BILL ANALYSIS �
AB 2500
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Date of Hearing: April 23, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 2500 (Hueso) - As Introduced: February 24, 2012
SUBJECT : State government: California Investment Trust: state
bank.
SUMMARY : Creates a State Bank in California. Specifically,
this bill :
1)Establishes the California Investment Trust (Trust) within
state government as an independent entity
2)Defines "advisory board" as the advisory board of the trust.
3)Defines "board" as the board of directors of the trust.
4)Defines" California Investment Trust Fund" as a fund
established for the deposit and appropriation of state money.
5)Defines "financial institutions" as a bank or savings
organization, including, but not limited to, banks, savings
and loan associations, and credit unions authorized to conduct
business in California, and state-chartered commercial banks,
trust companies, and savings and loan associations.
6)Defines "public funds" as any public funds of any local entity
or financial bank.
7)Defines "state-chartered bank" as a corporation incorporated,
with the approval of the commissioner, incorporated for the
purpose of engaging in, or that is authorized by the
commissioner to engage in, the commercial or industrial
banking business, and, in that capacity, may carry out various
powers and duties, including, among others, the receipt of
private deposits, and the loaning and investment of money.
8)Defines "state money" as all general fund money in the
possession of, or collected by, any state agency or department
that is not otherwise restricted for expenditure by the
California Constitution.
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9)Provides the purpose of the trust is to:
a) Support the economic development of the state by
increasing access to capital for businesses and farms
within the state in partnership with local financial
intuitions.
b) Provides stability to the local financial sector without
entering into competition with community banks, credit
unions, or other financial institutions.
c) Reduce the cost paid by the state government for banking
services.
d) To return profits, beyond those necessary to accomplish
the mission and sound operations of the trust to the
General Fund.
10)Creates a board of directors with the following members: the
Governor, or his or her designee, the Treasurer, The
Controller, or his or her designee, one member appointed by
Senate Rules and one member appointed by the Speaker of the
Assembly.
a) The Treasurer shall act as the chairperson of the Board.
b) Provides that three members constitute a quorum.
c) Allows the board to appoint a president of a trust who
will be allowed to hire others.
11)Creates an advisory board to the board with the following
members: a representative from the state's financial industry
sector, a representative from the state's small business
sector, a representative from the state's agricultural sector,
a representative from the state's labor groups, and at least
two members shall be officers of state-chartered banks who do
not maintain offices outside the boundaries of this state.
a) Specifies that the board will appoint positions that
shall not exceed 4 year terms.
b) Requires the advisory board to do the following: meet
regularly to review the trust's operations and finances,
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make recommendations, and meet with the board.
12)Allows the trust to accept deposits of public funds but does
not allow the trust to accept deposits of private funds.
a) Requires all state moneys to be deposited in the Trust.
b) Requires all income earned to become part of the
revenues and income of Trust.
c) Requires the Trust to pay interest on public deposits at
a rate comparable to average statewide rates paid by
private depositories of public funds.
d) Allows the Trust to offer other financial products to
state entities on a competitive basis.
13)Allows the Trust to do the following:
a) Make loans in the form of participation loans.
b) Purchase participation interests in loans made or held
by financial institutions doing business in this state.
c) Purchase, guarantee, or hold loans originated by
financial institutions
d) Purchase or hold loans that are insured or guaranteed in
whole or in part by the United States.
e) Make, purchase, guarantee, or hold loans of
instrumentalities of this state.
f) Purchase or hold loans that are obtained as security
pledged for or originated in the restructuring, of, any
other loan properly originated or participated in by the
trust.
g) Invest its funds in conformity with policies of the
board.
h) Buy and sell federal funds.
i) Act as a custodian bank for financial institutions
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organized under the law of this state.
j) Issue bank stock loans to financial institutions
organized under the laws of this state and doing the
majority of their business in this state.
aa) For financial institutions that make the trust a reserve
depository, perform the functions and render the services
of a clearinghouse, including all facilities for providing
domestic and foreign exchange.
bb) Perform all acts and do all things necessary,
convenient, advisable, or desirable to carry out the powers
expressly granted.
cc) The bank may not make a loan to any board member, the
president, or any officer of the bank.
