AB 1770: Local government: investments.
- Session Year: 2017-2018
- House: Assembly
- Latest Version Date: 2018-09-06
Existing law regulates the investment of public funds by local agencies, as defined. Existing law authorizes the legislative body of a local agency, as specified, that has money in a sinking fund or in its treasury not required for immediate needs to invest the money as it deems wise or expedient in certain securities and financial instruments. In this regard, existing law authorizes investment in a mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond that has a maximum of 5 years maturity. Existing law further requires that these investments be issued by an issuer rated A or its equivalent or better for the issuers debt as provided by a nationally recognized statistical rating organization (NRSRO) and rated in a rating category of AA or its equivalent or better by a NRSRO.
This bill would revise the maximum 5-year maturity requirement to instead require that the securities have a maximum remaining security of 5 years or less. The bill also would eliminate the requirement that the securities issuer be rated A or its equivalent or better for the issuers debts as provided by an NRSRO.
Existing law regulates the investment of public funds by local agencies, as defined. Existing law authorizes the legislative body of a local agency, as specified, that has money in a sinking fund or in its treasury not required for immediate needs to invest the money as it deems wise or expedient in certain securities and financial instruments. In this regard, existing law authorizes investment in a mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond that has a maximum of 5 years maturity. Existing law further requires that these investments be issued by an issuer rated A or its equivalent or better for the issuers debt as provided by a nationally recognized statistical rating organization (NRSRO) and rated in a rating category of AA or its equivalent or better by a NRSRO.
This bill would revise the maximum 5-year maturity requirement to instead require that the securities have a maximum remaining security of 5 years or less. The bill also would eliminate the requirement that the securities issuer be rated A or its equivalent or better for the issuers debts as provided by an NRSRO.
Existing law regulates the investment of public funds by local agencies, as defined. Existing law authorizes the legislative body of a local agency, as specified, that has money in a sinking fund or in its treasury not required for immediate needs to invest the money as it deems wise or expedient in certain securities and financial instruments. In this regard, existing law authorizes investment in a mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond that has a maximum of 5 years maturity. Existing law further requires that these investments be issued by an issuer rated A or its equivalent or better for the issuers debt as provided by a nationally recognized statistical rating organization (NRSRO) and rated in a rating category of AA or its equivalent or better by a NRSRO.
This bill would revise the maximum 5-year maturity requirement to instead require that the securities have a maximum remaining security of 5 years or less. The bill also would eliminate the requirement that the securities issuer be rated A or its equivalent or better for the issuers debts as provided by an NRSRO.
This section shall apply to a local agency that is a city, a 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. However, Section 53635 shall apply to all local agencies that pool money in deposits or investments with other local agencies that have separate governing bodies. The legislative body of a local agency having moneys in a sinking fund or moneys in its treasury not required for the immediate needs of the local agency may invest any portion of the moneys that it deems wise or expedient in those investments set forth below. A local agency purchasing or obtaining any securities prescribed in this section, in a negotiable, bearer, registered, or nonregistered format, shall require delivery of the securities to the local agency, including those purchased for the agency by financial advisers, consultants, or managers using the agencys funds, by book entry, physical delivery, or by third-party custodial agreement. The transfer of securities to the counterparty banks customer book entry account may be used for book entry delivery.
For purposes of this section, counterparty means the other party to the transaction. A counterparty banks trust department or separate safekeeping department may be used for the physical delivery of the security if the security is held in the name of the local agency. Where this section specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase. Where this section does not specify a limitation on the term or remaining maturity at the time of the investment, no investment shall be made in any security, other than a security underlying a repurchase or reverse repurchase agreement or securities lending agreement authorized by this section, that at the time of the investment has a term remaining to maturity in excess of five years, unless the legislative body has granted express authority to make that investment either specifically or as a part of an investment program approved by the legislative body no less than three months prior to the investment:
(a)Bonds issued by the local agency, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency or by a department, board, agency, or authority of the local agency.
(b)United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest.
(c)Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state.
(d)Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the other 49 states, in addition to California.
(e)Bonds, notes, warrants, or other evidences of indebtedness of a local agency within this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency.
(f)Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.
(g)Bankers acceptances otherwise known as bills of exchange or time drafts that are drawn on and accepted by a commercial bank. Purchases of bankers acceptances shall not exceed 180 days maturity or 40 percent of the agencys moneys that may be invested pursuant to this section. However, no more than 30 percent of the agencys moneys may be invested in the bankers acceptances of any one commercial bank pursuant to this section.
This subdivision does not preclude a municipal utility district from investing moneys in its treasury in a manner authorized by the Municipal Utility District Act (Division 6 (commencing with Section 11501) of the Public Utilities Code).
(h)Commercial paper of prime quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical rating organization (NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or (2):
(1)The entity meets the following criteria:
(A)Is organized and operating in the United States as a general corporation.
(B)Has total assets in excess of five hundred million dollars ($500,000,000).
(C)Has debt other than commercial paper, if any, that is rated in a rating category of A or its equivalent or higher by an NRSRO.
(2)The entity meets the following criteria:
(A)Is organized within the United States as a special purpose corporation, trust, or limited liability company.
(B)Has programwide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond.
(C)Has commercial paper that is rated A-1 or higher, or the equivalent, by an NRSRO.
Eligible commercial paper shall have a maximum maturity of 270 days or less. Local agencies, other than counties or a city and county, may invest no more than 25 percent of their moneys in eligible commercial paper. Local agencies, other than counties or a city and county, may purchase no more than 10 percent of the outstanding commercial paper of any single issuer. Counties or a city and county may invest in commercial paper pursuant to the concentration limits in subdivision (a) of Section 53635.
(i)Negotiable certificates of deposit issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally licensed or state-licensed branch of a foreign bank. Purchases of negotiable certificates of deposit shall not exceed 30 percent of the agencys moneys that may be invested pursuant to this section. For purposes of this section, negotiable certificates of deposit do not come within Article 2 (commencing with Section 53630), except that the amount so invested shall be subject to the limitations of Section 53638. The legislative body of a local agency and the treasurer or other official of the local agency having legal custody of the moneys are prohibited from investing local agency funds, or funds in the custody of the local agency, in negotiable certificates of deposit issued by a state or federal credit union if a member of the legislative body of the local agency, or a person with investment decisionmaking authority in the administrative office managers office, budget office, auditor-controllers office, or treasurers office of the local agency also serves on the board of directors, or any committee appointed by the board of directors, or the credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificates of deposit.
(j)(1)Investments in repurchase agreements or reverse repurchase agreements or securities lending agreements of securities authorized by this section, as long as the agreements are subject to this subdivision, including the delivery requirements specified in this section.
(2)Investments in repurchase agreements may be made, on an investment authorized in this section, when the term of the agreement does not exceed one year. The market value of securities that underlie a repurchase agreement shall be valued at 102 percent or greater of the funds borrowed against those securities and the value shall be adjusted no less than quarterly. Since the market value of the underlying securities is subject to daily market fluctuations, the investments in repurchase agreements shall be in compliance if the value of the underlying securities is brought back up to 102 percent no later than the next business day.
