BILL ANALYSIS �
AB 1617
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Date of Hearing: May 9, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1617 (Dickinson) - As Amended: April 23, 2012
Policy Committee: Banking and
Finance Vote: 8-4
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill provides that under certain circumstances, the
Treasurer shall invest at least 30% of the funds in the time
deposit program of the Pooled Money Investment Account (PMIA) in
time deposits in community banks or credit unions.
Specifically, this bill:
1)Requires the Treasurer make these time deposit investments
with community banks and credit unions, to the extent it is
consistent with liquidity requirements and prudent management
of state funds and in compliance with all other requirements
established by state law.
2)When choosing which community banks and credit unions to use
for investment, authorizes the Treasurer to consider specified
criteria about characteristics of the community the bank
serves, its small business lending and if the institution is
headquartered in this state.
FISCAL EFFECT
Administrative costs of approximately $500,000 for the Treasurer
to administer the program.
If the Treasurer could place the required investments without
affecting the rate of return or risk, then the impact on
investment income would be minor. However, the cost to the
state could be significant if the Treasurer was forced to accept
a lower rate of return to meet the standards and criteria in AB
1617. If the return was reduced by .1 basis point, or .0001%,
the state would earn $4 million less in interest, a portion of
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which would be lost to the General Fund.
If the investments could only be made while accepting a greater
risk, the costs could be more significant if the investments
were inadequately collateralized and the state suffered a loss
from the failure of an institution.
COMMENTS
1)Rationale . The author argues that by investing a specified of
the Treasurer's investments in time deposits 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 sound standards. The author notes
there are 13 large domestic banks, certified to receive PMIA
funds. The author argues these are the very institutions that
participated in highly leveraged activities that brought the
national and state economies to the brink of disaster. The
author notes many of these same institutions became so
financially unstable as a result of their own extremely risky
financial activity, the federal government had to bail them
out using taxpayer funds.
In contrast, according to the author, smaller community banks,
which did not participate in the unsound financial
transactions of the last decade, remain relatively stable, and
continue to offer financial services and credit to individuals
and small businesses in the local communities in which they
are located.
2)Background . The PMIA is governed by the Pooled Money
Investment Board (PMIB), consisting of the Treasurer,
Controller and Director of Finance. The PMIA consists of
moneys from the state General Fund, special funds held by
state agencies and deposits by local jurisdictions in the
Local Agency Investment Fund. The PMIB is restricted in its
type of investments, but the Treasurer invests PMIA funds in
banks and credit unions through the time deposit program
(TDP). To provide adequate protection for the state funds,
deposits in the TDP must be collateralized by at least 110% of
the funds on deposit.
Under the existing TDP, for February 2012, over $4 billion,
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about 6.5% of the 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 take
part in the TDP.
3)Opposition. The Treasurer writes in opposition that
investments, soundness of the banks, the return and the
state's needs for liquidity are paramount concerns. The
Treasurer also notes state investments are for short terms and
are not and cannot be effective catalysts for longer term and
riskier investment to community lending. The Treasurer
contends current policies result in the state doing everything
reasonably possible to achieve the objective of AB 1617,
especially given the scarcity and short-term nature of any
surplus funds the state is investing.
4)Previous Legislation. AB 1156 (Nava) of 2009 would have
prioritized the investment of surplus moneys in community
banks and credit unions. This bill was held on this
committee's Suspense File.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081