CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 945

Author:(McCarty)

As Amended Ver:September 4, 2019

Majority vote

SUMMARY:

Makes changes to the authority of local agencies to invest surplus funds in certain deposits.

The Senate Amendments:

1. Place a sunset date of January 1, 2026 on the increase from 30% to 50% of surplus funds that can be invested in certain deposits by specified local agencies.
2. Provide that a local agency can invest up to 30% of its surplus funds in placement services if it pools its investments with other local agencies, not 50% as otherwise permitted by this bill.
3. Specify that at the time of the local agency's investment with a selected depository institution and no less than monthly thereafter, the private sector entity shall ensure that the local agency is provided with an inventory of all depository institutions in which deposits have been placed on the local agency's behalf, that are within the private sector entity's network.
4. Require that within its network, the private sector entity shall ensure that it does not place additional deposits from a particular local agency with any depository institution identified as holding the local agency's deposits if those additional deposits would result in that local agency's total amount on deposit at the depository institution exceeding the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCAU) insurance limit.
5. Specify that if a selected depository uses two or more private sector entities to assist in the placement of a local agency's deposits, the selected depository shall ensure that it does not place additional deposits from a particular local agency with a deposit institution if those additional deposits would result in that local agency's total amount on deposit at that depository institution exceeding the FDIC or NCAU insurance limit.
6. Clarify that local agency deposits in depository institutions which use private sector placement agencies are subject to Government Code Section 53638, which limits the amount of money a local agency may deposit in a depository institution at a level intended to ensure that a local agency's deposits do not exceed the net worth, shareholder equity, or unimpaired capital and surplus of the depository.
7. Specify that the selected depository institution shall request that the local agency inform it of depository institutions at which the local agency has other deposits, and the selected depository institution shall provide that information to the private sector entity.
8. Make other conforming changes.

COMMENTS:

Investments. Since 1913, state law has authorized local officials to invest a portion of local governments' temporarily idle funds in a variety of financial instruments. Originally, state law limited the instruments to government bonds, but over time the laws governing local agency investments have been amended to keep pace with changing investment opportunities and current market offerings. California law allows local officials to deposit money in state or national banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in the State of California. These public deposits, which include funds placed into certificates of deposit (CDs), are subject to restrictions, including a requirement that deposits must be insured by the FDIC or, to the extent not insured, collateralized with certain types of securities in specified amounts. FDIC insurance usually covers only $250,000 per depositor per institution. As a result, to secure large public deposits, depository institutions must hold significant amounts of collateral.

In 2006, the Legislature authorized local agencies to invest up to 30% of their surplus funds in CDs issued through a private sector deposit placement service [AB 2011 (Vargas), Chapter 459, Statutes of 2006]. Subsequent legislation deleted a sunset date from the statutes authorizing local agencies to invest in CDs using a deposit placement service [(SB 1344 (Kehoe), Chapter 112, Statutes of 2010)]. In 2013, the Legislature expanded local governments' statutory authority to invest surplus funds through a deposit placement service to allow surplus funds to be placed not just in CDs but also in other types of deposits [AB 279 (Dickinson), Chapter 279, Statutes of 2013], and the sunset date on this authority was extended in 2015 to January 1, 2021 [AB 283 (Debabneh), Chapter 181, Statutes of 2015].

According to the Author:

"AB 945 will provide for greater opportunities for investments in our communities by allowing, but not requiring, local agencies to invest more of their surplus funds with local banks and credit unions. Those financial institutions will then have more capital to use for small business loans and other financial instruments, which will in turn provide a multiplier-effect of economic growth in our communities."

Arguments in Support:

Supporters argue that, "Typically, depository institutions that use reciprocal deposits as a means to collateralize against local agency deposits are community banks operating within the geographical region of the local agency. Unfortunately, the current law percentage limitation prevents banks and local agencies from using reciprocal deposits beyond 30% of surplus funds. The law's inflexibility limits how local agencies and banks work together in managing local agency funds and the manner in which they serve their communities. Measure AB 945 increases the statutory cap while maintaining a local agency's discretion in securing collateral."

Arguments in Opposition:

None on file.

FISCAL COMMENTS:

None

VOTES:

ASM LOCAL GOVERNMENT: 8-0-0

YES: Aguiar-Curry, Lackey, Bloom, Boerner Horvath, Ramos, Luz Rivas, Robert Rivas, Voepel

ASM BANKING AND FINANCE: 12-0-0

YES: Limón, Chen, Bauer-Kahan, Burke, Cervantes, Choi, Gabriel, Grayson, Melendez, Mark Stone, Weber, Wicks

ASSEMBLY FLOOR: 75-0-5

YES: Aguiar-Curry, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Diep, Eggman, Flora, Fong, Frazier, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, O'Donnell, Obernolte, Patterson, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood

ABS, ABST OR NV: Arambula, Chen, Friedman, Maienschein, Rendon

SENATE FLOOR: 39-1-0

YES: Allen, Archuleta, Atkins, Bates, Beall, Borgeas, Bradford, Caballero, Chang, Dahle, Dodd, Durazo, Galgiani, Glazer, Lena Gonzalez, Grove, Hertzberg, Hill, Hueso, Hurtado, Jackson, Jones, Leyva, McGuire, Mitchell, Monning, Morrell, Nielsen, Pan, Portantino, Roth, Rubio, Skinner, Stern, Stone, Umberg, Wieckowski, Wiener, Wilk

NO: Moorlach

UPDATED:

VERSION: September 4, 2019

CONSULTANT: Jimmy MacDonald / L. GOV. / (916) 319-3958 FN: 0002254

 THIRD READING  

Bill No: AB 945

Author: McCarty (D), et al.

Amended: 9/4/19 in Senate

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 5-0, 6/19/19

AYES: McGuire, Beall, Hurtado, Nielsen, Wiener

NO VOTE RECORDED: Moorlach, Hertzberg

SENATE BANKING & F.I. COMMITTEE: 7-0, 6/26/19

AYES: Bradford, Chang, Caballero, Dahle, Durazo, Hueso, Portantino

ASSEMBLY FLOOR: 75-0, 4/29/19 - See last page for vote

SUBJECT: Local government: financial affairs: surplus funds

SOURCE: California Bankers Association

DIGEST:

This bill increases the cap on the amount of surplus funds local agencies can invest in certain deposits and removes the January 1, 2021 sunset date on the ability to make these types of deposits.

Senate Floor Amendments of 9/4/19 clarify that a local agency can invest up to 30% of its surplus funds in placement services if it pools its investments with other local agencies, not 50% as otherwise permitted by the bill. The amendments also seek to avoid duplicate deposits of surplus funds when using placement services.

ANALYSIS:

Existing law:

1. Authorizes local agencies that do not pool their money in deposits or investments with other local agencies with separate governing bodies, and that have money in their treasuries that is not required for their immediate needs, to invest any portion of the money they deem wise or expedient in selected investments specified in law, and places limitations on the percentage of a local agency’s surplus that may be invested in some of those investments.
2. Includes negotiable certificates of deposit (CDs) among allowable investments, provided they are issued by a state- or nationally-chartered depository institution, and the local agency’s investment in the CDs does not exceed 30% of the agency’s surplus.
3. Authorizes local agencies that have the authority to invest surplus funds at their discretion to invest up to 30% of those funds in deposits at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity which assists in the placement of deposits. Under this authority, local governments may invest surplus funds in both CDs and in deposits other than CDs. Authority to invest in CDs does not sunset, while authority to invest in deposits other than CDs sunsets on January 1, 2021.
4. Imposes several rules on the local agencies and depository institutions that take advantage of the authority to invest in placement services:
   1. The local agency must use a nationally or state-chartered commercial bank, savings bank, savings and loan association, or credit union in California to invest its funds. The depository institution selected by the local agency (known as the selected depository institution) must serve as a custodian for each such local agency deposit.
   2. A selected depository institution may use a private sector entity to help place local agency deposits with one or more commercial banks, savings banks, savings and loan associations, or credit unions in the United States, which are within the network used by the private sector entity.
   3. Any private sector entity used by a selected depository institution to help place its local agency deposits must maintain policies and procedures requiring both of the following:
      1. The full amount of each deposit placed using the private sector entity and the interest that may accrue on each deposit must at all times be insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
      2. Every depository institution where funds are placed must be capitalized at a level that is sufficient, and be otherwise eligible to receive such deposits pursuant to FDIC or NCUA regulations.
   4. On the same date the local agency’s funds are placed by the private sector entity, the selected depository institution must receive an amount of insured deposits from other financial institutions that, in total, are equal to or greater than the full amount of the principal the local agency initially deposited with that institution.
5. Provides that, when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the county treasurer, the board of supervisors, or the trustee, as applicable, shall act with care, skill, prudence, and diligence, as specified, to safeguard the principal and maintain the liquidity needs of the county, the agency, and the other depositors, as applicable.
6. Limits the amount of money a local agency may deposit in a depository institution, at a level intended to ensure that the agency’s deposits do not exceed the net worth, shareholder equity, or unimpaired capital and surplus of the depository, as specified.

