Local Agency Deposits Law Made Permanent
October 18, 2010
In 2006 the California legislature enacted a law (AB 2011)  permitting banks to use a deposit placement service to satisfy collateralization requirements associated with taking local agency deposits . Under its terms, that law was due to expire as of January 1, 2012. Under SB 1344 enacted this legislative session and signed by the Governor, the sunset provision was removed and the law was thereby made permanent. SB 1344 also clarifies that only local agencies that are permitted under law to invest funds may avail themselves of this provision of law. A review of the law now made permanent follows.
A local agency may deposit up to 30% of its surplus funds in certificates of deposit at a bank, savings association, savings bank, or credit union that participates in such a deposit-sharing network. Since the entire amount of the deposits would be FDIC-insured, a bank would not be required to pledge collateral. The requirements are:
- The institution taking the original deposit (called the “selected” institution) must be “in this state,” which presumably would exclude internet-only banks and other banks that do not have a physical presence in California. This provision does not restrict out-of-state banks from participating in the deposit placement network.
- The full amount of the principal and the interest that may be accrued during the maximum term of the certificate(s) of deposit must be at all times FDIC-insured (or insured by the National Credit Union Administration, as applicable).
- The selected institution serves as a “custodian” for each CD that is issued with the placement service for the agency’s account.
- At the same time the agency’s funds are deposited and the CDs are issued, the selected institution will receive an amount of deposits from other institutions in the network of equal or greater amount. This requirement is intended to help ensure that an agency’s deposits stay local for use by the institution where the deposits were made; however, no recordkeeping requirements are imposed.
The lead lobbyist on the bill for CBA is Kevin Gould.
- See Government Code Sections 53601.8 and 53635.8.
- “Local agency” means county, city, city and county, including a chartered city or 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.
The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.
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