CC SR 20220621 K - FY2022-23 Investment Policy
CITY COUNCIL MEETING DATE: 06/21/2022
AGENDA REPORT AGENDA HEADING: Consent Calendar
AGENDA TITLE:
Consideration and possible action to revise the City’s Investment Policy for Fiscal Year
2022-23.
RECOMMENDED COUNCIL ACTION:
1) Review the recommended revisions to the City’s Investment Policy, including
recommendations by the Finance Advisory Committee (FAC); and,
2) If deemed acceptable, approve the Fiscal Year 2022-23 Investment Policy
applicable to the City of Rancho Palos Verdes, Rancho Palos Verdes Successor
Agency to the Redevelopment Agency, and Rancho Palos Verdes Improvement
Authority.
FISCAL IMPACT: N/A
Amount Budgeted: N/A
Additional Appropriation: N/A
Account Number(s): N/A
ORIGINATED BY: Jason Loya, Senior Administrative Analyst
REVIEWED BY: Trang Nguyen, Director of Finance
APPROVED BY: Ara Mihranian, AICP, City Manager
ATTACHED SUPPORTING DOCUMENTS:
A. FY 2022-23 Investment Policy (page A-1)
B. 2022 Local Agency Investment Guidelines (page B-1)
BACKGROUND:
The City’s idle or surplus funds are invested in accordance with principles of sound
treasury management and provisions of Government Code Section 53600 et seq.
(Investment of Surplus), and the City Council-approved Investment Policy. The
investment criteria in order of priority are Safety, Liquidity, and Yield, as described in the
attached Investment Policy (Attachment A).
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On an annual basis, the State of California law requires that public agencies adopt an
investment policy. Pursuant to this requirement, Staff reviews the City’s current policy,
statutory changes, and consults with the City’s investment broker for any possible
changes that may improve the City’s investment activities. The proposed changes were
presented to the Finance Advisory Committee (FAC) for review. Subsequently, Staff
presents the recommended revisions to the City Council for consideration tonight.
DISCUSSION:
Staff has reviewed the 2022 Local Agency Investment Guidelines (LAIG) published by
the California Debt and Investment Advisory Commission (CDAIC) (Attachment B). These
guidelines provide current information on the Government Code Section 53600 et seq.
which can affect the investment practices of local agencies in California. The 2022 LAIG
report does not include any approved changes to current investment statutes and has no
immediate impact on the City’s investment activities.
Additionally, Staff consulted with Managing Director, Josh Gorham, of Stifel (formerly
Vining Sparks), the City’s investment broker. This discussion did not yield any
recommended salient changes to current investment practices. However, Staff
recommends the following revisions to the policy:
• Vining Sparks was acquired by Stifel Nicolaus & Company, Inc. (“Stifel”) in
November 2021. The policy was updated to reflect the new firm.
• Clarified investment instrument options by including U.S. Treasury Obligations in
addition to Certificate of Deposits (CDs) and updating terms from three years to
five years to align with the current practice.
• Amended language to ensure all entities are insured by either the Federal Deposit
Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA)
insurance up to $250,000 to fully protect the City without any ambiguity.
• Amended language to explicitly include CDs, Certificate of Deposit Account
Registration System (CDARs), U.S. Treasury, and agency bonds.
On June 2, 2022, Staff presented the proposed FY 2022-23 Investment Policy to the FAC
for review and feedback. As a result, the FAC recommends that in addition to Staff’s
proposed revisions, expanding the City’s investments beyond the current pool of options,
given that all investments would be FDIC insured. After thoughtful consideration, as a
start, the revised policy was amended to add Bank of the West as one of the potential
banks that the City may purchase CDs from. For transparency, it has always been the
City’s best practice to include in its policy the names of the investment banks and
investment brokers. The investment instruments available to date are sufficient and
manageable, however, Staff will continue seeking for opportunities to expand the City’s
portfolio options when possible.
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ADDITIONAL INFORMATION:
As part of the City's annual independent audit, there is an annual review of the City's
Investment Policy regarding compliance with policy guidelines. This procedural review
will be performed in conjunction with the internal control testing applied to City policies.
Any discrepancies are required to be reported directly to the City Council in the auditor’s
management letter issued upon the completion of its examination.