(3)Reverse repurchase agreements or securities lending agreements may be utilized only when all of the following conditions are met:
(A)The security to be sold using a reverse repurchase agreement or securities lending agreement has been owned and fully paid for by the local agency for a minimum of 30 days prior to sale.
(B)The total of all reverse repurchase agreements and securities lending agreements on investments owned by the local agency does not exceed 20 percent of the base value of the portfolio.
(C)The agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security.
(D)Funds obtained or funds within the pool of an equivalent amount to that obtained from selling a security to a counterparty using a reverse repurchase agreement or securities lending agreement shall not be used to purchase another security with a maturity longer than 92 days from the initial settlement date of the reverse repurchase agreement or securities lending agreement, unless the reverse repurchase agreement or securities lending agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security.
(4)(A)Investments in reverse repurchase agreements, securities lending agreements, or similar investments in which the local agency sells securities prior to purchase with a simultaneous agreement to repurchase the security may be made only upon prior approval of the governing body of the local agency and shall be made only with primary dealers of the Federal Reserve Bank of New York or with a nationally or state-chartered bank that has or has had a significant banking relationship with a local agency.
(B)For purposes of this chapter, significant banking relationship means any of the following activities of a bank:
(i)Involvement in the creation, sale, purchase, or retirement of a local agencys bonds, warrants, notes, or other evidence of indebtedness.
(ii)Financing of a local agencys activities.
(iii)Acceptance of a local agencys securities or funds as deposits.
(5)(A)Repurchase agreement means a purchase of securities by the local agency pursuant to an agreement by which the counterparty seller will repurchase the securities on or before a specified date and for a specified amount and the counterparty will deliver the underlying securities to the local agency by book entry, physical delivery, or by third-party custodial agreement. The transfer of underlying securities to the counterparty banks customer book-entry account may be used for book-entry delivery.
(B)Securities, for purposes of repurchase under this subdivision, means securities of the same issuer, description, issue date, and maturity.
(C)Reverse repurchase agreement means a sale of securities by the local agency pursuant to an agreement by which the local agency will repurchase the securities on or before a specified date and includes other comparable agreements.
(D)Securities lending agreement means an agreement under which a local agency agrees to transfer securities to a borrower who, in turn, agrees to provide collateral to the local agency. During the term of the agreement, both the securities and the collateral are held by a third party. At the conclusion of the agreement, the securities are transferred back to the local agency in return for the collateral.
(E)For purposes of this section, the base value of the local agencys pool portfolio shall be that dollar amount obtained by totaling all cash balances placed in the pool by all pool participants, excluding any amounts obtained through selling securities by way of reverse repurchase agreements, securities lending agreements, or other similar borrowing methods.
(F)For purposes of this section, the spread is the difference between the cost of funds obtained using the reverse repurchase agreement and the earnings obtained on the reinvestment of the funds.
(k)Medium-term notes, defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Notes eligible for investment under this subdivision shall be rated in a rating category of A or its equivalent or better by an NRSRO. Purchases of medium-term notes shall not include other instruments authorized by this section and shall not exceed 30 percent of the agencys moneys that may be invested pursuant to this section.
(l)(1)Shares of beneficial interest issued by diversified management companies that invest in the securities and obligations as authorized by subdivisions (a) to (k), inclusive, and subdivisions (m) to (q), inclusive, and that comply with the investment restrictions of this article and Article 2 (commencing with Section 53630). However, notwithstanding these restrictions, a counterparty to a reverse repurchase agreement or securities lending agreement is not required to be a primary dealer of the Federal Reserve Bank of New York if the companys board of directors finds that the counterparty presents a minimal risk of default, and the value of the securities underlying a repurchase agreement or securities lending agreement may be 100 percent of the sales price if the securities are marked to market daily.
(2)Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.).
(3)If investment is in shares issued pursuant to paragraph (1), the company shall have met either of the following criteria:
(A)Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs.
(B)Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years experience investing in the securities and obligations authorized by subdivisions (a) to (k), inclusive, and subdivisions (m) to (q), inclusive, and with assets under management in excess of five hundred million dollars ($500,000,000).
(4)If investment is in shares issued pursuant to paragraph (2), the company shall have met either of the following criteria:
(A)Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs.
(B)Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years experience managing money market mutual funds with assets under management in excess of five hundred million dollars ($500,000,000).
(5)The purchase price of shares of beneficial interest purchased pursuant to this subdivision shall not include commission that the companies may charge and shall not exceed 20 percent of the agencys moneys that may be invested pursuant to this section. However, no more than 10 percent of the agencys funds may be invested in shares of beneficial interest of any one mutual fund pursuant to paragraph (1).
(m)Moneys held by a trustee or fiscal agent and pledged to the payment or security of bonds or other indebtedness, or obligations under a lease, installment sale, or other agreement of a local agency, or certificates of participation in those bonds, indebtedness, or lease installment sale, or other agreements, may be invested in accordance with the statutory provisions governing the issuance of those bonds, indebtedness, or lease installment sale, or other agreement, or to the extent not inconsistent therewith or if there are no specific statutory provisions, in accordance with the ordinance, resolution, indenture, or agreement of the local agency providing for the issuance.
(n)Notes, bonds, or other obligations that are at all times secured by a valid first priority security interest in securities of the types listed by Section 53651 as eligible securities for the purpose of securing local agency deposits having a market value at least equal to that required by Section 53652 for the purpose of securing local agency deposits. The securities serving as collateral shall be placed by delivery or book entry into the custody of a trust company or the trust department of a bank that is not affiliated with the issuer of the secured obligation, and the security interest shall be perfected in accordance with the requirements of the Uniform Commercial Code or federal regulations applicable to the types of securities in which the security interest is granted.
(o)A mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond. Securities eligible for investment under this subdivision shall be rated in a rating category of AA or its equivalent or better by an NRSRO and have a maximum remaining maturity of five years or less. Purchase of securities authorized by this subdivision shall not exceed 20 percent of the agencys surplus moneys that may be invested pursuant to this section.
(p)Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (q), inclusive. Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria:
(1)The adviser is registered or exempt from registration with the Securities and Exchange Commission.
(2)The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (q), inclusive.
(3)The adviser has assets under management in excess of five hundred million dollars ($500,000,000).
(q)United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of AA or its equivalent or better by an NRSRO and shall not exceed 30 percent of the agencys moneys that may be invested pursuant to this section.
This section shall apply to a local agency that is a city, a 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. However, Section 53635 shall apply to all local agencies that pool money in deposits or investments with other local agencies that have separate governing bodies. The legislative body of a local agency having moneys in a sinking fund or moneys in its treasury not required for the immediate needs of the local agency may invest any portion of the moneys that it deems wise or expedient in those investments set forth below. A local agency purchasing or obtaining any securities prescribed in this section, in a negotiable, bearer, registered, or nonregistered format, shall require delivery of the securities to the local agency, including those purchased for the agency by financial advisers, consultants, or managers using the agencys funds, by book entry, physical delivery, or by third-party custodial agreement. The transfer of securities to the counterparty banks customer book entry account may be used for book entry delivery.