This bill:

1. Deletes the sunset date on a local agency’s ability to invest up to 30% of its surplus funds in non-CD deposits at depository institutions that use private sector entities to assist in the placement of deposits.
2. Increases, until January 1, 2026, from 30% to 50%, the maximum allowable percentage of a local agency’s surplus funds that the local agency may invest in depository institutions that use a private sector entity to assist in the placement of deposits. If a local agency pools its monies with other local agencies, it can only invest up to 30% of its surplus funds in placement services. If that same local agency wanted to separately invest outside of the pool, it would only be able to invest an additional 20% of its surplus funds in placement services for a maximum of 50%.
3. Clarifies that local agency deposits in depository institutions which use private sector placement agencies are subject to existing limitations on the amount of money a local agency may deposit in a depository institution at a level intended to ensure that a local agency’s deposits do not exceed the net worth, shareholder equity, or unimpaired capital and surplus of the depository.
4. Requires placement agencies to ensure that each local agency which deposits its money in a depository institution that uses a private sector placement agency be provided, on a monthly basis, with an inventory of all depository institutions in which deposits have been placed on that local agency’s behalf.
5. Requires placement agencies to establish policies and procedures intended to ensure that they do not place additional deposits from a particular local agency with a depository institution, when such additional deposits would result in that local agency’s total amount on deposit at that depository institution exceeding the FDIC or NCUA limit.
6. Requires that depository institutions request that a participating local agency inform it of other depository institutions where it locates its deposits, which the depository institution must then provide to the private sector entity that assists with the placement of those deposits.

Background

In 1989, U.S. Congress codified the idea of “brokered deposits” into the Federal Deposit Insurance Act. This legislation helped regulate investors engaged in the business of placing deposits, or facilitating the placement of deposits, for third parties with insured depository institutions. In 2003, a private company established a network through which banks could place customer funds in deposits at other banks and receive deposits in an equal amount of funds in return. As an alternative to seeking other forms of collateral, placement services allow a public agency to deposit more than $250,000 in one bank while maintaining FDIC insurance by placing deposits in amounts that do not exceed $250,000 in other institutions.

In 2006, the Legislature authorized local agencies to invest up to 30% of their surplus funds in CDs issued through a private sector deposit placement service and included a January 1, 2012, sunset date (AB 2011, Vargas, Chapter 459, Statutes of 2006). Subsequent legislation repealed a sunset date from the statutes authorizing local agencies to invest in CDs using a deposit placement service (SB 1344, Kehoe, Chapter 112, Statutes of 2010). In 2013, the Legislature expanded local governments’ statutory authority to invest surplus funds through a deposit placement service to allow surplus funds to be placed not just in CDs but also in other types of deposits with a January 1, 2017 sunset date (AB 279, Dickinson, Chapter 228, Statutes of 2013). Finally, AB 283 (Debabneh, Chapter 181, Statutes of 2015) extended the sunset date on this authority to January 1, 2021.

Comments

1. Purpose of this bill. According to the author, “AB 945 will provide for greater opportunities for investments in our communities by allowing, but not requiring, local agencies to invest more of their surplus funds with local banks and credit unions. Those financial institutions will then have more capital to use for small business loans and other financial instruments, which will in turn provide a multiplier-effect of economic growth in our communities.”
2. Necessary? While banking organizations want to increase the limit on placement service deposits to provide more flexibility to local governments, it is unclear whether this change is necessary. No cities or special districts came forward with specific information regarding how close their member agencies are to the cap. According to the California Bankers Association, the banks cannot disclose how close their customers are to the 30% cap. Without knowing the proportion of surplus funds different types of local agencies have invested in placement service deposits, and their respective financial conditions, it is difficult to assess whether an increase in the cap is warranted.
3. What’s the harm? Increasing the cap does not require any local agency to actually increase the level of its deposits in placement services. This bill only permits them to invest more surplus funds in placement services if they determine it is in their best interest. However, having a higher cap may give banks an opportunity to more aggressively market placement service deposits to local governments. While all local agencies are subject to the prudent investor standard, some local agencies may not have the financial expertise to determine whether investing additional surplus funds in placement services is the most appropriate financial strategy.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 9/4/19)

California Bankers Association (source)

1st Capital Bank

Association of California Water Agencies

Bank of San Francisco

California Community Banking Network

California Credit Union League

Central Valley Community Bank

Citizens Business Bank

Exchange Bank

Five Star Bank

Fresno First Bank

Luther Burbank Savings

Malaga Bank

Manufacturers Bank

Mission Bank

Pinnacle Bank

River City Bank

San Diego County Treasurer-Tax Collector Dan McAllister

OPPOSITION: (Verified 9/4/19)

None received

ASSEMBLY FLOOR: 75-0, 4/29/19

AYES: Aguiar-Curry, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Diep, Eggman, Flora, Fong, Frazier, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood

NO VOTE RECORDED: Arambula, Chen, Friedman, Maienschein, Rendon

Prepared by: Jonathan Peterson / GOV. & F. / (916) 651-4119

9/5/19 15:38:11

**** END ****

 THIRD READING  

Bill No: AB 945

Author: McCarty (D), et al.

Amended: 7/1/19 in Senate

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 5-0, 6/19/19

AYES: McGuire, Beall, Hurtado, Nielsen, Wiener

NO VOTE RECORDED: Moorlach, Hertzberg

SENATE BANKING & F.I. COMMITTEE: 7-0, 6/26/19

AYES: Bradford, Chang, Caballero, Dahle, Durazo, Hueso, Portantino

ASSEMBLY FLOOR: 75-0, 4/29/19 - See last page for vote

SUBJECT: Local government: financial affairs: surplus funds

SOURCE: California Bankers Association

DIGEST:

This bill increases the cap on the amount of surplus funds local agencies can invest in certain deposits and removes the January 1, 2021 sunset date on the ability to make these types of deposits.

ANALYSIS:

Existing law:

1. Authorizes local agencies that do not pool their money in deposits or investments with other local agencies with separate governing bodies, and that have money in their treasuries that is not required for their immediate needs, to invest any portion of the money they deem wise or expedient in selected investments specified in law, and places limitations on the percentage of a local agency’s surplus that may be invested in some of those investments.
2. Includes negotiable certificates of deposit (CDs) among allowable investments, provided they are issued by a state- or nationally-chartered depository institution, and the local agency’s investment in the CDs does not exceed 30% of the agency’s surplus.
3. Authorizes local agencies that have the authority to invest surplus funds at their discretion to invest up to 30% of those funds in deposits at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity which assists in the placement of deposits. Under this authority, local governments may invest surplus funds in both CDs and in deposits other than CDs. Authority to invest in CDs does not sunset, while authority to invest in deposits other than CDs sunsets on January 1, 2021.
4. Imposes several rules on the local agencies and depository institutions that take advantage of the authority to invest in placement services:
   1. The local agency must use a nationally or state-chartered commercial bank, savings bank, savings and loan association, or credit union in California to invest its funds. The depository institution selected by the local agency (known as the selected depository institution) must serve as a custodian for each such local agency deposit.
   2. A selected depository institution may use a private sector entity to help place local agency deposits with one or more commercial banks, savings banks, savings and loan associations, or credit unions in the United States, which are within the network used by the private sector entity.
   3. Any private sector entity used by a selected depository institution to help place its local agency deposits must maintain policies and procedures requiring both of the following:
      1. The full amount of each deposit placed using the private sector entity and the interest that may accrue on each deposit must at all times be insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
      2. Every depository institution where funds are placed must be capitalized at a level that is sufficient, and be otherwise eligible to receive such deposits pursuant to FDIC or NCUA regulations.
   4. On the same date the local agency’s funds are placed by the private sector entity, the selected depository institution must receive an amount of insured deposits from other financial institutions that, in total, are equal to or greater than the full amount of the principal the local agency initially deposited with that institution.
5. Provides that, when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the county treasurer, the board of supervisors, or the trustee, as applicable, shall act with care, skill, prudence, and diligence, as specified, to safeguard the principal and maintain the liquidity needs of the county, the agency, and the other depositors, as applicable.
6. Limits the amount of money a local agency may deposit in a depository institution, at a level intended to ensure that the agency’s deposits do not exceed the net worth, shareholder equity, or unimpaired capital and surplus of the depository, as specified.

