BILL ANALYSIS �
AB 1933
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Date of Hearing: April 21, 2014
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
AB 1933 (Levine) - As Introduced: February 19, 2014
SUBJECT : Local government: investments
SUMMARY : Allows a local agency to invest up to 30% of their
surplus moneys in obligations, issued by the International Bank
for Reconstruction and Development (World Bank), International
Finance Corporation (IFC), or Inter-America Development Bank
(IADB). Specifically, this bill :
1)Provides that investments in specified entities shall be
limited to those rated at "AA" or higher credit rating.
2)Specifies that the investments shall have a maximum maturity
of five years or less.
EXISTING LAW
1)Defines, a "local agency" to mean a city, district, or other
local agency that does not pool money in deposits or
investments with other local agencies, other than local
agencies that have the same governing body. (Government Code,
Section 53600. All further references are to Government
Code.)
2)Allows the legislative body of a local agency to invest funds
not immediately needed by the agency in a variety of specified
financial instruments, including local agency bonds, U.S.
Treasury obligations, state obligations, California local
agency obligations, U.S. agency obligations, bankers'
acceptances, commercial paper, negotiable certificates of
deposit, CD placement service, repurchase agreements, reverse
repurchase agreements and securities lending agreements,
medium-term notes, mutual funds and money market mutual funds,
collateralized bank deposits, and mortgage pass-through
securities. (Section 53601)
3)Allows the state Treasury to invest in obligations issued,
assumed, or guaranteed by the World Bank, the IADB, the Asian
Development Bank, the African Development Bank, the IFC, or
the Government Development Bank of Puerto Rico. (Section
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16430)
4)Provides state retirement system and 1937 Act retirement
systems with authority to invest in rated bonds, notes, or
other obligations issued, assumed, or unconditionally
guaranteed by the African Development Bank, the Asian
Development Bank, the Caribbean Development Bank, the IADB,
the IFC, the World Bank, the European Bank for Reconstruction
and Development, and any other international financial
institution that has met the payments of similar bonds, notes,
or other obligations when due and in which the United States
is a member. (Section 7514.1)
FISCAL EFFECT : Unknown
COMMENTS :
This bill uses the terminology "United States dollar denominated
senior unsecured unsubordinated obligations issued or
unconditionally guaranteed?" What does this mean?
Unsubordinated debt refers to loans and debt securities (e.g.,
bonds, CDs, collateralized securities, etc.) for which the
repayment priority outranks other debts owed by the same
individual entity (called subordinated debt). Debt in the form
of loans or debt securities (e.g. bonds and CDs) are classified
as unsubordinated debt if claims on revenues and capital assets
by lenders and/or investors take priority over the repayment of
other related debt. Related debt with a lower payment priority
is called subordinated debt and is, consequently, considered
riskier than unsubordinated debt. In most cases, loans are
determined to be subordinated or unsubordinated based on the
amount and length of time outstanding in comparison with other
loans. In the bond markets, unsubordinated and subordinated
debt can best be exemplified by the tranches into which
collateralized securities are classified based on value and time
to maturity. A security's Class A tranche is considered
unsubordinated debt because it takes payment priority over
Classes B and C, both of which are subordinated debt. This means
that obligations on Class A issues of a security will always be
fulfilled before those of Class B and C issues.
This bill would allow local agencies to invest in bonds issued,
or guaranteed by what are known as "supranationals."
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Supranationals are international institutions that provide
development financing, advisory services and/or financial
services to their member countries to achieve the overall goal
of improving living standards through sustainable economic
growth.
AB 1933 allows investment in instruments issued by three
specific entities, known collectively as the "Washington
Supras." These Washington Supras are the following three
entities:
1)The World Bank (officially called International Bank for
Reconstruction and Development, IBRD) is the largest part of
the World Bank Group and finances activities by issuing bonds
in the capital markets. Established in 1944, it works with
member countries to promote equitable and sustainable economic
growth, by providing financing and risk management solutions
directly to sovereign governments - globally.
2) IFC, part of the World Bank Group, created in 1956, provides
investments and advisory services to build the private sector
in developing countries.
3) IADB, established in 1959, supports efforts by Latin America
and the Caribbean countries to reduce poverty and inequality
These entities finance their activities through the issuance of
bonds in the capital markets and income received from interest
on loans made to other nations or projects. The World Bank has
an AAA credit rating with the current largest shareholder the
United States at 15.19%.
The California Association of County Treasurers and Tax
Collectors, sponsors of AB 1933 write in support of the bill:
The universe of liquid triple-A bond issuers available to
local agencies has reduced dramatically in addition to the
diminishing supply of government sponsored enterprises
(GSE) such as Fannie and Freddie federal agency securities.
Government Investment Officers need alternative investment
options that provide safety and diversification for managed
investment pools.
The triple-A supranational, or "supra" sector is an option
for portfolio manager that offers high credit quality and a
AB 1933
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stable return at spreads above US Treasuries.
Supranationals are international institutions that provide
development financing, advisory services and/or other
financial services to their member countries to achieve
overall goal of improving living standards through
sustainable economic growth.
Previous legislation .
Since 1913, state law has authorized local officials to invest a
portion of their temporarily idle funds in a variety of
financial instruments. The Legislature has since expanded this
list of investment options available to local agencies to invest
funds not required for the immediate needs of the local agency.
Most recently SB 194 (Governance and Finance Committee), Chapter
382, Statutes of 2011, added the federally chartered branches of
foreign banks to the list of financial institutions whose
certificates of deposit are eligible for local agencies'
investments, and AB 1745 (Committee on Revenue and Taxation),
Chapter 340, Statutes of 2007, added registered treasury notes
or bonds, including bonds payable solely out of the revenues
from a revenue-producing property owned by a state, department,
board, agency or authority.
Technical amendments.
Changes proposed via this bill require some additional
amendments to correct cross references.
1)Page 7, line 22 delete "(o)" and insert "(q)"
2)Page 8, line 5 delete "(o)" and insert "(q)"
3)Page 9, line 20 and line 30: Delete "(o)" and add "(q)."
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of County Treasurers and Tax Collectors
(Sponsor)
Opposition
AB 1933
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None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081