14)Establishes the trust fund in the State Treasury for use by
the trust.
15)Provides that the board will determine how much of the excess
money earned by the trust shall be transferred to the General
Fund.
16)Requires the board to adopt rules and regulations.
17)Requires the State Auditor to contract with an independent
auditor for an annual audit of the trust and report to the
legislature and the board.
18)Requires the Department of Finance and the Controller to
examine the bank at least once every 24 months.
19)Requires the Treasurer to prepare a report of each calendar
month on the General Fund, the trust and every other fund
under his or her control, as specified.
20)Requires all business of the California Investment Trust to
be conducted under the name of the California Investment
Trust.
21)Specifies that records, as specified, of the trust are
confidential and shall not be disclosed to the public.
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22)Makes various findings and declarations.
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EXISTING LAW
1)Authorizes the establishment and operation of state-chartered
banks, state-chartered credit unions, state-chartered
industrial loan companies, and state-chartered savings
associations, all of which are overseen by the California
Department of Financial Institutions (DFI), and allows for the
operation of federally-chartered depository institutions and
foreign (out-of-state) depository institutions in California.
2)Creates the California Infrastructure and Economic Development
Bank (I-Bank), within Business Transportation and Housing
(BTH). I-Bank is located within the BTH Agency and is
governed by a five-member Board of Directors. The I-Bank was
created in 1994 to promote economic revitalization, enable
future development, and encourage a healthy climate for jobs
in California. The I-Bank operates pursuant to the
Bergeson-Peace Infrastructure and Economic Development Bank
Act. The I-Bank has broad authority to issue tax-exempt and
taxable revenue bonds, provide financing to public agencies,
provide credit enhancements, acquire or lease facilities, and
leverage State and Federal funds. The I-Bank's current
programs include the Infrastructure State Revolving Fund
(ISRF) Program, 501(c)(3) Revenue Bond Program, Industrial
Development Revenue Bond Program, Exempt Facility Revenue
Bond Program and Governmental Bond Program. �Government Code
Section 63000 et seq.].
3)Requires the Treasurer to receive and keep in the vaults of
the Treasury or to deposit in banks or credit unions all
moneys belonging to the state.
4)Requires the Controller to account for all expenditures as
scheduled in the Budget Act including providing a monthly
comparison between actual and estimated revenues.
5)Establishes various financing programs relating to housing,
small business, infrastructure and schools. These programs
are administered through multiple agencies under differing
goals, processes and reporting requirements.
FISCAL EFFECT : Unknown.
COMMENTS :
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AB 2500, if enacted, would create a State Bank in California.
The measure creates a board of directors, an advisory board to
the board of directors, and specifies that all state moneys
shall be deposited into the Investment Trust Fund. The measure
also requires the state bank to be audited, adopt rules and
regulations, and submit and prepare reports. According to the
measure, the purpose of the State Bank is to support economic
development, provide stability, and reduce the cost paid by
state government for banking and return profits.
Banks are entities that accept deposits and make loans. State
governments in 49 states except North Dakota deposit their cash
reserves in private institutions that also serve a wide array of
other customers. These private depositories are subject to
federal and state regulations and oversight, but their lending
and investment decisions are based on their own independent
assessments of risks and returns and are not under the direct
control of public officials.
As of December 31, 2011, California has 178 state-chartered
banks and 158 state-chartered credit unions. These numbers do
not include federally chartered institutions but poses the
question of what can a state bank provide that these
institutions cannot?
BANK OF NORTH DAKOTA (BND)
The only example of a state bank is the BND. In 1919, the state
legislature established BND with $2 million of capital.
BND was charged with the mission of "promoting agriculture,
commerce and industry" in North Dakota. It was never intended
for BND to compete with or replace existing banks. Instead, Bank
of North Dakota was created to partner with other financial
institutions and assist them in meeting the needs of the
citizens of North Dakota. The State of North Dakota began
using bank profits in 1945 when money was first transferred into
the General Fund. Since that time, capital transfers have
become the norm to augment state revenues. To this point, BND
is perceived to be a success.