This bill:

1. Deletes the sunset date on a local agency’s ability to invest up to 30% of its surplus funds in non-CD deposits at depository institutions that use private sector entities to assist in the placement of deposits.
2. Increases, until January 1, 2026, from 30% to 50%, the maximum allowable percentage of a local agency’s surplus funds that the local agency may invest in depository institutions that use a private sector entity to assist in the placement of deposits.
3. Clarifies that local agency deposits in depository institutions which use private sector placement agencies are subject to existing limitations on the amount of money a local agency may deposit in a depository institution at a level intended to ensure that a local agency’s deposits do not exceed the net worth, shareholder equity, or unimpaired capital and surplus of the depository.
4. Requires placement agencies to ensure that each local agency which deposits its money in a depository institution that uses a private sector placement agency be provided, on a monthly basis, with an inventory of all depository institutions in which deposits have been placed on that local agency’s behalf.
5. Requires placement agencies to establish policies and procedures intended to ensure that they do not place additional deposits from a particular local agency with a depository institution, when such additional deposits would result in that local agency’s total amount on deposit at that depository institution exceeding the FDIC or NCUA limit.

Background

In 1989, U.S. Congress codified the idea of “brokered deposits” into the Federal Deposit Insurance Act. This legislation helped regulate investors engaged in the business of placing deposits, or facilitating the placement of deposits, for third parties with insured depository institutions. In 2003, a private company established a network through which banks could place customer funds in deposits at other banks and receive deposits in an equal amount of funds in return. As an alternative to seeking other forms of collateral, placement services allow a public agency to deposit more than $250,000 in one bank while maintaining FDIC insurance by placing deposits in amounts that do not exceed $250,000 in other institutions.

In 2006, the Legislature authorized local agencies to invest up to 30% of their surplus funds in CDs issued through a private sector deposit placement service and included a January 1, 2012, sunset date (AB 2011, Vargas, Chapter 459, Statutes of 2006). Subsequent legislation repealed a sunset date from the statutes authorizing local agencies to invest in CDs using a deposit placement service (SB 1344, Kehoe, Chapter 112, Statutes of 2010). In 2013, the Legislature expanded local governments’ statutory authority to invest surplus funds through a deposit placement service to allow surplus funds to be placed not just in CDs but also in other types of deposits with a January 1, 2017 sunset date (AB 279, Dickinson, Chapter 228, Statutes of 2013). Finally, AB 283 (Debabneh, Chapter 181, Statutes of 2015) extended the sunset date on this authority to January 1, 2021.

Comments

1. Purpose of this bill. According to the author, “AB 945 will provide for greater opportunities for investments in our communities by allowing, but not requiring, local agencies to invest more of their surplus funds with local banks and credit unions. Those financial institutions will then have more capital to use for small business loans and other financial instruments, which will in turn provide a multiplier-effect of economic growth in our communities.”
2. Necessary? While banking organizations want to increase the limit on placement service deposits to provide more flexibility to local governments, it is unclear whether this change is necessary. No cities or special districts came forward with specific information regarding how close their member agencies are to the cap. According to the California Bankers Association, the banks cannot disclose how close their customers are to the 30% cap. Without knowing the proportion of surplus funds different types of local agencies have invested in placement service deposits, and their respective financial conditions, it is difficult to assess whether an increase in the cap is warranted.
3. What’s the harm? Increasing the cap does not require any local agency to actually increase the level of its deposits in placement services. This bill only permits them to invest more surplus funds in placement services if they determine it is in their best interest. However, having a higher cap may give banks an opportunity to more aggressively market placement service deposits to local governments. While all local agencies are subject to the prudent investor standard, some local agencies may not have the financial expertise to determine whether investing additional surplus funds in placement services is the most appropriate financial strategy.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 7/3/19)

California Bankers Association (source)

1st Capital Bank

Association of California Water Agencies

Bank of San Francisco

California Community Banking Network

California Credit Union League

Central Valley Community Bank

Citizens Business Bank

Exchange Bank

Five Star Bank

Fresno First Bank

Luther Burbank Savings

Malaga Bank

Manufacturers Bank

Mission Bank

Pinnacle Bank

River City Bank

San Diego County Treasurer-Tax Collector Dan McAllister

OPPOSITION: (Verified 7/16/19)

San Francisco Treasurer-Tax Collector Jose Cisneros

ASSEMBLY FLOOR: 75-0, 4/29/19

AYES: Aguiar-Curry, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Diep, Eggman, Flora, Fong, Frazier, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood

NO VOTE RECORDED: Arambula, Chen, Friedman, Maienschein, Rendon

Prepared by: Jonathan Peterson / GOV. & F. / (916) 651-4119

7/16/19 13:47:09

**** END ****

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2019 - 2020 Regular

Bill No: AB 945 Hearing Date: June 26, 2019

Subject: Local government: financial affairs: surplus funds.

SUMMARY

This bill, as agreed to be amended in the Senate Governance & Finance Committee, deletes the January 1, 2021 sunset date on a local agency’s ability to invest up to 30% of its surplus funds in deposits other than certificates of deposit at depository institutions that use private sector entities to assist in the placement of deposits and, until January 1, 2026, increases, from 30% to 50%, the maximum allowable percentage of a local agency’s surplus funds that the local agency may invest in depository institutions that use a private sector entity to assist in the placement of deposits.

EXISTING LAW

1. Defines a local agency as a county, city, city and county, school district, community college district, public district, county board of education, county superintendent of schools, or any public or municipal corporation (Government Code Section 53600).
   
2. Authorizes local agencies that do not pool their money in deposits or investments with other local agencies with separate governing bodies, and that have money in their treasuries that is not required for their immediate needs, to invest any portion of the money they deem wise or expedient in selected investments specified in law, and places limitations on the percentage of a local agency’s surplus that may be invested in some of those investments (Government Code Section 53601).
   
3. Includes negotiable certificates of deposit (CDs) among allowable investments, provided they are issued by a state- or nationally-chartered depository institution, and the local agency’s investment in the CDs does not exceed 30% of the agency’s surplus (Government Code Section 53601).
   
4. Authorizes local agencies that have the authority to invest surplus funds at their discretion to invest up to 30% of those funds in deposits at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity which assists in the placement of deposits (Government Code Sections 53601.8 and 53635.8). Under this authority, local governments may invest surplus funds in both CDs and in deposits other than CDs. Authority to invest in CDs does not sunset, while authority to invest in deposits other than CDs sunsets on January 1, 2021.
   
5. Imposes several rules on the local agencies and depository institutions that take advantage of the authority described in Existing Law Number 4 above, as follows:
   
   1. The local agency must use a nationally or state-chartered commercial bank, savings bank, savings and loan association, or credit union in California to invest its funds. The depository institution selected by the local agency (known as the selected depository institution) must serve as a custodian for each such local agency deposit.
      
   2. A selected depository institution may use a private sector entity to help place local agency deposits with one or more commercial banks, savings banks, savings and loan associations, or credit unions in the United States, which are within the network used by the private sector entity.
      
