BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
AB 1617 (Dickinson) Hearing Date: June 27, 2012
As Amended: April 23, 2012
Fiscal: Yes
Urgency: No
SUMMARY Would require the State Treasurer to ensure that at
least 30 percent of the moneys invested in the Time Deposit
program are invested in time deposits with community banks and
credit unions, as specified.
DESCRIPTION
1. Would require that, to the maximum extent consistent with
liquidity requirements and prudent management of surplus
moneys, the State Treasurer (Treasurer) must ensure that at
least 30 percent of the moneys invested in the Time Deposit
program are invested with community banks and credit unions.
2. Would define a community bank, for purposes of this bill,
as a bank or savings institution in California with
aggregate assets of less than $10 billion, and would define
credit unions by reference to Section 14002 of the Financial
Code.
3. Would require the Treasurer to identify in public reports
related to the Time Deposit program the recipients of time
deposits that meet the definition of community bank or
credit union.
4. When choosing which community banks and credit unions to
use for the investment of moneys pursuant to this bill,
would authorize the Treasurer to consider the following:
a. The extent to which a community bank or credit union
serves a community with an unemployment rate that exceeds
the statewide average;
b. Whether the community bank or credit union services
a predominantly low- or moderate-income community;
AB 1617 (Dickinson), Page 2
c. Whether the community bank or credit union offers
small business loans in the communities it serves,
including, but not limited to, commercial and industrial
loans, real estate loans, and lines of credit;
d. Whether the community bank is an "eligible bank"
pursuant to Government Code Section 16500 (i.e., whether
it is a state or national bank located in this state,
which received an overall rating of not less than
"satisfactory" in its most recent Community Reinvestment
Act evaluation); and,
e. Whether the community bank or credit union is
headquartered in this state.
EXISTING LAW
1. Establishes the Office of the State Treasurer, and states
the duties, responsibilities, and obligations of that office
(Government Code Section 12302 et seq.). Further provides
authorities and requirements governing the investment of
state surplus moneys by the Treasurer (Section 16430 et
seq.), and the deposit of state surplus moneys by the
Treasurer into eligible banks (Government Code Section 16500
et seq.).
2. Requires that all state money be held by the Treasurer in
treasury trust accounts, and requires that all money in the
State Treasury, except as specified, be appropriated for the
purpose of investment and deposit, as provided in state
statute. Further provides that nonstate money held by the
Treasurer in the Local Agency Investment Fund (LAIF) may be
included in those investments and deposits made by the
Treasurer, as provided in state statute (Section 16480).
3. Establishes the Pooled Money Investment Board (PMIB),
consisting of the State Controller, Treasurer, and Director
of Finance (Section 16480.1), to manage investments of state
and nonstate money held by the Treasurer.
4. States the intent of the Legislature that money available
for investment or deposit by the Treasurer be invested in
securities or deposited in banks and savings and loan
associations in such a way as to realize the maximum return
consistent with safe and prudent treasury management
AB 1617 (Dickinson), Page 3
(Section 16480.2).
COMMENTS
1. Purpose: This bill is sponsored by the author, to ensure
that a reasonable amount of state surplus funds residing in
the Pooled Money Investment Account (PMIA) are deposited in
state-based community banks and credit unions.
2. Background and Discussion: The PMIA has three primary
sources of funds: the State General Fund, State special
funds, and moneys deposited by local governments into the
Local Agency Investment Fund. Investments of PMIA funds are
used to manage the state's cash flow and strengthen the
financial security of local government entities. The size
of the PMIA portfolio varies from month to month, reflecting
state and local cash flow. At the end of May 2012, the PMIA
portfolio totaled $64 billion.
The PMIB has established safety, liquidity, and yield as the
primary investment objectives of the PMIA. By law, PMIA
moneys can be invested only in the following categories:
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.
As of April 30, 2012, the PMIA portfolio was broken down as
follows: US Treasuries (48%), certificates of deposit/bank
notes (17%), loans (15%), securities of federally-sponsored
agencies (9%), time deposits (6%), and all other investments
(4%); does not add to 100% due to rounding.
The numbers above make it clear that this bill focuses on what
is currently a relatively small part of the PMIA portfolio
(time deposits, which currently represent about 6% of the
total PMIA portfolio).
