate?
3)In making investments in community banks and credit unions the
bill provides that the Treasurer "shall consider" various
criteria relating to the communities served by the
institutions. While it is a requirement to "consider" these
factors it is unclear on how each factor would be weighted in
making investments.
Suggested amendments :
1)In order to specifically target the TDP, committee staff
recommends that the bill should be amended to avoid placing an
investment threshold in the PMIA and instead provide for a
threshold within the TDP. For example, it may be more
appropriate to provide that 30% of investments in time
deposits should go to community banks and credit unions.
Committee staff is supportive of further changing the 30%
threshold, but first would encourage stakeholders to provide
information and justification for a greater percentage if it's
deemed necessary.
2)In order to provide more clarity, staff recommends language
that would provide that the Treasurer delineate in the PMIA
Board Reports which banks are community banks.
3)In regards to factors that must be considered prior to
investing in community banks and credit unions, staff
recommends that the consideration of these factors should be
permissive in nature, instead of mandatory.
Previous Legislation.
AB 1156 (Nava) of 2009 would have prioritized the investment of
surplus moneys in community banks and credit unions. Held in
Assembly Appropriations.
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REGISTERED SUPPORT / OPPOSITION :
Support
California Credit Union League
California Independent Bankers
Opposition
California State Treasurer
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081