   3. Any private sector entity used by a selected depository institution to help place its local agency deposits must maintain policies and procedures requiring both of the following:
      
      1. The full amount of each deposit placed using the private sector entity and the interest that may accrue on each deposit must at all times be insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
         
      2. Every depository institution where funds are placed must be capitalized at a level that is sufficient, and be otherwise eligible to receive such deposits pursuant to FDIC or NCUA regulations.
         
   4. On the same date the local agency’s funds are placed by the private sector entity, the selected depository institution must receive an amount of insured deposits from other financial institutions that, in total, are equal to or greater than the full amount of the principal the local agency initially deposited with that institution.
      
6. Provides that, with regard to county funds deposited in the county treasury, the board of supervisors is the agent of the county, who serves as a fiduciary and is subject to the prudent investor standard, unless a delegation has occurred, as specified, in which case the county treasurer is the agent of the county with respect to those funds, serves as a fiduciary, and is subject to the prudent investor standard (Government Code Section 27000.3).
   
7. Provides that, with regard to funds deposited in the county treasury by local agencies other than the county, the county treasurer serves as a fiduciary subject to the prudent investor standard (Government Code Section 27000.3).
   
8. Provides that, except as specified in Government Code Section 27000.3, all governing bodies of local agencies or persons authorized to make investment decisions on behalf of those local agencies investing public funds are trustees and therefore fiduciaries subject to the prudent investor standard (Government Code Section 53600.3).
   
9. Provides that, when investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, the county treasurer, the board of supervisors, or the trustee, as applicable, shall act with care, skill, prudence, and diligence, as specified, to safeguard the principal and maintain the liquidity needs of the county, the agency, and the other depositors, as applicable (Government Code Sections 27000.3 and 53600.3).
   
10. Limits the amount of money a local agency may deposit in a depository institution, at a level intended to ensure that the agency’s deposits do not exceed the net worth, shareholder equity, or unimpaired capital and surplus of the depository, as specified (Government Code Section 53638).
    

THIS BILL, as agreed to be amended in the Senate Governance & Finance Committee

1. Deletes the sunset date on a local agency’s ability to invest up to 30% of its surplus funds in non-CD deposits at depository institutions that use private sector entities to assist in the placement of deposits.
   
2. Until January 1, 2026, increases, from 30% to 50%, the maximum allowable percentage of a local agency’s surplus funds that the local agency may invest in depository institutions that use a private sector entity to assist in the placement of deposits.
   

COMMENTS

1. Purpose: This bill is sponsored by the California Bankers Association (CBA) to increase banks’ access to local agency deposits.
   
2. Background: This bill builds upon authority first granted to local agencies in California in 2006 (AB 2011 (Vargas), Chapter 459, Statutes of 2006). In 2006, the California Independent Bankers (predecessor organization to the California Community Banking Network) sponsored legislation intended to help community banks attract deposits from local government agencies. Prior to the 2006 legislation, community banks struggled to attract local agency deposits, because of the requirement that local agency deposits above the FDIC deposit insurance limit be fully collateralized. Unlike their larger counterparts, small banks lacked the necessary collateral to accept large deposits.
   
   Recognizing that smaller banks would benefit from the ability to accept multiple deposits in increments up to, but not exceeding the FDIC deposit insurance limit, a private sector entity (Promontory Interfinancial LLC) created a CD placement service. Promontory’s CD placement service relies on the fact that FDIC insurance is “per depositor, per institution.” For example, if a local agency with $2 million to deposit places that money in a single depository institution, only $250,000 of that deposit is insured by the FDIC. However, if that local agency splits up its $2 million into eight slices of $250,000 each, and deposits each of those eight $250,000 slices into a different depository institution, the whole $2 million will be insured. Promontory devised a way to save local agencies the need to manually split their deposits into slices up to, but not exceeding the FDIC insurance limit, while simultaneously giving relatively small banks an opportunity to receive public funds in insured increments of $250,000 or less.
   
   Promontory’s CD placement service works, in part because of its large network of member banks, and in part because of the FDIC’s willingness to insure deposits that are parceled out by Promontory in amounts up to, but not exceeding the FDIC’s deposit insurance limit. The service works as follows: a local agency with an amount of surplus funds to invest that exceeds the FDIC insurance limit (now $250,000) goes to a local California bank (the “selected” bank), which belongs to the CD placement service. At the request of the selected bank, the CD placement service splits up the local agency’s deposit into slices, each of which is valued at $250,000 or less. Each of these slices is then parceled out to banks throughout the country, which are also members of the placement service, and which issue CDs. In that way, the full amount of the local agency’s deposit is FDIC-insured.
   
   At the same time the local agency’s funds are deposited with the selected bank, and then parceled out to banks across the country that are members of the CD placement network in amounts of $250,000 or less, the selected bank receives deposits from other members of the placement service network, which are equal to or greater than the full amount of the principal the local agency initially deposited with the selected bank. Thus, the selected bank ends up with at least the same amount of money on deposit that it received from the local agency; however, the full value of that money is insured, because it is held in increments of $250,000 or less for depositors that originally deposited their money with other selected banks.
   
   Deposits that are parceled out by placement agencies are known as reciprocal deposits or brokered deposits.
   
   In 2013, AB 279 (Dickinson), Chapter 228, Statutes of 2013, authorized local agencies to invest surplus funds in deposits other than CDs at depository institutions that use private sector placement services to distribute those non-CD deposits. Non-CD deposits include demand deposit accounts and money market accounts. The logic behind the non-CD depository authority is identical to the CD deposit authority; the only difference is that deposits are held in demand deposit accounts or money market accounts, and not in CDs.
   
   Authority to invest surplus funds in deposits other than CDs at depository institutions that use private sector placement services to distribute those non-CD deposits sunsets on January 1, 2021. This bill would delete that sunset date.
   
3. How Many Placement Agencies Are There and How Much Local Agency Money Is Invested in Reciprocal Deposits? In 2006, when California enacted its first bill authorizing the use of placement agencies, Promontory Interfinancial was the only placement agency in existence. Since that time, several additional placement agencies have been created. Although this bill’s sponsor was unable to obtain a comprehensive list of all placement agencies in use in California, the sponsor was able to identify all of the following companies currently offering placement services: Anova Financial, CDC Deposits, Promontory Interfinancial Network, PMA Financial Network, Reich and Tang, Stone Castle, and Total Bank Solutions.
   
   At present, Anova Financial, Promontory Interfinancial Network, and PMA Financial Network offer both CD and non-CD placement services. The other companies currently offer non-CD placement services only. Given the current, relatively low interest rate environment and the resultant, relatively low yields on CDs, local agencies currently favor non-CD deposits over CD deposits, because the yields on CDs are too low to overcome local agencies’ desire for liquidity. As interest rates rise, CD deposits will likely regain their earlier popularity.
   
   The Department of Business Oversight (DBO) tracks local agency deposits in state banks through its Local Agency Security Program (LASP). According to DBO, for the month of March 2019, its LASP tracked 151 depository institutions in the state holding deposits of $18.2 billion. Of that total, only $242 million (1.3%) were held as reciprocal deposits.
   
4. Could Some Local Agency Money Allocated By Placement Agencies Be Uninsured? Although it is unknown whether any local agency deposits placed by placement agencies are uninsured, the possibility exists. Uninsured deposits could occur if a local agency’s money is placed into the same bank by more than one placement service, resulting in a local agency’s amount on deposit at that bank greater than $250,000. For example, if City A invests $1 million in Bank A and $1 million in Bank B, and if Bank A and Bank B each use different placement agencies, money attributable to City A could be placed by Placement Agency A in the same bank in which money attributable to City A is placed by Placement Agency B. If Placement Agency A and B both place $250,000 of City A’s money in the same bank, only $250,000 of that money will be insured. Existing law contains no mechanism requiring placement agencies to coordinate with each other to ensure that doubling up does not occur. This bill’s author has agreed to amendments (see Amendments section) to institute safeguards that will reduce the possibility of such doubling up resulting in uninsured deposits.
   
5. Could This Bill Increase Consumers’ Cost of Banking? The FDIC’s Deposit Insurance Fund (DIF) is the source of money for claims against FDIC insurance. If the assets of a failed bank are not purchased by another, healthier depository institution, the DIF pays depositors who held money in the failed bank, up to the amounts of their insured deposits. The DIF is capitalized through assessments imposed on banks. Like other costs incurred by banks, the cost of DIF assessments is reflected in the prices banks charge for their products and services and in the fees they impose on their customers.
   