The Time Deposit Program: The Time Deposit Program was
established in 1945, to provide deposits to community banks
at competitive rates. Time deposit accounts are 3-month and
6-month accounts with financial institutions that agree to
offer the state a rate the state sets. These types of
AB 1617 (Dickinson), Page 4
accounts similar to, but slightly different from negotiable
certificates of deposit and bank notes. The latter are
similar to time deposits, but are purchased from financial
institutions at the rates offered by the institutions (not
the rates demanded by the state, as is the case with time
deposits).
The Time Deposit Program assures a yield to the PMIA indexed to
the yield of Treasury bills with comparable maturities, and
makes money available to community banks at generally better
rates than they can obtain from other sources. Eligible
institutions include commercial banks, savings banks, and
credit unions that are federally insured and licensed to
accept deposits in the California. The program is driven by
demand among eligible depository institutions. By making
funds available to these institutions, they, in turn, can
re-invest in the California communities in which they are
located.
At the end of May 2012, the PMIA had 184 time deposits totaling
$4.4 billion in 60 institutions. Approximately 87% of the
Time Deposit program's investments were held by institutions
that the Treasurer considers to be community banks and
credit unions.
3. Discretion: The arguments in favor of and against this bill
(see below) all boil down to one topic: discretion. The
question before this Committee is, "Should the Legislature
dictate investment policy to the Treasurer, or should the
Treasurer have the discretion to invest moneys in the PMIA
as he or she believes to be most appropriate?"
The 30% threshold contained in this bill is far below the 87%
figure, which represents current PMIA Time Deposit
investments in community banks and credit unions. Thus,
this bill is not about changing the investment practices of
the current Treasurer. It is about setting a floor for
future Treasurers to follow.
4. Summary of Arguments in Support: The American Federation
of State, County and Municipal Employees (AFSCME) supports
the bill, because it will help ensure that state taxpayer
funding is used responsibly to stimulate economic activity
in California communities, and to support smaller financial
institutions that remain the financial backbone of small
businesses and counties around the state.
AB 1617 (Dickinson), Page 5
AFSCME observes that, under current law, the State Treasurer
invests temporarily idle state and local funds from the PMIA
and LAIF into a variety of investment and products offered
by financial institutions that meet certain requirements
concerning safety and soundness. At present, 13 large
domestic banks are certified to receive PMIA funds, in
addition to community banks and credit unions.
Many of these larger domestic banks participated in highly
leveraged activities that brought our national and state
economies to the verge of disaster. These institutions were
also responsible for residential lending practices that led
many families to lose their homes and jobs. Now, these same
institutions have severely restricted the availability of
credit for individuals and small businesses, thus inhibiting
the state's recovery from the Great Recession. Smaller
community banks and credit unions did not participate in
these unsound, risky financial transactions of the last
decade; they have remained relatively stable, and continue
to offer financial services and credit to individuals and
small businesses in the local communities in which they are
located and operate. In comparison to larger banks, the
Treasurer deposits a small share of state surplus funds in
community banks (approximately 6% of the more than $66
billion in the PMIA).
5. Summary of Arguments in Opposition:
a. State Treasurer Bill Lockyer believes that the bill
"would mandate fiscally imprudent changes to the State's
Time Deposit program that would harm California's
community banks. AB 1617 would reduce the PMIA's
investment opportunities and lower returns for all PMIA
participants, including the State, cities, counties,
school districts and special districts" The Treasurer
and the office's professional investment staff should
retain the discretion to alter the PMIA's investment mix,
if circumstances warrant. "By mandating the 30 percent
set-aside, AB 1617 would erode that discretion and unduly
constrain the PMIA's earning power."
Treasurer Lockyer also asserts that the bill would harm the
community banks it seeks to help, by imposing new
qualification criteria. At present, financial
institutions must maintain minimum projected performance
levels, be rated at least satisfactory under Community
AB 1617 (Dickinson), Page 6
Reinvestment Act criteria, and maintain sufficient
collateral to cover PMIA deposit balances that are not
covered by FDIC or NCUA insurance. Under AB 1617, banks
would have to meet a host of additional requirements,
including a requirement that they have aggregate assets
of less than $10 billion. While the Treasurer is
uncertain how many existing, qualifying institutions
would fail to meet the requirements in the bill, he is
sure that the following five institutions would be
immediately disqualified, solely on the basis of their
asset levels: Bank of the West, City National Bank,
East-West Bank, Rabobank, and Union Bank.
