Legislative Update 2010 CALIFORNIA MUNICIPAL TREASURERS ASSOCIATION ESSENTIALS

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: Ø Ø Ø 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: Ø Ø 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 : Ø Ø 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 brandt. stevens@treasurer. ca. gov