   In 2006, when California approved the first bill authorizing local agencies to deposit money in banks and credit unions that use private sector placement services, California’s housing market was soaring, our economy was strong, and bank failures were far from anyone’s mind. At that time, relying on FDIC insurance to help bolster deposits at local community banks raised very few questions, because the DIF was fully capitalized.
   
   Between 2007 and 2013, nearly 500 banks failed across the United States, resulting in payments of just under $90 billion from the DIF to depositors. Although the FDIC went to great lengths to assure depositors that it was fully able to protect every depositor with an FDIC-insured account, the agency also significantly increased its assessments on healthier banks, to help build its back its DIF to fully capitalized levels.
   
   Significantly, 211 of the nearly 500 banks that failed during the financial crisis were members of Promontory’s network. The FDIC resolved 205 of those 211 through purchase and assumption transactions, in which the purchasing bank agreed to acquire all of the deposits of the failed bank. However, six of the 211 failures of banks within Promontory’s Network did result in a payout from the FDIC’s DIF to depositors, which drew down the DIF by an unknown amount. Although similar statistics are unavailable for the other third party deposit placement agencies, FDIC data (see immediately below) suggests that these placement agencies likely saw similar levels of bank failures within their networks.
   
   According to research cited by the FDIC in a recent Advanced Notice of Proposed Rulemaking and Invitation for Comment (Federal Register Vol. 84, No. 25, Wednesday, February 6, 2019, page 2387), “the use of brokered deposits is associated with a higher probability of bank failure... When banks substitute brokered deposits for core deposits or equity, this can increase their probability of failure. It is also possible that the use of brokered deposits is a general indicator of a higher risk appetite on the part of bank management, which may be reflected in the riskiness of the assets that a bank purchases.”
   
   The FDIC’s findings bolster the argument that an expansion of California local agencies’ use of placement services may stress the DIF. The more money local agencies invest in depositories that use deposit placement agencies, the more local agency money will be held in insured increments in banks that accept brokered deposits. If any of these banks fail, and if the FDIC is unable to find a healthier bank to assume the failed bank’s assets, the DIF will be forced to pay out the failed bank’s depositors. If the DIF is subject to enough stress, healthier banks will be required to pay higher assessments to ensure that the DIF remains fully capitalized, which could increase consumers’ costs for banking services.
   
6. Is An Increase to Fifty Percent Necessary or Appropriate? This bill’s sponsor is seeking an increase in the maximum allowable percentage of surplus funds a local agency may invest in depositories that use private sector placement agencies from 30% to 50%, claiming that some local agencies are bumping up against the 30% limit in existing law. However, because the sponsor is unable to name those agencies for confidentiality reasons, it is unclear how widespread a problem the 30% cap is. To date, only one local agency trade group (the Association of California Water Agencies) has publicly requested the increase being proposed in this bill.
   
   A different local agency trade group (the California Association of County Treasurers and Tax Collectors; CACTTC) opposes the proposed increase. Even though the increase from 30% to 50% is discretionary rather than mandatory, CACTCC believes that the temptation toward overleveraging will be too great, if the cap is raised to 50%. CACTCC cites data in a report issued by the California Debt and Investment Advisory Commission (https://www.treasurer.ca.gov/CDIAC/LAIG/guideline.pdf), which lists all of the types of investments local agencies are authorized to make, together with the maximum allowable percentage of a local agency’s portfolio that each investment may represent. Local agencies are not capped with respect to their ability to invest their surplus funds in the safest types of investments (e.g., U.S. Treasury bonds, state obligations, and collateralized bank deposits, among others). Caps applicable to other types of investments range between 20% (mutual funds) and 40% (commercial paper). CACTTC points to these cap sizes as part of its justification for opposing this bill’s increase in cap size to 50%.
   
7. Support:
   
   1. CBA is sponsoring this bill on grounds that the current law cap of 30% “prevents banks and local agencies from using reciprocal deposits beyond 30 percent of surplus funds. The law’s inflexibility limits how local agencies and banks work together in managing local agency funds and the manner in which they service their communities. AB 945 increases the statutory cap while maintaining a local agency’s discretion in securing collateral.” The California Community Banking Network, several community banks, and California Credit Union League support the bill for similar reasons.
      
   2. The Association of California Water Agencies is supportive of the potential for AB 945 to expand local agency control over their investments.
      
   3. The Treasurer-Tax Collector of San Diego County supports the bill because it will increase the options for counties and other local government agencies to make their own decisions about whether to use the additional authority this bill would grant.
      
8. Opposition:
   
   1. The California Association of County Treasurers and Tax Collectors and California Association of School Business Officials oppose the bill, based on the provision that increases the maximum percentage of a county’s funds a county may invest in depository institutions which use private sector placement agencies. “County treasurers manage the funds not only of counties, but also school districts and other special districts; these are known as pool participants. The schools’ money constitutes approximately half of what is in the pool on an average day. The underlying premise of school district participation in the county treasurer pool is that they can enjoy better rates, more security, pooled risk and other assurances related to a shared pool, which is why special districts so often elect to participate in the pool. AB 945 is seeking to substantially increase the amount of pool dollars that can be invested in reciprocal deposits from 30% to 50%. This proposal is unwarranted, and through two policy committees, not a single public agency has voiced official support for this change. This massive increase is not solving a current problem....CACTTC seriously doubts that any independent audit of a county pool finding 50% of its funds invested in reciprocal deposits would be found to be consistent with prudent investor standards. Diversification and the mitigation of risk are critical elements in a sound investment policy.”
      
   2. The San Francisco Treasurer-Tax Collector writes, “It’s an unfortunate reality that banks fail. When there are public dollars in those banks that exceed the insurance limit of $250,000, it causes tremendous uncertainty for those public agencies with dollars on deposit. ...There have been 23 bank failures in California as reported by the FDIC since the late 1980s. Intensifying the amount of money in any one bank or one type of bank instrument is inherently risky. When 50% of the dollars put at risk belong to the state’s K-14 schools, it puts the state at risk because of the Constitutional guarantee of Proposition 98. School funds should not be encumbered in this fashion and any law that facilitates that should be rejected.”
9. Amendments: This bill’s author agreed to amendments in the Senate Governance and Finance Committee to place a sunset date of January 1, 2026 on the increase from 30% to 50%. Those amendments will be taken in this Committee for timing purposes. This bill’s author has also agreed to three other amendments, as described immediately below. A fourth amendment (reducing the maximum allowable percentage applicable to counties and county pools from 50% to 40%; Government Code Section 53635.8) was still under discussion as of the date this analysis was prepared.
   
   1. Clarify that local agency deposits in depository institutions which use private sector placement agencies are subject to Government Code Section 53638, which limits the amount of money a local agency may deposit in a depository institution at a level intended to ensure that a local agency’s deposits do not exceed the net worth, shareholder equity, or unimpaired capital and surplus of the depository.
      
   2. Require placement agencies to ensure that each local agency which deposits its money in a depository institution that uses a private sector placement agency be provided, on a monthly basis, with an inventory of all depository institutions in which deposits have been placed on that local agency’s behalf.
      
   3. Require placement agencies to establish policies and procedures intended to ensure that they do not place additional deposits from a particular local agency with a depository institution, when such additional deposits would result in that local agency’s total amount on deposit at that depository institution exceeding the FDIC or NCUA limit.
10. Prior and Related Legislation:
    
    1. AB 283 (Dababneh), Chapter 181, Statutes of 2015 deleted the 10% per placement agency cap added by AB 279 and extended the sunset date on local agencies’ ability to invest in non-CD deposits at depository institutions that use private sector placement agencies to January 1, 2021.
       
    2. AB 279 (Dickinson), Chapter 228, Statutes of 2013, until January 1, 2017, authorized local agencies to invest surplus funds in deposits other than CDs at depository institutions that use a private sector entity to assist in the placement of deposits, but capped the amount that any local agency could invest in non-CD deposits placed by any single placement service at 10%.
       
    3. SB 1344 (Kehoe), Chapter 112, Statutes of 2010 deleted the sunset date contained in AB 2011, thus permanently extending the ability of local agencies to use private sector, CD placement services.
       