The Treasurer continues, "AB 1617 would undermine the
PMIA's ability to perform its vital cash management
function for the state. One of the PMIA's primary
responsibilities is to invest the State's idle cash to
even out the highs and lows of anticipated future
revenues and disbursements...Locking up a fixed and
arbitrary percentage of the Time Deposit program means
locking up State monies that may be needed to meet the
State's cash flow requirements."
Finally, the Treasurer asserts that AB 1617 fails to
address what would happen if the 30 percent allocation
mandate cannot be met. "Lacking direction or a safe
harbor for such a scenario, my office would have two
options: reduce the size of the Time Deposit program in
an effort to meet the required participation level; or
discontinue the program."
b. East-West Bank opposes the bill on the basis that it
would pull deposits out of mid-sized banks, such as
East-West Bank. "The $10 billion asset size threshold of
AB 1617 excludes other mid-sized banks headquartered in
California that focus on small and medium sized
businesses, such as Silicon Valley Bank, City National
Bank, Cathay Bank and First Republic Bank."
East-West offers two possible amendments for consideration
by the author: a) allow deposits in minority banks of
any size, or b) raise the threshold of $10 billion to
$100 billion. East-West explains that mid-sized minority
banks such as itself and Cathay Bank focus on underserved
minority communities and on financing international
trade, which is a strength of the California economy.
AB 1617 (Dickinson), Page 7
East-West currently has assets of approximately $22
billion, and Cathay Bank currently has assets of about
$12 billion. East-West also suggests that the FDIC
minority banks program is well-recognized and well-suited
to be used as the criterion for defining minority banks
in the Time Deposit Program. �Staff note: Staff
understands from discussions with the author's office
that the Legislative Counsel raised concerns about
amending the bill to include the term minority bank,
citing Proposition 209, the 1996 ballot measure which
prohibited state government institutions from considering
race, sex, or ethnicity in their decisions].
With respect to its alternate amendment, East-West observes
that if the asset limit were raised to $50 billion, the
following seven banks would also be able to receive time
deposits: East-West Bank, Cathay Bank, City National
Bank, One West Bank, Silicon Valley Bank, First Republic
Bank, and California Bank and Trust. If the limit were
raised to $100 billion, Bank of the West and Union Bank
would also qualify.
c. The California Bankers Association (CBA) is also
opposed, based on the arguments that the bill will
adversely impact community banks and jeopardize the Time
Deposit program, and on the basis that the bill is
unnecessary. According to CBA, the measure will render
the Time Deposit program less accessible for the very
institutions the bill purports to help. Community banks,
in particular, which are already struggling under the
weight of federal regulatory requirements, will now have
to meet a series of added conditions on top of the
current Time Deposit program requirements. Even if the
Treasurer does not ultimately consider the standards
enumerated in the bill, the burden of proof will be on
financial institutions to provide information regarding
their adherence to these standards, in order to qualify
for the Time Deposit program. Some banks may also have
trouble determining the extent to which they meet some of
the standards in the bill. For example, a community bank
may not know the extent to which its footprint is in an
area that exceeds the statewide unemployment average.
Nor is it the case that the statewide unemployment rate
is a static number. The rate fluctuates, and this
measure does not address how this fluctuation might
affect a bank's eligibility.
AB 1617 (Dickinson), Page 8
CBA echoes the Treasurer's concerns regarding the
possibility that the bill will jeopardize the Time
Deposit program and impact the state's cash flow.
Finally, CBA observes that its own analysis of the
Treasurer's Pooled Money Investment Board Report, dated
April 2012, reflects the fact that 48 of the 55
institutions (89%) receiving Time Deposit monies had
assets of less than $10 billion. This so far exceeds
the 30% figure specified by AB 1617 that CBA views the
bill as unnecessary.
6. Amendments:
a. As noted above, this bill is intended to regulate
investments of money in the PMIA, an account which holds
both state and local monies. Yet, when discussing this
bill, several have assumed that because it refers to
investments by the State Treasurer, it refers only to
investments of state monies. To clarify the author's
intent, staff suggests the following amendment: Page 2,
line 11, after "the" insert: state and local
7. Prior and Related Legislation:
a. AB 1156 (Nava), 2009-10 Legislative Session: Would
have required the State Treasurer to give community banks
and credit unions first priority for the investment of
state surplus funds and the investment of local agency
surplus funds in certificates of deposit. Held on the
Assembly Appropriations Committee Suspense File.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
AFSCME
Opposition
State Treasurer Bill Lockyer
California Bankers Association
East-West Bank
AB 1617 (Dickinson), Page 9
Consultant: Eileen Newhall (916) 651-4102