CONCLUSION:
Based on the information provided, Staff recommends that the City Council approve the
proposed revisions to the FY 2022-23 Investment Policy for the City of Rancho Palos
Verdes, Rancho Palos Verdes Successor Agency to the Redevelopment Agency, and
Rancho Palos Verdes Improvement Authority. The revised and complete policy of the
proposed FY 2022-23 Investment Policy is presented in Attachment A.
ALTERNATIVES:
In addition to Staff recommendations, the following alternative action is available for the
City Council’s consideration:
1. Discuss and make recommendations on other investment options, as
deemed appropriate by the City Council.
2. Take no action.
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ATTACHMENT A
CITY OF RANCHO PALOS VERDES, RANCHO PALOS
VERDES SUCCESSOR AGENCY TO THE
REDEVELOPMENT AGENCY AND RANCHO PALOS
VERDES IMPROVEMENT AUTHORITY FY 2022-23
INVESTMENT POLICY
OBJECTIVES
The City of Rancho Palos Verdes, Rancho Palos Verdes Successor Agency to the
Redevelopment Agency, and Rancho Palos Verdes Improvement Authority (hereafter
referred to as “City”) strive to maintain the level of investment of all idle funds as near
100% as possible through the optimum operation of its cash management system. The
City has determined that its investment criteria, listed in order of priority, are safety,
liquidity, and yield.
DELEGATION OF AUTHORITY
The City has designated the Director of Finance as the City Treasurer, the Successor
Agency to the former Redevelopment Agency and Improvement Authority (hereafter
referred to as City Treasurer). The City has delegated the authority to the City Treasurer
to invest City funds subject to the limitations set forth in this Investment Policy. The City
Treasurer shall be trustee and fiduciary on behalf of the City. If the City Treasurer is
unavailable, the City has delegated authority to the City Manager, also designated as the
Executive Director of the Successor Agency to the former Redevelopment Agency and
Chief Administrative Officer of the Improvement Authority, to conduct transactions in
connection with the investment of the City’s funds.
INVESTMENT INSTRUMENTS
The City can invest in the following investment instruments as approved by the California
Government Code:
1. Demand deposits and money market savings accounts totaling a book
balance up to five million dollars ($5,000,000) with Bank of the West or any
other financial institution approved by the City Council; provided, however,
that not more than 15% of the City's funds are on deposit a t said bank.
Demand deposits and money market savings accounts may exceed five
million dollars ($5,000,000) or 15% of the City’s funds for no more than thirty
(30) days if the accounts are to hold monies being transitioned between
investment instruments listed in the Investment Policy.
2. The Local Agency Investment Fund (LAIF) administered by the Treasurer
of the State of California.
3. Certificates of Deposit (CDs) and U.S. Treasury Obligations (Treasury)
placed through Stifel, formerly Vining-Sparks, and/or Bank of the West, as
well as Certificate of Deposit Account Registration System (“CDARs”)
through Malaga Bank. The maximum maturity for all investment instruments
is five years. All entities are insured by the Federal Deposit Insurance
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Corporation as authorized by Government Code Section 53601.8 through
53635.8 (enacted by AB 2011 in September 2006) or by the National Credit
Union Administration (NCUA) for up to $250,000.
4. The City may invest in the following government sponsored agency bonds
out to three years: Freddie Mac (FHLMC), Fannie Mae (FNMA), Federal
Farm Credit Bank (FFCB), Federal Home Loan Bank (FHLB), and Farmer
Mac (FAMCA).
5. Total CDs, CDARs, Treasury, and agency bonds, are at the maximum of
50% of the total portfolio.
6. Money Market Savings Accounts and demand deposits with institutions
other than those specified in paragraph 1 above, p rovided that no deposit
made pursuant to this paragraph in any one institution shall exceed the
amount insured by the Federal Deposit Insurance Corporation.
7. Shares of "money market funds", which are sold without any sales
commission or sales charge of any kind (true no load funds), which limit
investment to securities issued by (or guaranteed as to both principal and
interest by) the United States, which are issued in the City's name and are
rated in the highest ranking or numerical rating by at least one of the
nationally recognized statistical rating organizations (not to exceed 15% of
the total portfolio).
The listed investments are the only authorized investments for the City.
POLICY CRITERIA FOR SELECTING INVESTMENTS (IN ORDER OF PRIORITY)
SAFETY:
Safety, and the minimizing of risk associated with investing, refers to attempts to reduce
the potential for loss of principal, interest, or a combination of the two. The first level of
risk control is reduction of default risk by investing in instruments that appear to be the
most credit worthy. The second level of risk control is reduction of market risk by investing
in instruments that have relatively short maturities, thereby eliminating risk of loss from a
forced sale. The City only invests in those instruments that are considered very safe.