    4. AB 2011 (Vargas), Chapter 459, Statutes of 2006, until January 1, 2012, authorized local agencies to invest surplus funds in a private sector, CD placement service.

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

California Bankers Association (sponsor)

1^st Capital Bank

Association of California Water Agencies

Bank of San Francisco

California Community Banking Network

California Credit Union League

Central Valley Community Bank

Citizens Business Bank

Exchange Bank

Five Star Bank

Fresno First Bank

Luther Burbank Savings

Malaga Bank

Manufacturers Bank

Mission Bank

Pinnacle Bank

River City Bank

San Diego County Treasurer-Tax Collector Dan McAllister

Opposition

California Association of County Treasurers and Tax Collectors

California Association of School Business Officials

San Francisco Treasurer-Tax Collector Jose Cisneros

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Local government: financial affairs: surplus funds

Increases the cap on the amount of surplus fund local agencies can invest in certain deposits and removes the January 1, 2021, sunset date on the ability to make these types of deposits.

Background

Investments. Since 1913, state law has authorized local officials to invest a portion of local agencies’ temporarily idle funds in a variety of financial instruments. Originally, state law limited the instruments to government bonds, but over time the laws governing local agency investments have been amended to keep pace with changing investment opportunities and current market offerings. California law allows local officials to deposit money in state or national banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in the State of California. When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, state law outlines local agencies’ investment objectives, also known as the prudent investor standard. The primary objective is to safeguard the principal of the funds under its control. The secondary objective is to meet the liquidity needs of the depositor. The final objective is to achieve a return on the funds under its control. These public deposits, which include funds placed into certificates of deposit (CDs), are subject to restrictions, including a requirement that deposits must be insured by the Federal Deposit Insurance Corporation (FDIC) or, in the case of a credit union, the National Credit Union Administration (NCUA). FDIC or NCUA insurance usually covers only $250,000 per depositor per institution. Deposits that do not meet these insurance require other forms of collateralization with certain types of securities in specified amounts, such as surety bonds. Since many local agencies have deposits well in excess of $250,000, to secure large public deposits, depository institutions must hold significant amounts of collateral.

Placement services. In 1989, U.S. Congress codified the idea of “brokered deposits” into the Federal Deposit Insurance Act. This legislation helped regulate investors engaged in the business of placing deposits, or facilitating the placement of deposits, for third parties with insured depository institutions. In 2003, a private company established a network through which banks could place customer funds in deposits at other banks and receive deposits in an equal amount of funds in return. As an alternative to seeking other forms of collateral, placement services allow a public agency to deposit more than $250,000 in one bank while maintaining FDIC insurance by placing deposits in amounts that do not exceed $250,000 in other institutions.

In California, to use a placement service, a local agency first selects a nationally or state chartered commercial bank, savings bank, savings and loan association, or credit union in California to invest the funds, also known as the “selected depository.” The selected depository institution may use a private sector entity to help place local agency deposits with one or more commercial banks, savings banks, savings and loan associations, or credit unions that are located in the United States and within the network used by the private sector entity for this purpose. The local agency deposits its funds in the selected depository, and the depository parcels out these deposits to other members of the placement network in amounts of $250,000 or less. At the same time, the selected depository receives deposits from other members of the placement service network in amounts of $250,000 or less, which are equal to, or greater than, the full amount of the principal the local agency initially deposited with the selected bank. The selected depository ends up with at least the same amount of money on deposit that it received from the local agency; however, the full value of that money is insured, because it is held in increments of $250,000 or less for depositors that originally deposited their money with other selected institutions.

The private sector entities operating these placement services must maintain policies and procedures that require the following:

• The full amount of each deposit placed, including interest, shall at all times be insured by the FDIC or the NCUA.
• Every depository institution where funds are placed shall be capitalized at a sufficient level to receive deposits pursuant to FDIC or NCUA.

In 2006, the Legislature authorized local agencies to invest up to 30% of their surplus funds in CDs issued through a private sector deposit placement service and included a January 1, 2012, sunset date (AB 2011, Vargas, 2006). Subsequent legislation repealed a sunset date from the statutes authorizing local agencies to invest in CDs using a deposit placement service (SB 1344, Kehoe, 2010). In 2013, the Legislature expanded local governments’ statutory authority to invest surplus funds through a deposit placement service to allow surplus funds to be placed not just in CDs but also in other types of deposits with a January 1, 2017 sunset date (AB 279, Dickinson, 2013). Finally, AB 283 (Debabneh, 2015) extended the sunset date on this authority to January 1, 2021.

The California Bankers Association and its members want to increase the limit and eliminate the January 1, 2021, sunset date.

Proposed Law

Assembly Bill 945 increases the cap on the amount of surplus funds local agencies can invest in placement service deposits from 30% to 50%, and removes the January 1, 2021, sunset date on the ability to make non-CD placement service deposits.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. According to the author, “AB 945 will provide for greater opportunities for investments in our communities by allowing, but not requiring, local agencies to invest more of their surplus funds with local banks and credit unions. Those financial institutions will then have more capital to use for small business loans and other financial instruments, which will in turn provide a multiplier-effect of economic growth in our communities.”

2. Necessary? While banking organizations want to increase the limit on placement service deposits to provide more flexibility to local governments, it is unclear whether this change is necessary. No cities or special districts came forward with specific information regarding how close their member agencies are to the cap. According to the California Bankers Association, the banks cannot disclose how close their customers are to the 30% cap. According to the county auditors and tax collectors, counties do not generally invest more than 2% of surplus funds in placement services. However, on account of their relatively smaller budgets, special districts or cities may or may not be close to the 30% cap. Without knowing the proportion of surplus funds different types of local agencies have invested in placement service deposits, and their respective financial conditions, it is difficult to assess whether an increase in the cap is warranted. The Committee may wish to consider whether it has sufficient information to justify raising the cap.

3. What’s the harm? Increasing the cap does not require any local agency to actually increase the level of its deposits in placement services. The bill only permits them to invest more surplus funds in placement services if they determine it is in their best interest. However, having a higher cap may give banks an opportunity to more aggressively market placement service deposits to local governments. Smaller local agencies may be more enticed by the promises of depositories offering placement services, since it allows them to deposit funds in a single bank often with the promise of higher interest rates, rather than considering banking with multiple institutions or finding other sources of collateral. While all local agencies are subject to the prudent investor standard, some local agencies may not have the financial expertise to determine whether investing additional surplus funds in placement services is the most appropriate financial strategy. When the Legislature wants to limit local government’s investment risk, it often places statutory caps on how much a local agency can invest in a particular investment tool. Increasing such a cap potentially exposes local agencies to a greater level of risk. According to the California County Association of Treasurers and Tax Collectors, increasing the cap could increase that likelihood that FDIC insurance could be at risk, which raises concerns over the condition of county investment pools, which include deposits from school districts and special districts. This increased risk could occur when deposits are made to more than one selected depository institution, when local agencies use more than one placement service, or if the placement service makes administrative errors when swapping deposits. However, it is also possible that since these deposits appear to be insured, this risk may or may not have significant effects on local agencies. Given this uncertainty, the Committee may wish to consider amending the bill to include a five-year sunset on the increased threshold to determine whether placement services remain stable and secure investment tools for local agencies.

4. FDIC guidance. Placement services are complicated investment tools because the local agency does not control where deposits go–the placement service does. Since the local agency does not know where its deposits are held, it makes it more difficult for that local agency to monitor where its selected depository institution holds its funds. Ultimately, the local agency has to rely upon FDIC’s continued guidance on placement services for confidence these are sound investment tools. According to 2019 FDIC guidance on brokered deposits generally, which includes placement service deposits, greater proportions of brokered deposits are associated with higher probabilities of bank failure and higher insurance fund loss rates. Since increasing the cap on local governments for investing surplus funds could lead to greater overall use of placement services, there could be additional risks to depository institutions who make greater use of placement services.

5. Double-referred. The Senate Rules Committee has ordered a double-referral of AB 945—first to the Senate Governance & Finance Committee, which has jurisdiction over bills relating to local government finance issues, and then to the Senate Banking and Financial Institutions Committee, which has jurisdiction over bills relating to banking policy.

