Legislative Update 2010 California Municipal Treasurers Association Essentials of Treasury Management Workshop September 30, 2010
Four legislative bills: SB 1344 – Public fund investments, CD’s; chaptered AB 1156 – Public fund investments, community banks; did not pass AB 2080 – BABs federal interest subsidy; waiting for the Governor’s signature AB 155 – Local Agency bankruptcy review; did not pass
SB 1344 (Kehoe) Public funds can be invested in negotiable CD’s (Section 53601 or 53601.7) or via a selected depository institution that invests in CD’s at multiple financial institutions using a placement service (Section 53601.8). SB 1344 deletes the sunset clause in Section 53601.8 that prohibited use of a placement service after January 1, 2012.
SB 1344 In 2006, AB 2011 added Section 53601.8 to the public fund investment code. Although 33 other states had experience with CD investments via a placement service, California did not. AB 2011 included the sunset clause to gather “empirical evidence” on the use of a CD placement service.
AB 1156 (Nava) AB 1156 requires first priority for community banks and credit unions when placing state and local agency surplus funds in CD’s. The bill does not specify the conditions under which community banks and credit unions would be given first priority. If a reduced rate of return is a priority criteria, state and local agencies could lose millions of dollars in interest earnings.
AB 1156 The Banking and Finance Committee voted 10-0 to pass the bill to the Assembly floor but no further action was taken.
AB 2080 (Hernandez) AB 2080 allows local agencies to securitize future BABs federal interest subsidy payments by selling the rights to those payments (all or part) to a Joint Powers Authority. The JPA can purchase the rights with its own revenues or by issuing bonds. With bond issuance, the JPA can pledge, assign, etc., the rights to the BABs interest subsidy payments for purposes of securing the bonds.
AB 2080 • California is (at this time) the only state to allow securitization of the BABs interest subsidy. • Uncertainties about securitization include: • whether federal law would permit securitization • the possibility that Congress may not extend BABs issuance beyond 2010 • concerns over IRS offsets.
AB 155 (Mendoza) AB 155 would have required a local agency request approval from the California Debt and Investment Advisory Commission (CDIAC) prior to filing for federal bankruptcy protection.
AB 155 • The agency must file a “thorough analysis” of its bankruptcy petition with CDIAC, including: • a demonstration that the agency can not or will not be able to pay its undisputed debts • a demonstration that it has exhausted all options to bankruptcy • a specific plan for restoring the financial soundness of the local agency • a list of creditors that may be impaired or seek damages as a result of a bankruptcy filing.
AB 155 • CDIAC can approve the request within 5 days. • Alternatively, CDIAC can find the local agency has not sufficiently demonstrated irreparable harm that could occur over a 30 day evaluation period. • Staff would publish an evaluation after 30 days, considering several factors, including whether the agency has : • demonstrated it has exhausted other remedies • anticipated the transfer of service responsibilities to other governments or parties.
AB 155 Publication of the staff report would be followed by a Commission hearing and a vote by Commission members to approve or deny the local agency’s request. The bill was amended in June to allow local agencies to over-ride a negative decision by the Commission by a vote of the local agency at a public meeting.
AB 155 The bill was amended in the last week of the session to allow local agencies to choose between a filing with CDIAC or the State Auditor. The State Auditor would have the same responsibility to evaluate whether the local agency had exhausted alternatives to bankruptcy and had a specific plan for restoring financial soundness, etc. The bill was not taken up for a vote on the last day of the session.
AB 155 The central public policy issue is whether state review would, in some sense, improve local agency decision making regarding a bankruptcy filing? A related policy question is whether state oversight would be beneficial to the local agency’s creditors, for example, bondholders?
Contact Information I want to acknowledge the contribution of Nova Edwards with respect to the initial research for this presentation. I’m always interested in talking to people involved in public finance. Phone – 916/653-4957 or email - email@example.com