Today, BND has total assets of $4 billion and total deposits of
$3.1 billion. It is comparable in size to the 180th largest
private bank in the nation. Roughly 50% of the bank's loan
portfolio consists of loan participations and loan purchases
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from community banks.
BND is overseen by the Industrial Commission of North Dakota,
composed of the governor, the attorney general, and the
agriculture commissioner. The governor also appoints an
advisory board of seven banking and finance experts. BND
deposits are backed by the full faith and credit of the state of
North Dakota and are not insured by the Federal Deposit
Insurance Corporation (FDIC). BND is examined annually by an
independent auditor and every 24 months by the North Dakota
Department of Financial Institutions. BND's budget including
decisions on salaries, employee headcount and major capital
projects are controlled by the legislature.
In May of 2011, the Federal Reserve Bank of Boston released a
report titled, "The Bank of North Dakota: A model for
Massachusetts and other states?" This report makes several
findings which include:
Financial difficulties of a state bank can exacerbate state
fiscal problems.
North Dakota views the BND as a revenue source rather than a
fiscal stabilization tool.
BND is a tax exempt institution and a state with a public bank
forgoes the tax revenues it would otherwise collect from any
banks the public bank displaces.
State should recognize that the benefits of a publicly owned
bank are hard to quantify, depend on the bank's specific
objectives, and likely vary depending on the structure of a
state's economy and banking system.
North Dakota's recent economic resilience can be attributable
to the strong performance of industries such a as agriculture
and energy, which play a much more important role in North
Dakota than in most other parts of the United States.
Creating a state bank would entail significant startup costs.
Massachusetts estimated for their state that an amount of $3.6
billion would be necessary. California's economy is much
larger.
Beyond the initial capitalization, the state would need to
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determine a schedule for depositing funds in the newly created
public bank.
The recently enacted Dodd-Frank Act gives federal agencies new
authority over large and systematically important institutions
(Too BIG To Fail). Due to its potential size, a fully
capitalized state-owned bank in Massachusetts likely poses
supervisory and regulatory challenges.
BND's most important role in 2011 was serving as a lending
partner for North Dakota's numerous small banks.
The willingness and capacity of a state-owned bank to offset a
serious credit crunch has not been shown.
With the possible exception of the Great Depression, BND's
contributions to stabilizing the state's economy and finances
appear to have been relatively minor.
NEED FOR THE BILL :
According to the Author, "AB 2500 is modeled after the Bank of
North Dakota and seeks to run a similar program in California to
build a strong resilient economy and use the people's collective
resources for their own benefit. The mission of the investment
trust is to foster growth in agriculture, education, community
development, economic development, housing, and industry in the
state.
Specifically, AB 2500:
Provides stability to the local financial sector without
competing against community banks, credit unions or other
financial institutions.
Augments the state's general fund with profits earned.
Makes participation loans in conjunction with financial
institutions doing business in the state.
Accepts deposits of public funds, not private funds."
OTHER STATES
According to the U.S. Census Bureau, the population size of
North Dakota as of 2011 is 683,932. To compare, California has
a population size as of 2011, of 37,691,912. This is a drastic
difference. California also has the 8th largest economy in the
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world.
In 2011, at least 11 states looked into creating state banks.
These states included Illinois, Virginia, Hawaii, Oregon,
Washington, Massachusetts, Maryland, Arizona, Vermont,
California and Maine. Most of these states introduced measures
to study the concept of a state bank. Not one State has been
successful in creating a State Bank except for the BND in 1919.
In the 1970's at least six states explored starting a
state-owned bank; these states were Colorado, Maine, New York,
New Jersey, Oregon and Washington. At that time, as well, not
one state was successful in creating a state-owned bank.
MASSACHUSETTS
In 2010, Massachusetts introduced SB 2331 which created a study
on whether to implement a state owned bank. Massachusetts was
successful in creating a study of a State Bank. Following the
study in 2011, Massachusetts decided not to pursue a state-owned
bank following the study because the study found:
It would require significant initial capital investment
without a proven need to justify the investment.
Given the vast differences in the banking industries and
economies of North Dakota and Massachusetts, the only
existing model is inadequate to provide guidance.