For purposes of this section, counterparty means the other party to the transaction. A counterparty banks trust department or separate safekeeping department may be used for the physical delivery of the security if the security is held in the name of the local agency. Where this section specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase. Where this section does not specify a limitation on the term or remaining maturity at the time of the investment, no investment shall be made in any security, other than a security underlying a repurchase or reverse repurchase agreement or securities lending agreement authorized by this section, that at the time of the investment has a term remaining to maturity in excess of five years, unless the legislative body has granted express authority to make that investment either specifically or as a part of an investment program approved by the legislative body no less than three months prior to the investment:
(a)Bonds issued by the local agency, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency or by a department, board, agency, or authority of the local agency.
(b)United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest.
(c)Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state.
(d)Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the other 49 states, in addition to California.
(e)Bonds, notes, warrants, or other evidences of indebtedness of a local agency within this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency.
(f)Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.
(g)Bankers acceptances otherwise known as bills of exchange or time drafts that are drawn on and accepted by a commercial bank. Purchases of bankers acceptances shall not exceed 180 days maturity or 40 percent of the agencys moneys that may be invested pursuant to this section. However, no more than 30 percent of the agencys moneys may be invested in the bankers acceptances of any one commercial bank pursuant to this section.
This subdivision does not preclude a municipal utility district from investing moneys in its treasury in a manner authorized by the Municipal Utility District Act (Division 6 (commencing with Section 11501) of the Public Utilities Code).
(h)Commercial paper of prime quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical rating organization (NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or (2):
(1)The entity meets the following criteria:
(A)Is organized and operating in the United States as a general corporation.
(B)Has total assets in excess of five hundred million dollars ($500,000,000).
(C)Has debt other than commercial paper, if any, that is rated in a rating category of A or its equivalent or higher by an NRSRO.
(2)The entity meets the following criteria:
(A)Is organized within the United States as a special purpose corporation, trust, or limited liability company.
(B)Has programwide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond.
(C)Has commercial paper that is rated A-1 or higher, or the equivalent, by an NRSRO.
Eligible commercial paper shall have a maximum maturity of 270 days or less. Local agencies, other than counties or a city and county, may invest no more than 25 percent of their moneys in eligible commercial paper. Local agencies, other than counties or a city and county, may purchase no more than 10 percent of the outstanding commercial paper of any single issuer. Counties or a city and county may invest in commercial paper pursuant to the concentration limits in subdivision (a) of Section 53635.
(i)Negotiable certificates of deposit issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally licensed or state-licensed branch of a foreign bank. Purchases of negotiable certificates of deposit shall not exceed 30 percent of the agencys moneys that may be invested pursuant to this section. For purposes of this section, negotiable certificates of deposit do not come within Article 2 (commencing with Section 53630), except that the amount so invested shall be subject to the limitations of Section 53638. The legislative body of a local agency and the treasurer or other official of the local agency having legal custody of the moneys are prohibited from investing local agency funds, or funds in the custody of the local agency, in negotiable certificates of deposit issued by a state or federal credit union if a member of the legislative body of the local agency, or a person with investment decisionmaking authority in the administrative office managers office, budget office, auditor-controllers office, or treasurers office of the local agency also serves on the board of directors, or any committee appointed by the board of directors, or the credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificates of deposit.
(j)(1)Investments in repurchase agreements or reverse repurchase agreements or securities lending agreements of securities authorized by this section, as long as the agreements are subject to this subdivision, including the delivery requirements specified in this section.
(2)Investments in repurchase agreements may be made, on an investment authorized in this section, when the term of the agreement does not exceed one year. The market value of securities that underlie a repurchase agreement shall be valued at 102 percent or greater of the funds borrowed against those securities and the value shall be adjusted no less than quarterly. Since the market value of the underlying securities is subject to daily market fluctuations, the investments in repurchase agreements shall be in compliance if the value of the underlying securities is brought back up to 102 percent no later than the next business day.
(3)Reverse repurchase agreements or securities lending agreements may be utilized only when all of the following conditions are met:
(A)The security to be sold using a reverse repurchase agreement or securities lending agreement has been owned and fully paid for by the local agency for a minimum of 30 days prior to sale.
(B)The total of all reverse repurchase agreements and securities lending agreements on investments owned by the local agency does not exceed 20 percent of the base value of the portfolio.
(C)The agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security.
(D)Funds obtained or funds within the pool of an equivalent amount to that obtained from selling a security to a counterparty using a reverse repurchase agreement or securities lending agreement shall not be used to purchase another security with a maturity longer than 92 days from the initial settlement date of the reverse repurchase agreement or securities lending agreement, unless the reverse repurchase agreement or securities lending agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security.
(4)(A)Investments in reverse repurchase agreements, securities lending agreements, or similar investments in which the local agency sells securities prior to purchase with a simultaneous agreement to repurchase the security may be made only upon prior approval of the governing body of the local agency and shall be made only with primary dealers of the Federal Reserve Bank of New York or with a nationally or state-chartered bank that has or has had a significant banking relationship with a local agency.
(B)For purposes of this chapter, significant banking relationship means any of the following activities of a bank:
(i)Involvement in the creation, sale, purchase, or retirement of a local agencys bonds, warrants, notes, or other evidence of indebtedness.
(ii)Financing of a local agencys activities.
(iii)Acceptance of a local agencys securities or funds as deposits.
(5)(A)Repurchase agreement means a purchase of securities by the local agency pursuant to an agreement by which the counterparty seller will repurchase the securities on or before a specified date and for a specified amount and the counterparty will deliver the underlying securities to the local agency by book entry, physical delivery, or by third-party custodial agreement. The transfer of underlying securities to the counterparty banks customer book-entry account may be used for book-entry delivery.
(B)Securities, for purposes of repurchase under this subdivision, means securities of the same issuer, description, issue date, and maturity.
(C)Reverse repurchase agreement means a sale of securities by the local agency pursuant to an agreement by which the local agency will repurchase the securities on or before a specified date and includes other comparable agreements.
(D)Securities lending agreement means an agreement under which a local agency agrees to transfer securities to a borrower who, in turn, agrees to provide collateral to the local agency. During the term of the agreement, both the securities and the collateral are held by a third party. At the conclusion of the agreement, the securities are transferred back to the local agency in return for the collateral.
(E)For purposes of this section, the base value of the local agencys pool portfolio shall be that dollar amount obtained by totaling all cash balances placed in the pool by all pool participants, excluding any amounts obtained through selling securities by way of reverse repurchase agreements, securities lending agreements, or other similar borrowing methods.
(F)For purposes of this section, the spread is the difference between the cost of funds obtained using the reverse repurchase agreement and the earnings obtained on the reinvestment of the funds.
(k)Medium-term notes, defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Notes eligible for investment under this subdivision shall be rated in a rating category of A or its equivalent or better by an NRSRO. Purchases of medium-term notes shall not include other instruments authorized by this section and shall not exceed 30 percent of the agencys moneys that may be invested pursuant to this section.