Assembly Actions

Assembly Local Government Committee: 8-0

Assembly Banking and Finance Committee: 12-0

Assembly Floor: 75-0

Support and Opposition

(6/14/19)

Support: Association of California Water Agencies; California Bankers Association; California Community Banking Network; California Credit Union League.

Opposition: California Association of County Treasurers and Tax Collectors; California Association of School Business Officials (CASBO); City and County of San Francisco, Treasurer’s Office.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 945

Author:(McCarty)

As Introduced Ver:February 20, 2019

Majority vote

SUMMARY:

Increases the amount that local agencies can invest surplus funds in certain deposits.

Major Provisions

Increases the cap on the amount of surplus fund local agencies can invest in certain deposits. This bill also removes the January 1, 2021, sunset date on the ability to make these types of deposits.

COMMENTS:

Investments. Since 1913, state law has authorized local officials to invest a portion of local governments' temporarily idle funds in a variety of financial instruments. Originally, state law limited the instruments to government bonds, but over time the laws governing local agency investments have been amended to keep pace with changing investment opportunities and current market offerings. California law allows local officials to deposit money in state or national banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in the State of California. These public deposits, which include funds placed into certificates of deposit (CDs), are subject to restrictions, including a requirement that deposits must be insured by the Federal Deposit Insurance Corporation (FDIC) or, to the extent not insured, collateralized with certain types of securities in specified amounts. FDIC insurance usually covers only $250,000 per depositor per institution. As a result, to secure large public deposits, depository institutions must hold significant amounts of collateral.

In 2006, the Legislature authorized local agencies to invest up to 30% of their surplus funds in CDs issued through a private sector deposit placement service AB 2011 (Vargas), Chapter 459, Statutes of 2006. Subsequent legislation deleted a sunset date from the statutes authorizing local agencies to invest in CDs using a deposit placement service SB 1344 (Kehoe), Chapter 112, Statutes of 2010. In 2013, the Legislature expanded local governments' statutory authority to invest surplus funds through a deposit placement service to allow surplus funds to be placed not just in CDs but also in other types of deposits

AB 279 (Dickinson), Chapter 228, Statutes of 2013, and the sunset date on this authority was extended in 2015 to January 1, 2021 AB 283 (Debabneh), Chapter 181, Statutes of 2015.

According to the Author:

According to the author, "AB 945 will provide for greater opportunities for investments in our communities by allowing, but not requiring, local agencies to invest more of their surplus funds with local banks and credit unions. Those financial institutions will then have more capital to use for small business loans and other financial instruments, which will in turn provide a multiplier-effect of economic growth in our communities."

Arguments in Support:

Supporters argue that, "Typically, depository institutions that use reciprocal deposits as a means to collateralize against local agency deposits are community banks operating within the geographical region of the local agency. Unfortunately, the current law percentage limitation prevents banks and local agencies from using reciprocal deposits beyond 30% of surplus funds. The law's inflexibility limits how local agencies and banks work together in managing local agency funds and the manner in which they serve their communities. Measure AB 945 increases the statutory cap while maintaining a local agency's discretion in securing collateral."

Arguments in Opposition:

Opponents argue that, "AB 945 seeks to increase the amount of treasury pool dollars that can be deposited into a single investment. Ordinarily, the minimum amount of time those funds are held in a certificate of deposit is 180 days. That's not particularly liquid. In cases where a local agency needs their funds, but they are otherwise constrained, the county treasury provides 'dry period financing' which is a burden on other pool participants and should not be considered a regular method to manage treasury demand when large percentages of county pool funds are on deposit with a single instrument for a long period of time. Increasing the authority to invest 50% of the treasury pool into one type of deposit would create new and unfair pressures on pool participants, to the extent a single participant's fund are needed but unavailable. For a county treasurer to knowingly constrain the pool in that manner is inconsistent with other sections of the law that require liquidity."

FISCAL COMMENTS:

None

VOTES:

ASM LOCAL GOVERNMENT: 8-0-0

YES: Aguiar-Curry, Lackey, Bloom, Boerner Horvath, Ramos, Luz Rivas, Robert Rivas, Voepel

ASM BANKING AND FINANCE: 12-0-0

YES: Limón, Chen, Bauer-Kahan, Burke, Cervantes, Choi, Gabriel, Grayson, Melendez, Mark Stone, Weber, Wicks

UPDATED:

VERSION: February 20, 2019

CONSULTANT: Jimmy MacDonald / L. GOV. / (916) 319-3958 FN: 0000237

Date of Hearing: April 22, 2019

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Monique Limón, Chair

ABPCA Bill Id:AB 945 (

Author:McCarty) – As Introduced Ver:February 20, 2019

SUBJECT: Local government: financial affairs: surplus funds

SUMMARY: Increases the amount of surplus funds that a local agency can invest in certain deposits.

Specifically, this bill:

1. Deletes the January 1, 2021, sunset date in existing law which allows a local agency to invest up to 30% of its surplus funds in deposits at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity to assist in the placement of deposits.
2. Increases the amount of surplus funds a local agency can invest in these deposits from 30% to 50%.

EXISTING LAW:

1. Authorizes a local agency, until January 1, 2021, to invest a portion of its surplus funds in deposits at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity that assists in the placement of deposits, provided that the purchases of deposits, in total, do not exceed 30% of the agency's funds.
   
2. Provides that the following conditions apply for a local agency to invest its surplus funds in deposits:
   1. The local agency shall choose a nationally or state chartered commercial bank, savings bank, savings and loan association, or credit union in California to invest the funds, which shall be known as the "selected" depository institution;
   2. The selected depository institution may use a private sector entity to help place local agency deposits with one or more commercial banks, savings banks, savings and loan associations, or credit unions that are located in the United States and within the network used by the private sector entity for this purpose;
   3. Any private sector entity used by a selected depository institution to help place its local agency deposits shall maintain policies and procedures that require the following:
      
      1. The full amount of each deposit placed, including interest, shall at all times be insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA); and,
         
      2. Every depository institution where funds are placed shall be capitalized at a sufficient level to receive deposits pursuant to FDIC or NCUA.
   4. The selected depository institution shall serve as a custodian for each deposit; and,
   5. On the same date the local agency's funds are deposited, the selected depository institution shall receive an amount of insured deposits from other financial institutions that, in total, are equal to, or greater than, the full amount of the principal that the local agency initially deposited through the selected depository institution for investment.

FISCAL EFFECT: None

COMMENTS:

1. PURPOSE

The author states:

AB 945 will provide for greater opportunities for investments in our communities by allowing, but not requiring, local agencies to invest more of their surplus funds with local banks and credit unions. Those financial institutions will then have more capital to use for small business loans and other financial instruments, which will in turn provide a multiplier-effect of economic growth in our communities.

1. BACKGROUND

State law authorizes local officials to invest a portion of local governments’ temporarily idle funds in a variety of financial instruments. California law allows local officials to deposit money in state or national banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in the State of California. These public deposits are subject to restrictions, including a requirement that deposits must be insured by the FDIC or, to the extent not insured, collateralized with certain types of securities in specified amounts. FDIC insurance usually covers only $250,000 per depositor per institution. As a result, to secure large public deposits, depository institutions must hold significant amounts of collateral.

Deposit placement services emerged in the early 2000s as a mechanism for a depository institution to accept a deposit from a local government of greater than the FDIC insured amount. Deposit placement services interface with depository institutions (not directly with customers) to split up and spread out large deposits across multiple institutions. This service allows the local government’s full deposit to be insured by the FDIC (or NCUA in the case of credit unions), which incentivizes local community banks and credit unions to seek larger deposits from local government customers. The service also provides a way for the depository institution to avoid purchasing costly collateral by splitting the deposit across multiple institutions and keeping the full amount of the deposit insured by the FDIC or NCUA.

By incentivizing local community depository institutions to compete for local government deposits, more taxpayer funds can be injected into the local banking system, rather than being invested in government bonds or other debt securities outside of the local banking system. Local government customers include county treasurers, city treasurers, and financial managers at special districts (e.g., school districts, water districts, mosquito abatement districts, etc.) and joint powers authorities. The amount of surplus funds that these entities invest can range from a few thousand dollars to multiple billions of dollars.