The bank's public funds would be exposed to an
unacceptably high risk, would be used to provide risky gap
financing, and would need to match the current rate of
return earned under the management of the treasurer.
Infrastructure investment in Massachusetts is much more
established than in North Dakota.
Massachusetts already has a large network of public and
quasi-public agencies and nonprofits that offer various
lending programs and services, including lending to support
infrastructure.
CALIFORNIA
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In 2011, Assemblymember Hueso introduced AB 750 which would have
created a task force to look into the feasibility of a State
Bank. AB 750 passed out of the Assembly Banking and Finance
Committee with a 10-1 vote. The Governor stated in his veto
messages that "This bill would mandate yet another "blue ribbon"
task force: in this case to examine whether California should
establish a state bank. This is a matter well within the
jurisdiction and competence of the Assembly and Senate Banking
Committees."
Although AB 750 was vetoed, it is the opinion of the Committee
that a study still needs to take place prior to the creation of
a State Bank. The Legislature does not have enough information
and data relevant to California as to the benefits and/or
consequences to creating a State Bank.
POOLED MONEY INVESTMENT ACCOUNT (PMIA)
The PMIA, created in 1955, governed by the Pooled Money
Investment Board (PMIB) has the responsibility for administering
an effective cash management and investment program. The PMIA
manages all monies flowing through the accounts in the State
Treasury and keeps all available funds invested consistent with
and subject to the goals of safety, liquidity and yield. The
PMIA 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.
ARGUMENTS IN SUPPORT
According to the Public Banking Institute, "The California
Investment Trust will strengthen economic and community
development. By providing loans in partnership with community
banks to individuals and businesses, the California Investment
Trust will eliminate fees currently paid by state government for
banking services, and will combine these savings with additional
revenue generated through various operating activities.
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AB 2500 will create the California Investment Trust and model it
after the highly successful Bank of North Dakota. In response to
current economic challenges, several states, including Maine,
Oregon, Washington and Rhode Island, have considered the
creation of a state bank"
ARGUMENTS IN OPPOSITION
According to the California Treasurer, Bill Lockyer, "AB 2500
would detrimentally overlay the current centralized treasury
system as well as requiring capitalization and long-term
investments which would further complicate the state's ability
to meet its obligations, especially while the state continues to
suffer from structural imbalance of revenues and expenditures,
resulting in chronic shortages of cash and scarce reserves. In
addition, the types of investing proposed as permissible for the
Investment Trust would significantly increase the risk of losses
to earnings and principal, losses that would be shouldered by
the General Fund."
QUESTIONS :
1)What information exists that establishes that California needs
a state bank? AB 750 (Hueso) of 2011 was on the right track
with trying to gather the necessary information to support or
not support a State Bank in California.
2)What problem exists that a state bank will cure? Considering
California's budget shortfall and the state's credit rating,
should California take on the responsibilities of having its
own State Bank? According to the S&P, California has an A-
rating, S&P's fourth-lowest investment grade and the lowest of
any state.
3)Where would California get the money to capitalize a State
Bank?
4)How would AB 2500 save California money? The measure creates
a new entity, with new positions and responsibilities.
5)Considering a state bank may not be FDIC insured, what happens
if the bank fails?
6)Should California be encouraging private financial
institutions to establish branches that provide tax revenue to
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the state rather than establish a tax-exempt state bank that
will compete with local, established financial institutions?
AMENDMENTS :
Should this measure move forward as currently drafted, the
author will need to make several technical and substantive
amendments to clarify and clean up the language.
The Committee is recommending that the contents of AB 2500 be
deleted and language creating a study be implemented to further
look into whether a state bank should be established in
California. Evidence from the Massachusetts study shows that it
is very important to study the feasibility before investing
energy into building a state bank which is not a small task for
any state to take on.
REGISTERED SUPPORT / OPPOSITION :
Support
Contra Costa Interfaith Supporting Community Organization
Hollywood Adventist Church
PICO California
Public Banking Institute
Most Holy Trinity Church - PACT
Town of Fairfax
6 Individuals
Opposition
California Bankers Association (CBA)
California Independent Bankers (CIB)
California State Treasurer
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081