(l)(1)Shares of beneficial interest issued by diversified management companies that invest in the securities and obligations as authorized by subdivisions (a) to (k), inclusive, and subdivisions (m) to (q), inclusive, and that comply with the investment restrictions of this article and Article 2 (commencing with Section 53630). However, notwithstanding these restrictions, a counterparty to a reverse repurchase agreement or securities lending agreement is not required to be a primary dealer of the Federal Reserve Bank of New York if the companys board of directors finds that the counterparty presents a minimal risk of default, and the value of the securities underlying a repurchase agreement or securities lending agreement may be 100 percent of the sales price if the securities are marked to market daily.
(2)Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.).
(3)If investment is in shares issued pursuant to paragraph (1), the company shall have met either of the following criteria:
(A)Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs.
(B)Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years experience investing in the securities and obligations authorized by subdivisions (a) to (k), inclusive, and subdivisions (m) to (q), inclusive, and with assets under management in excess of five hundred million dollars ($500,000,000).
(4)If investment is in shares issued pursuant to paragraph (2), the company shall have met either of the following criteria:
(A)Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs.
(B)Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years experience managing money market mutual funds with assets under management in excess of five hundred million dollars ($500,000,000).
(5)The purchase price of shares of beneficial interest purchased pursuant to this subdivision shall not include commission that the companies may charge and shall not exceed 20 percent of the agencys moneys that may be invested pursuant to this section. However, no more than 10 percent of the agencys funds may be invested in shares of beneficial interest of any one mutual fund pursuant to paragraph (1).
(m)Moneys held by a trustee or fiscal agent and pledged to the payment or security of bonds or other indebtedness, or obligations under a lease, installment sale, or other agreement of a local agency, or certificates of participation in those bonds, indebtedness, or lease installment sale, or other agreements, may be invested in accordance with the statutory provisions governing the issuance of those bonds, indebtedness, or lease installment sale, or other agreement, or to the extent not inconsistent therewith or if there are no specific statutory provisions, in accordance with the ordinance, resolution, indenture, or agreement of the local agency providing for the issuance.
(n)Notes, bonds, or other obligations that are at all times secured by a valid first priority security interest in securities of the types listed by Section 53651 as eligible securities for the purpose of securing local agency deposits having a market value at least equal to that required by Section 53652 for the purpose of securing local agency deposits. The securities serving as collateral shall be placed by delivery or book entry into the custody of a trust company or the trust department of a bank that is not affiliated with the issuer of the secured obligation, and the security interest shall be perfected in accordance with the requirements of the Uniform Commercial Code or federal regulations applicable to the types of securities in which the security interest is granted.
(o)A mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond. Securities eligible for investment under this subdivision shall be rated in a rating category of AA or its equivalent or better by an NRSRO and have a maximum remaining maturity of five years or less. Purchase of securities authorized by this subdivision shall not exceed 20 percent of the agencys surplus moneys that may be invested pursuant to this section.
(p)Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (q), inclusive. Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria:
(1)The adviser is registered or exempt from registration with the Securities and Exchange Commission.
(2)The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (q), inclusive.
(3)The adviser has assets under management in excess of five hundred million dollars ($500,000,000).
(q)United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of AA or its equivalent or better by an NRSRO and shall not exceed 30 percent of the agencys moneys that may be invested pursuant to this section.
This section shall apply to a local agency that is a city, a 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. However, Section 53635 shall apply to all local agencies that pool money in deposits or investments with other local agencies that have separate governing bodies. The legislative body of a local agency having moneys in a sinking fund or moneys in its treasury not required for the immediate needs of the local agency may invest any portion of the moneys that it deems wise or expedient in those investments set forth below. A local agency purchasing or obtaining any securities prescribed in this section, in a negotiable, bearer, registered, or nonregistered format, shall require delivery of the securities to the local agency, including those purchased for the agency by financial advisers, consultants, or managers using the agencys funds, by book entry, physical delivery, or by third-party custodial agreement. The transfer of securities to the counterparty banks customer book entry account may be used for book entry delivery.
For purposes of this section, counterparty means the other party to the transaction. A counterparty banks trust department or separate safekeeping department may be used for the physical delivery of the security if the security is held in the name of the local agency. Where this section specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase. Where this section does not specify a limitation on the term or remaining maturity at the time of the investment, no investment shall be made in any security, other than a security underlying a repurchase or reverse repurchase agreement or securities lending agreement authorized by this section, that at the time of the investment has a term remaining to maturity in excess of five years, unless the legislative body has granted express authority to make that investment either specifically or as a part of an investment program approved by the legislative body no less than three months prior to the investment:
(a)Bonds issued by the local agency, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency or by a department, board, agency, or authority of the local agency.
(b)United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the faith and credit of the United States are pledged for the payment of principal and interest.
(c)Registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state.
(d)Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the other 49 states, in addition to California.
(e)Bonds, notes, warrants, or other evidences of indebtedness of a local agency within this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency.
(f)Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises.
(g)Bankers acceptances otherwise known as bills of exchange or time drafts that are drawn on and accepted by a commercial bank. Purchases of bankers acceptances shall not exceed 180 days maturity or 40 percent of the agencys moneys that may be invested pursuant to this section. However, no more than 30 percent of the agencys moneys may be invested in the bankers acceptances of any one commercial bank pursuant to this section.
This subdivision does not preclude a municipal utility district from investing moneys in its treasury in a manner authorized by the Municipal Utility District Act (Division 6 (commencing with Section 11501) of the Public Utilities Code).
(h)Commercial paper of prime quality of the highest ranking or of the highest letter and number rating as provided for by a nationally recognized statistical rating organization (NRSRO). The entity that issues the commercial paper shall meet all of the following conditions in either paragraph (1) or (2):
(1)The entity meets the following criteria:
(A)Is organized and operating in the United States as a general corporation.
(B)Has total assets in excess of five hundred million dollars ($500,000,000).
(C)Has debt other than commercial paper, if any, that is rated in a rating category of A or its equivalent or higher by an NRSRO.
(2)The entity meets the following criteria:
(A)Is organized within the United States as a special purpose corporation, trust, or limited liability company.
(B)Has programwide credit enhancements including, but not limited to, overcollateralization, letters of credit, or a surety bond.
(C)Has commercial paper that is rated A-1 or higher, or the equivalent, by an NRSRO.
Eligible commercial paper shall have a maximum maturity of 270 days or less. Local agencies, other than counties or a city and county, may invest no more than 25 percent of their moneys in eligible commercial paper. Local agencies, other than counties or a city and county, may purchase no more than 10 percent of the outstanding commercial paper of any single issuer. Counties or a city and county may invest in commercial paper pursuant to the concentration limits in subdivision (a) of Section 53635.
(i)Negotiable certificates of deposit issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally licensed or state-licensed branch of a foreign bank. Purchases of negotiable certificates of deposit shall not exceed 30 percent of the agencys moneys that may be invested pursuant to this section. For purposes of this section, negotiable certificates of deposit do not come within Article 2 (commencing with Section 53630), except that the amount so invested shall be subject to the limitations of Section 53638. The legislative body of a local agency and the treasurer or other official of the local agency having legal custody of the moneys are prohibited from investing local agency funds, or funds in the custody of the local agency, in negotiable certificates of deposit issued by a state or federal credit union if a member of the legislative body of the local agency, or a person with investment decisionmaking authority in the administrative office managers office, budget office, auditor-controllers office, or treasurers office of the local agency also serves on the board of directors, or any committee appointed by the board of directors, or the credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificates of deposit.