1. EXPECTED IMPACT

If this bill is enacted, it is likely that local government entities will increase the amount that they deposit with local financial institutions. Nothing in this bill requires a local government to change their investment strategy. Rather, the bill provides the local government with an additional option that may better meet the government’s priorities related to liquidity, return, and cost of administration, without compromising the safety of principal.

Local government deposits can serve as a stable and low-cost funding source for community banks and credit unions to originate loans. To the extent that a local banking system needs additional liquidity, these deposits may help to increase credit availability for consumers and businesses in a given area.

One potential side effect of this bill is related to liquidity management of county investment pools. County treasurers manage the funds not only of counties, but also manage an investment pool that cities and special districts can invest in. To the extent that local governments decide to shift their investments away from a county-managed pool and into the local banking system, county treasurers may need to rebalance their investment portfolios to ensure adequate liquidity for pool participants. In other words, county treasurers may need to hold a smaller portion of longer-term, higher-returning securities in their portfolios, in order to meet the immediate cash needs of pool participants.

1. DOUBLE-REFERRED

This bill was also referred to the Assembly Local Government Committee, which passed the bill on an 8-0 vote.

1. ARGUMENTS IN SUPPORT

A coalition of financial institutions writes:

Typically, depository institutions that use reciprocal deposits as a means to collateralize against local agency deposits are community banks operating within the geographical region of the local agency. Unfortunately, the current law percentage limitation prevents banks and local agencies from using reciprocal deposits beyond 30% of surplus funds. The law’s inflexibility limits how local agencies and banks work together in managing local agency funds and the manner in which they serve their communities. Measure AB 945 increases the statutory cap while maintaining a local agency’s discretion in securing collateral.

1. ARGUMENTS IN OPPOSITION

The California Association of Treasurers and Tax Collectors writes:

Increasing the authority to invest 50% of the treasury pool into one type of deposit would create new and unfair pressures on pool participants, to the extent a single participant’s funds are needed but unavailable.

REGISTERED SUPPORT / OPPOSITION:

Support

American Riviera Bank
Association Of California Water Agencies
California Bankers Association
California Community Banking Network
California Credit Union League
Central Valley Community Bank
Five Star Bank
Fresno First Bank 
Pinnacle Bank

Opposition

California Association Of County Treasurers & Tax Collectors (unless amended)

Analysis Prepared by: Michael Burdick / B. & F. / (916) 319-3081

Date of Hearing: April 10, 2019

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Cecilia Aguiar-Curry, Chair

ABPCA Bill Id:AB 945 (

Author:McCarty) – As Introduced Ver:February 20, 2019

SUBJECT: Local government: financial affairs: surplus funds.

SUMMARY: Increases the amount that local agencies can invest surplus funds in certain deposits. Specifically, this bill:

1. Deletes the January 1, 2021, sunset date in existing law which allows a local agency to invest up to 30% of its surplus funds in deposits other than certificates of deposits (CDs) at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity to assist in the placement of deposits.
2. Increases the amount a local agency can invest its surplus funds in these deposits from 30% to 50%.

EXISTING LAW:

1. Authorizes a local agency, until January 1, 2021, to invest a portion of its surplus funds in deposits at a commercial bank, savings bank, savings and loan association, or credit union that uses a private sector entity that assists in the placement of non-CD deposits, provided that the purchases of deposits, in total, do not exceed 30% of the agency's funds.
   
2. Provides that the following conditions apply for a local agency to invest its surplus funds in deposits:
   1. The local agency shall choose a nationally or state chartered commercial bank, savings bank, savings and loan association, or credit union in California to invest the funds, which shall be known as the "selected" depository institution;
   2. The selected depository institution may use a private sector entity to help place local agency deposits with one or more commercial banks, savings banks, savings and loan associations, or credit unions that are located in the United States and within the network used by the private sector entity for this purpose;
   3. Any private sector entity used by a selected depository institution to help place its local agency deposits shall maintain policies and procedures that require the following:
      
      1. The full amount of each deposit placed, including interest, shall at all times be insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA); and,
         
      2. Every depository institution where funds are placed shall be capitalized at a sufficient level to receive deposits pursuant to FDIC or NCUA.
   4. The selected depository institution shall serve as a custodian for each deposit; and,
   5. On the same date the local agency's funds are deposited, the selected depository institution shall receive an amount of insured deposits from other financial institutions that, in total, are equal to, or greater than, the full amount of the principal that the local agency initially deposited through the selected depository institution for investment.
      

FISCAL EFFECT: None

COMMENTS:

1. Investments. Since 1913, state law has authorized local officials to invest a portion of local governments’ temporarily idle funds in a variety of financial instruments. Originally, state law limited the instruments to government bonds, but over time the laws governing local agency investments have been amended to keep pace with changing investment opportunities and current market offerings. California law allows local officials to deposit money in state or national banks, savings associations, federal associations, credit unions, or federally insured industrial loan companies in the State of California. These public deposits, which include funds placed into certificates of deposit (CDs), are subject to restrictions, including a requirement that deposits must be insured by the FDIC or, to the extent not insured, collateralized with certain types of securities in specified amounts. FDIC insurance usually covers only $250,000 per depositor per institution. As a result, to secure large public deposits, depository institutions must hold significant amounts of collateral.

In 2006, the Legislature authorized local agencies to invest up to 30% of their surplus funds in CDs issued through a private sector deposit placement service [AB 2011 (Vargas), Chapter 459, Statutes of 2006]. Subsequent legislation deleted a sunset date from the statutes authorizing local agencies to invest in CDs using a deposit placement service [(SB 1344 (Kehoe), Chapter 112, Statutes of 2010)]. In 2013, the Legislature expanded local governments’ statutory authority to invest surplus funds through a deposit placement service to allow surplus funds to be placed not just in CDs but also in other types of deposits
[AB 279 (Dickinson), Chapter 279, Statutes of 2013], and the sunset date on this authority was extended in 2015 to January 1, 2021 [AB 283 (Debabneh), Chapter 181, Statutes of 2015].

1. Bill Summary and Author’s Statement. This bill increases the cap on the amount
   of surplus fund local agencies can invest in certain deposits. This bill also removes the
   January 1, 2021, sunset date on the ability to make these types of deposits. This bill is sponsored by the California Banker’s Association.

According to the author, “AB 945 will provide for greater opportunities for investments in our communities by allowing, but not requiring, local agencies to invest more of their surplus funds with local banks and credit unions. Those financial institutions will then have more capital to use for small business loans and other financial instruments, which will in turn provide a multiplier-effect of economic growth in our communities.”

1. Arguments in Support. Supporters argue that, “Typically, depository institutions that use reciprocal deposits as a means to collateralize against local agency deposits are community banks operating within the geographical region of the local agency. Unfortunately, the current law percentage limitation prevents banks and local agencies from using reciprocal deposits beyond 30% of surplus funds. The law’s inflexibility limits how local agencies and banks work together in managing local agency funds and the manner in which they serve their communities. Measure AB 945 increases the statutory cap while maintaining a local agency’s discretion in securing collateral.”
   
2. Arguments in Opposition. Opponents argue that, “AB 945 seeks to increase the amount of treasury pool dollars that can be deposited into a single investment. Ordinarily, the minimum amount of time those funds are held in a certificate of deposit is 180 days. That’s not particularly liquid. In cases where a local agency needs their funds, but they are otherwise constrained, the county treasury provides ‘dry period financing’ which is a burden on other pool participants and should not be considered a regular method to manage treasury demand when large percentages of county pool funds are on deposit with a single instrument for a long period of time. Increasing the authority to invest 50% of the treasury pool into one type of deposit would create new and unfair pressures on pool participants, to the extent a single participant’s fund are needed but unavailable. For a county treasurer to knowingly constrain the pool in that manner is inconsistent with other sections of the law that require liquidity.”
3. Double-referral. This bill is double-referred to the Banking and Finance Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

California Banker’s Association [SPONSOR]

Association of California Water Agencies
California Community Banking Network

California Credit Union League

Opposition

California Association of Treasurers and Tax Collectors (unless amended)

Analysis Prepared by: Jimmy MacDonald / L. GOV. / (916) 319-3958