(j)(1)Investments in repurchase agreements or reverse repurchase agreements or securities lending agreements of securities authorized by this section, as long as the agreements are subject to this subdivision, including the delivery requirements specified in this section.
(2)Investments in repurchase agreements may be made, on an investment authorized in this section, when the term of the agreement does not exceed one year. The market value of securities that underlie a repurchase agreement shall be valued at 102 percent or greater of the funds borrowed against those securities and the value shall be adjusted no less than quarterly. Since the market value of the underlying securities is subject to daily market fluctuations, the investments in repurchase agreements shall be in compliance if the value of the underlying securities is brought back up to 102 percent no later than the next business day.
(3)Reverse repurchase agreements or securities lending agreements may be utilized only when all of the following conditions are met:
(A)The security to be sold using a reverse repurchase agreement or securities lending agreement has been owned and fully paid for by the local agency for a minimum of 30 days prior to sale.
(B)The total of all reverse repurchase agreements and securities lending agreements on investments owned by the local agency does not exceed 20 percent of the base value of the portfolio.
(C)The agreement does not exceed a term of 92 days, unless the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security.
(D)Funds obtained or funds within the pool of an equivalent amount to that obtained from selling a security to a counterparty using a reverse repurchase agreement or securities lending agreement shall not be used to purchase another security with a maturity longer than 92 days from the initial settlement date of the reverse repurchase agreement or securities lending agreement, unless the reverse repurchase agreement or securities lending agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity date of the same security.
(4)(A)Investments in reverse repurchase agreements, securities lending agreements, or similar investments in which the local agency sells securities prior to purchase with a simultaneous agreement to repurchase the security may be made only upon prior approval of the governing body of the local agency and shall be made only with primary dealers of the Federal Reserve Bank of New York or with a nationally or state-chartered bank that has or has had a significant banking relationship with a local agency.
(B)For purposes of this chapter, significant banking relationship means any of the following activities of a bank:
(i)Involvement in the creation, sale, purchase, or retirement of a local agencys bonds, warrants, notes, or other evidence of indebtedness.
(ii)Financing of a local agencys activities.
(iii)Acceptance of a local agencys securities or funds as deposits.
(5)(A)Repurchase agreement means a purchase of securities by the local agency pursuant to an agreement by which the counterparty seller will repurchase the securities on or before a specified date and for a specified amount and the counterparty will deliver the underlying securities to the local agency by book entry, physical delivery, or by third-party custodial agreement. The transfer of underlying securities to the counterparty banks customer book-entry account may be used for book-entry delivery.
(B)Securities, for purposes of repurchase under this subdivision, means securities of the same issuer, description, issue date, and maturity.
(C)Reverse repurchase agreement means a sale of securities by the local agency pursuant to an agreement by which the local agency will repurchase the securities on or before a specified date and includes other comparable agreements.
(D)Securities lending agreement means an agreement under which a local agency agrees to transfer securities to a borrower who, in turn, agrees to provide collateral to the local agency. During the term of the agreement, both the securities and the collateral are held by a third party. At the conclusion of the agreement, the securities are transferred back to the local agency in return for the collateral.
(E)For purposes of this section, the base value of the local agencys pool portfolio shall be that dollar amount obtained by totaling all cash balances placed in the pool by all pool participants, excluding any amounts obtained through selling securities by way of reverse repurchase agreements, securities lending agreements, or other similar borrowing methods.
(F)For purposes of this section, the spread is the difference between the cost of funds obtained using the reverse repurchase agreement and the earnings obtained on the reinvestment of the funds.
(k)Medium-term notes, defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Notes eligible for investment under this subdivision shall be rated in a rating category of A or its equivalent or better by an NRSRO. Purchases of medium-term notes shall not include other instruments authorized by this section and shall not exceed 30 percent of the agencys moneys that may be invested pursuant to this section.
(l)(1)Shares of beneficial interest issued by diversified management companies that invest in the securities and obligations as authorized by subdivisions (a) to (k), inclusive, and subdivisions (m) to (q), inclusive, and that comply with the investment restrictions of this article and Article 2 (commencing with Section 53630). However, notwithstanding these restrictions, a counterparty to a reverse repurchase agreement or securities lending agreement is not required to be a primary dealer of the Federal Reserve Bank of New York if the companys board of directors finds that the counterparty presents a minimal risk of default, and the value of the securities underlying a repurchase agreement or securities lending agreement may be 100 percent of the sales price if the securities are marked to market daily.
(2)Shares of beneficial interest issued by diversified management companies that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.).
(3)If investment is in shares issued pursuant to paragraph (1), the company shall have met either of the following criteria:
(A)Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs.
(B)Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years experience investing in the securities and obligations authorized by subdivisions (a) to (k), inclusive, and subdivisions (m) to (q), inclusive, and with assets under management in excess of five hundred million dollars ($500,000,000).
(4)If investment is in shares issued pursuant to paragraph (2), the company shall have met either of the following criteria:
(A)Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs.
(B)Retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years experience managing money market mutual funds with assets under management in excess of five hundred million dollars ($500,000,000).
(5)The purchase price of shares of beneficial interest purchased pursuant to this subdivision shall not include commission that the companies may charge and shall not exceed 20 percent of the agencys moneys that may be invested pursuant to this section. However, no more than 10 percent of the agencys funds may be invested in shares of beneficial interest of any one mutual fund pursuant to paragraph (1).
(m)Moneys held by a trustee or fiscal agent and pledged to the payment or security of bonds or other indebtedness, or obligations under a lease, installment sale, or other agreement of a local agency, or certificates of participation in those bonds, indebtedness, or lease installment sale, or other agreements, may be invested in accordance with the statutory provisions governing the issuance of those bonds, indebtedness, or lease installment sale, or other agreement, or to the extent not inconsistent therewith or if there are no specific statutory provisions, in accordance with the ordinance, resolution, indenture, or agreement of the local agency providing for the issuance.
(n)Notes, bonds, or other obligations that are at all times secured by a valid first priority security interest in securities of the types listed by Section 53651 as eligible securities for the purpose of securing local agency deposits having a market value at least equal to that required by Section 53652 for the purpose of securing local agency deposits. The securities serving as collateral shall be placed by delivery or book entry into the custody of a trust company or the trust department of a bank that is not affiliated with the issuer of the secured obligation, and the security interest shall be perfected in accordance with the requirements of the Uniform Commercial Code or federal regulations applicable to the types of securities in which the security interest is granted.
(o)A mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond of a maximum of five years maturity. bond. Securities eligible for investment under this subdivision shall be issued by an issuer rated in a rating category of A or its equivalent or better for the issuers debt as provided by an NRSRO and rated in a rating category of AA or its equivalent or better by an NRSRO. NRSRO and have a maximum remaining maturity of five years or less. Purchase of securities authorized by this subdivision shall not exceed 20 percent of the agencys surplus moneys that may be invested pursuant to this section.
(p)Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7 that invests in the securities and obligations authorized in subdivisions (a) to (q), inclusive. Each share shall represent an equal proportional interest in the underlying pool of securities owned by the joint powers authority. To be eligible under this section, the joint powers authority issuing the shares shall have retained an investment adviser that meets all of the following criteria:
(1)The adviser is registered or exempt from registration with the Securities and Exchange Commission.
(2)The adviser has not less than five years of experience investing in the securities and obligations authorized in subdivisions (a) to (q), inclusive.
(3)The adviser has assets under management in excess of five hundred million dollars ($500,000,000).
(q)United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, or Inter-American Development Bank, with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of AA or its equivalent or better by an NRSRO and shall not exceed 30 percent of the agencys moneys that may be invested pursuant to this section.
|
Date
|
Status
|
|---|---|
| Sep 6, 2018 | Chaptered by Secretary of State - Chapter 271, Statutes of 2018. |
| Sep 6, 2018 | Approved by the Governor. |
| Aug 28, 2018 | Enrolled and presented to the Governor at 3 p.m. |
| Aug 23, 2018 | In Assembly. Ordered to Engrossing and Enrolling. |
| Aug 23, 2018 | Read third time. Passed. Ordered to the Assembly. |
| Jun 21, 2018 | Read second time. Ordered to third reading. |
| Jun 20, 2018 | From committee: Do pass. (Ayes 7. Noes 0.) (June 20). |
| May 3, 2018 | Referred to Com. on GOV. & F. |
| Apr 19, 2018 | In Senate. Read first time. To Com. on RLS. for assignment. |
| Apr 19, 2018 | Read third time. Passed. Ordered to the Senate. (Ayes 71. Noes 0.) |
| Apr 16, 2018 | Read second time. Ordered to Consent Calendar. |
| Apr 12, 2018 | From committee: Do pass. To Consent Calendar. (Ayes 9. Noes 0.) (April 11). |
| Jan 22, 2018 | Referred to Com. on L. GOV. |
| Jan 5, 2018 | From printer. May be heard in committee February 4. |
| Jan 4, 2018 | Read first time. To print. |
|
Date
|
Description
|
Location
|
Votes
|
|
|---|---|---|---|---|
| Aug 23, 2018 | Assembly 3rd Reading AB1770 Steinorth By Leyva | Senate Floor |
Passed |
|
| Jun 20, 2018 | Do pass | Senate Standing Committee on Governance and Finance |
Passed |
|
| Apr 19, 2018 | AB 1770 STEINORTH Consent Calendar Second Day Regular Session | Assembly Floor |
Passed |
|
| Apr 11, 2018 | Do pass. To Consent Calendar. | Assembly Standing Committee on Local Government |
Passed |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
|
Organization
|
Position
|
Date
|
|---|---|---|
| California Association of County Treasurer-Tax Collectors | ** Support | Jun 22, 2018 |
| California Municipal Treasurers Association | ** Support | Jun 22, 2018 |
| Unknown. | ** Against | Jun 18, 2018 |
Office of Senate Floor Analyses (916) 651-1520 Fax: (916) 327-4478 | AB |
THIRD READING
Bill No: AB 1770
:
SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 6/20/18
AYES: McGuire, Nguyen, Beall, Hernandez, Hertzberg, Lara, Moorlach
ASSEMBLY FLOOR: 71-0, 4/19/18 (Consent) - See last page for vote
SOURCE: California Association of County Treasurer-Tax Collectors
DIGEST:
This bill deletes the requirement that the issuer of an asset-based security must be rated in a rating category of A or above to be eligible for investment of surplus local agency funds.
Existing law:
- Authorizes local officials to invest a portion of their temporarily idle funds in a variety of financial instruments (Government Code §53601).
- Limits this authorization based on maturity lengths, the percentage of funds that a local agency can invest in a particular type of instrument, and the rating by a National Rating Statistical Rating Organization (NRSRO), such as Moody's, Standard and Poor's, or Fitch necessary, necessary to qualify as sufficiently safe for local agencies to purchase.
- Allows local agencies to invest in of "prime" quality commercial paper of the highest ranking rated by one of the three NSRSOs with a maximum maturity of 270 days or less, so long as commercial paper comprises no more than 25 percent of their surplus funds in eligible commercial paper, and the commercial paper of a single issuer does not exceed more than 10 percent of its total outstanding commercial paper.
- Allows local agencies to invest in mortgage-backed securities (MBS), backed by home mortgage loans, and asset-backed securities (ABS) backed by collateral such as credit card debt and auto loans, so long as:
- The security is issued by an entity in a rating category of A (or its equivalent) or better,
- The security itself rated in a rating category of AA or better, and
- The securities comprise no more than 20% of the agency’s surplus funds.
This bill:
- Alters local agency surplus investment statutes to delete the requirement that the issuer of the security must be rated in a rating category of A or above, thereby defaulting to the requirement that the securities be rated AA or above to be eligible for investment.
- Makes technical and conforming changes.
Background
Securitization is the process through which loans and other assets such as home mortgages, car loans, and credit card debt are pooled together and converted into tradeable, liquid credits. Local agencies can invest in federal agency or U.S. Government enterprise obligations, such as securities issued by the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and Government National Mortgage Association (Ginnie Mae). State law does not cap the percentage of funds local agencies can invest in U.S. government or federal agency obligations.
Generally, issuers of MBS and ABS are trusts organized as separate legal entities only for the purpose of issuing specific securities. Each security or “tranche” is typically rated based on its unique structure and claims on the cash flows generated from the assets held in the trust. As a result, different securities issued by the same trust can have different ratings. Additionally, the entity that creates the trust and puts the assets in it often has no legal recourse to the issuer. In 2015, issuance of MBS and ABS by both private issuers and federal agencies exceeded $1.9 trillion. As of 2015 there was $10 trillion of outstanding MBS and ABS, including more than $7 trillion issued by federal agencies, according to the State Treasurer.
Credit agencies usually rate both specific security issues as well as the entity that issues the product. These two ratings can be different: for example, an issuer with a BB rating can issue BBB rated bonds because the NSRSO determines that investors in the bonds have more repayment security because of specific credit protections contained in that issue. An issuer rating generally indicates the likelihood of an entire company may default with regard to all its financial obligations, while an issue rating is based on a blend of default risk and the priority of a creditor's claim in bankruptcy associated with the specific debt being rated. Securities experts generally recommend using the issuer's rating as the issuer can often default on all its obligations even if it only defaults on one. However, many special purpose trusts issuing securities are not themselves rated, or specific issuances sufficiently secure to merit higher ratings, so AB 1770 is necessary to enable county treasurers to purchase these instruments, which usually offer higher yields than plainer investments.
FISCAL EFFECT: Appropriation: Fiscal Com.: Local:
California Association of County Treasurer-Tax Collectors (source)
California Municipal Treasurers Association
OPPOSITION: (Verified 6/22/18)
None received
ARGUMENTS IN SUPPORT: According to the author, “According to the author, “Current law limits the securities local agencies are allowed to invest in. To be eligible for investment, a non-government backed pass-through or asset-backed security must be rated ‘AA’ or higher and be issued by an issuer with a credit rating of ‘A’ or higher. The ‘A’ issuer requirement was included in AB 3576 (1991 Umberg) when this section was added in 1992, but the entities issuing these securities and their structures have changed significantly since then. The entities that actually issue these securities are legally separate from the issuer whose credit rating current law requires to be considered. Typically, these securities are supported solely by pools of assets and are structured as trusts in order to create a legal claim on the underlying assets. If the trusts are in anyway contractually supported by the issuer, the issuer’s support and general obligation credit strength are reflected in the asset-backed trust and/or individual security ratings. In many cases, the trusts themselves are not rated by the rating agencies, only the securities issued through the trusts are rated. AB 1770 will allow local agencies access to ‘AA-AAA’ rated securities that are currently ineligible for purchase by removing the issuer rating requirement. Agencies will still be limited to purchasing highly-rated securities, preserving the safety of agencies’ portfolios. This bill will also clear up any ambiguity over the application of the five year tenor limit to securities authorized under this section.”
ASSEMBLY FLOOR: 71-0, 4/19/18
AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bonta, Brough, Burke, Caballero, Carrillo, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk-Silva, Reyes, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon
NO VOTE RECORDED: Calderon, Cristina Garcia, Eduardo Garcia, Melendez, Mullin, Quirk, Rodriguez
6/22/18 13:51:48
**** END ****
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Mike McGuire, Chair
2017 - 2018 Regular
Bill No: | AB 1770 | Hearing Date: | 6/20/18 |
Author: | Steinorth | Tax Levy: | No |
Version: | 1/4/18 | Fiscal: | No |
Consultant: | Grinnell | ||
Local government: investments
Deletes the requirement that the issuer of an asset-based security must be rated in a rating category of A or above to be eligible for investment of surplus local agency funds.
Background
Since 1913, state law has authorized local officials to invest a portion of their temporarily idle funds in a variety of financial instruments (Government Code §53601). As part of its oversight function, the Legislature limits the maturity lengths on many of these newer instruments, the percentage of funds that a local agency can invest in a particular type of instrument, and the rating by a National Rating Statistical Rating Organization (NRSRO), such as Moody's, Standard and Poor's, or Fitch necessary to qualify as sufficiently safe for local agencies to purchase.
Originally, state law limited the instruments to government bonds, but over time legislators expanded the list to include the more sophisticated instruments of modern finance. In 1978, state lawmakers added commercial paper (short-term promissory notes typically issued by corporations) to the list of authorized instruments. Eligible paper must be of "prime" quality of the highest ranking rated by one of the three NSRSOs. Eligible commercial paper is limited to a maximum maturity of 270 days or less. Local agencies may invest no more than 25 percent of their surplus funds in eligible commercial paper and may not purchase more than 10 percent of the outstanding commercial paper of any single issuer.
Securitization is the process through which loans and other assets such as home mortgages, car loans, and credit card debt are pooled together and converted into tradeable, liquid credits. Local agencies can invest in federal agency or U.S. Government enterprise obligations, such as securities issued by the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and Government National Mortgage Association (Ginnie Mae). In 1992, the Legislature allowed local agencies to invest in any mortgage pass-through security, collateralized mortgage obligation, or mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable pass-through certificate, or consumer receivable-backed bond of a maximum of five years’ maturity (AB 3576, Umberg). Under AB 3576, local agencies can invest in mortgage-backed securities (MBS), backed by home mortgage loans, and asset-backed securities (ABS) backed by collateral such as credit card debt and auto loans. To be eligible for investment, the security must be issued by an issuer in a rating category of A (or its equivalent) or better, and the security itself rated in a rating category of AA or better. State law does not cap the percentage of funds local agencies can invest in U.S. government or federal agency obligations; however, state law caps investment in private securities at 20% of the agency’s surplus funds.
Generally, issuers of MBS and ABS are trusts organized as separate legal entities only for the purpose of issuing specific securities. Each security or “tranche” is typically rated based on its unique structure and claims on the cash flows generated from the assets held in the trust. As a result, different securities issued by the same trust can have different ratings. Additionally, the entity that creates the trust and puts the assets in it often has no legal recourse to the issuer. In 2015, issuance of MBS and ABS by both private issuers and federal agencies exceeded $1.9 trillion. As of 2015 there was $10 trillion of outstanding MBS and ABS, including more than $7 trillion issued by federal agencies, according to the State Treasurer.
Citing ambiguity in the statute, and wanting clear authority to invest funds in qualified special purpose MBS and ABS trusts, the California Association of County Treasurer-Tax Collectors want to remove the requirement that issuer have an A rating to purchase MBS and ABS, while retaining the standard that the securities themselves be rated AA.
Proposed Law
Assembly Bill 1770 alters local agency surplus investment statutes to delete the requirement that the issuer of the security must be rated in a rating category of A or above, thereby defaulting to the requirement that the securities be rated AA or above to be eligible for investment. The bill also makes technical and conforming changes.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill. According to the author, “Current law limits the securities local agencies are allowed to invest in. To be eligible for investment, a non-government backed pass-through or asset-backed security must be rated ‘AA’ or higher and be issued by an issuer with a credit rating of ‘A’ or higher. The ‘A’ issuer requirement was included in AB 3576 (1991 Umberg) when this section was added in 1992, but the entities issuing these securities and their structures have changed significantly since then. The entities that actually issue these securities are legally separate from the issuer whose credit rating current law requires to be considered. Typically, these securities are supported solely by pools of assets and are structured as trusts in order to create a legal claim on the underlying assets. If the trusts are in anyway contractually supported by the issuer, the issuer’s support and general obligation credit strength are reflected in the asset-backed trust and/or individual security ratings. In many cases, the trusts themselves are not rated by the rating agencies, only the securities issued through the trusts are rated. AB 1770 will allow local agencies access to ‘AA-AAA’ rated securities that are currently ineligible for purchase by removing the issuer rating requirement. Agencies will still be limited to purchasing highly-rated securities, preserving the safety of agencies’ portfolios. This bill will also clear up any ambiguity over the application of the five year tenor limit to securities authorized under this section.”
2. Buyer beware. While authorized as eligible investments for surplus funds for twenty years, securitized investment products were a significant catalyst of the financial crisis ten years ago when ABS and MBS markets collapsed. Since 2010, the Securities and Exchange Commission (SEC) has adopted a number of rules regarding MBS and ABS, often as directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. According to the State Treasurer, local agencies should exercise caution when considering investing in mortgage-backed securities and asset-backed securities. The Treasurer recommends that at a minimum, they should analyze the different characteristics and risk profile of the MBS/ABS transactions, collateralized mortgage obligations or other pay-through securities prior to purchasing, and fully review and understand the complexity of the structured investments products and the underlying assets used to securitize those products, even if the security carries an implied or explicit guarantee of the United States. Ratings agency Standard and Poor’s states that MBS/ABS markets are in much better condition today because asset quality has improved significantly from ten years ago.
3. Issue or issuer? Credit agencies usually rate both specific security issues as well as the entity that issues the product. These two ratings can be different: for example, an issuer with a BB rating can issue BBB rated bonds because the NSRSO determines that investors in the bonds have more repayment security because of specific credit protections contained in that issue. An issuer rating generally indicates the likelihood of an entire company may default with regard to all its financial obligations, while an issue rating is based on a blend of default risk and the priority of a creditor's claim in bankruptcy associated with the specific debt being rated. Securities experts generally recommend using the issuer's rating as the issuer can often default on all its obligations even if it only defaults on one. However, many special purpose trusts issuing securities are not themselves rated, or specific issuances sufficiently secure to merit higher ratings, so AB 1770 is necessary to enable county treasurers to purchase these instruments, which usually offer higher yields than plainer investments.
Assembly Actions
Assembly Revenue and Taxation Committee: 9-0
Assembly Floor: 71-0
Support and Opposition
(6/15/18)
Support: California Association of County Treasurer-Tax Collectors, California Municipal Treasurers Association.
Opposition: Unknown.
-- END --
Date of Hearing: April 11, 2018
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cecilia Aguiar-Curry, Chair
ABPCA Bill Id:AB 1770 (
Author:Steinorth) – As Introduced Ver:January 4, 2018
SUBJECT: Local government: investments.
SUMMARY: Updates and clarifies the preconditions required for asset-backed securities (ABS) and other pass-through securities in which local agencies may invest. Specifically, this bill:
- Removes a rating requirement on issuers of mortgage passthrough securities, collateralized mortgage obligations, mortgage-backed or other pay-through bonds, equipment lease-backed certificates, consumer receivable passthrough certificates, or consumer receivable-backed bonds.
- Clarifies that all of the investment vehicles in 1), above, must have a maximum remaining maturity of five years or less.
EXISTING LAW:
- Allows the legislative body of a local agency to invest funds not immediately needed by the agency in a variety of specified financial instruments.
- Allows local agencies to invest in a mortgage passthrough security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond of a maximum of five years’ maturity.
- Requires securities eligible for investment pursuant to 2), above, to be issued by an issuer rated in a rating category of "A" or its equivalent or better for the issuer’s debt as provided by a nationally recognized statistical rating organization (NRSRO) and rated in a rating category of "AA" or its equivalent or better by an NRSRO.
FISCAL EFFECT: None
COMMENTS:
- Bill Summary. This bill updates and clarifies the preconditions required for specified asset-backed securities and other pass-through securities in which local agencies are allowed to invest. Specifically, this bill removes a requirement that mortgage passthrough securities, collateralized mortgage obligations, mortgage-backed or other pay-through bonds, equipment lease-backed certificates, consumer receivable passthrough certificates, or consumer receivable-backed bonds be issued by an issuer rated in a rating category of "A" or its equivalent or better for the issuer’s debt as provided by an NRSRO. This bill also clarifies that all of these types of investments must have a maximum remaining maturity of five years or less.
This bill is sponsored by the California Association of County Treasurers and Tax Collectors.
- Author’s Statement. According to the author, “Local agencies’ opportunities for investment in highly-rated ABS have been unnecessarily limited by requiring an issuer rating of “A” or better. As the statute is currently written, many “AA-AAA” rated ABS and pass through securities are ineligible for purchase due to the ambiguity surrounding the definition of what constitutes the issuer in an ABS transaction.
"The ABS market has experienced significant changes since (this requirement was enacted in) 1992, including the creation of registered securitized trusts, which purchase the assets from the issuer/sponsor and issue ABS in the marketplace. Most of these securitized trusts are not individually rated by the NRSROs, while ABS issued by the trusts may be rated
“AA-AAA.” Therefore, as currently written in the statute, the required “A” issuer rating prevents counties from investing in highly-rated ABS because of this ratings ambiguity.
"For example, the registered asset-backed security Ford Credit Auto Owner Trust 2017-B A3 (tranche) 1.69% 11/15/21 CUSIP# 34531HAD1 is rated “AAA” by S&P & Moody’s, but is ineligible for purchase because Ford Motor Credit Co., LLC is rated Baa2/BBB/BBB. Ford Credit Auto Owner Trust 2017-B (not rated) is a separate legal entity from Ford Motor Credit Co., LLC. The ratings of Ford Motor Co. or Ford Motor Credit Co., LLC have no bearing on the trust because there is no support or guarantee to the asset-backed trust.
"Furthermore, the placement of commas and phrasing makes the application of the 'maximum of five years’ maturity' tenor limit unclear. Given that all securities under the statute are understood to be non-government insured or backed (vs. government insured or backed agency pass through securities…), the language should be clear that all investment types in this section are limited to a maximum of five years’ final maturity. The current language could be read to imply that only consumer receivable-backed bonds are limited
to a maximum of five years’ maturity.”
- Background on Securitized Investment/Securities. Since 1913, state law has authorized local officials to invest a portion of their temporarily idle funds in a variety of financial instruments. AB 3576 (Umberg), Chapter 173, Statutes of 1992, added certain types of collateralized medium term notes, or ABS, to the list of instruments eligible for local agency investment. Under the terms of AB 3576, local agencies were permitted to purchase mortgage pass-through securities, collateralized mortgage obligations, equipment lease-backed certificates, consumer receivable pass-through certificates, or consumer receivable-backed bonds of a maximum of five years maturity, provided all of the following conditions were met:
- The securities were rated “AA” or better by a NRSO;
- The issuer of the securities had an “A” or higher rating for its debt as provided by a NRSO;
- Such securities compromised no more than 20% of the agency’s funds eligible for investment.
In 1992, the minimum “A” rating for an issuer was considered necessary due to the fact that the ABS market was still in its infancy. As noted above in the author's statement, the ABS market has experienced significant changes since the early 90’s, including the creation of registered securitized trusts that purchase the assets from the issuer/sponsor and issue ABS in the marketplace. Some issuers of ABS now in the market are not rated, precluding local agencies from investing in the securities they issue. By eliminating the requirement that issuers be rated, this bill will increase the securities in which local agencies are allowed to invest. Agencies will still be limited to purchasing highly-rated securities, maintaining the safety of the agencies’ portfolios.
This bill will also clarify any uncertainty regarding which investment vehicles are subject to the five-year tenor limit by clarifying that all investment types in this category are limited to a maximum maturity limit of five years or less.
- Arguments in Support. The California Association of County Treasurers and Tax Collectors, sponsor of this measure, states, "(Existing law requiring issuers to be rated) restricts counties and other agencies from purchasing many 'AA-AAA' rated ABS when their associated issuers do not meet the required rating…Additionally, the language (in existing law) is ambiguous with regard to the maximum maturity (tenor) limit of five years…Both of these outdated provisions create limitations that have caused counties that either purchase ABS or have outside advisors that manage their assets to lose important investment opportunities…AB 1770 will allow counties to purchase a broader range of 'AA-AAA' rated securities that are of very high quality, while also clearing up any ambiguity over the application of the five-year tenor limit. Both of these changes will allow counties to diversify their portfolios which will in turn increase portfolio safety, liquidity, and yield…"
- Arguments in Opposition. None on file.
REGISTERED SUPPORT / OPPOSITION:
Support
California Association of County Treasurers and Tax Collectors
California Municipal Treasurers Association
Opposition
None on file
Analysis Prepared by: Puja Navaney / L. GOV. / (916) 319-3958
Bill Author
Bill Co-Author(s):