LIQUIDITY:
Liquidity refers to the ability to easily sell at any time with minimal risk of losing some
portion of principal or interest. Liquidity is an important quality for an investment to have,
for at any time the City may have unexpected or unusual circumstances that result in
larger disbursements than expected, and some investments may need to be sold to meet
the contingency. Most investments of the City are highly liquid, with the exception of
insured Time Certificates of Deposit issued by banks and savings and loan associations
whose maturities are selected in anticipation of disbursement needs, thereby obviating
the need for forced liquidation or lost interest penalties.
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YIELD:
Yield is the potential dollar earnings an investment can provide, and also is sometimes
described as the rate of return. The City attempts to obtain the highest yield possible
when selecting an investment, provided that the criteria stated herein for safety and
liquidity are met.
POLICY CONSTRAINTS AND GUIDELINES
The City of Rancho Palos Verdes operates its investment program according to the
prudent investor standard with many additional, self-imposed constraints. The City
Treasurer shall act with the care, skill, prudence and diligence to safeguard principal and
maintain liquidity. The City Treasurer shall: (1) not speculate; (2) not buy corporate debt
securities; (3) not deal in futures or options; (4) not purchase on margin or through reverse
repurchase agreements; (5) not buy long term securities; and (6) not acquire any
investment expressly prohibited by State statute.
REPORTS PROVIDED BY THE TREASURER
The City Treasurer shall annually render a Statement of Investment Policy to the City
Council for their approval, and this policy shall be in compliance with all applicable State
statutes.
The City Treasurer shall render a monthly report of cash balances to the City Manager
and City Council showing the type of investment, date of purchase, custodian (if
applicable), institution, date of maturity, amount of deposit or purchase price, current
market value for all securities, and rate of interest. The report shall also include a
description of any of the City's funds, investments, or programs that are under the
management of contracted parties.
The monthly Report of Cash Balances shall state its relationship to the Investment Policy
by indicating each and every instance that there is a divergence from, or violation of,
policy or stating that the monthly report is in compliance with the Investment Policy.
INVESTMENT AUDITS AND INVESTMENT POLICY EVALUATION
As a part of the City's annual independent audit, there shall be an annual review of the
City's Investment Policy regarding compliance with the Policy guidelines. These review
procedures will be performed in conjunction with the internal control testing applied to City
policies. Any discrepancies will be reported directly to the City Council in the auditor’s
management letter issued upon the completion of their examination.
INVESTMENT GUIDELINES
Cash Availability Guidelines:
1. A cash flow analysis shall be developed as necessary which will serve as a ba sis
for determining the cash available for investment and maturity dates needed to
cover future disbursements.
2. Revenue receipts are consolidated into one bank account and invested on a
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pooled concept basis. Interest earnings are allocated according to fund cash and
investment balances.
3. Active bank balances are kept as low as possible without jeopardizing good
banking relationships by maintaining investment of available cash as near to 100%
as possible.
4. Sufficient funds are maintained in very liquid investments to meet most unexpected
contingencies.
Investing Guidelines:
1. Only investments authorized by the Investment Policy are utilized.
2. A copy of the Investment Policy should be given to each financial institution with
which the City does business, and the City will request an acknowledgement not
less than annually that such financial institution has received and reviewed the
Policy.
3. Before an unfamiliar security is purchased, the issuer and the instrument are
researched and investigated and all contractual agreements and administrative
procedures are completed before any transactions are consummated.
4. The City does not permit the purchase of securities on margin or via reverse
repurchase agreements (using the security to be purchased as collateral).
5. Every investment transaction is documented and the procedure for monitoring is
clearly defined.
6. Investment strategies are reviewed by the City Treasurer for possible need to
change at least annually. They are reviewed more frequently as changes in
economic conditions dictate.
Guidelines for certain Types of Investments:
California State Local Agency Investment Fund
A resolution is on file with the State Treasurer that permits maintaining an account
in LAIF.
Custody
Custody of investments in securities backed by the full faith and credit of the United
States Government shall be placed, pursuant to a written custody agreement, with
Bank of the West or any other financial institution approved by the City Council.
INTERNAL CONTROL OBJECTIVES FOR INVESTMENTS
Internal control for investments is the procedure established by management of the City
to assist in ensuring as far as practicable:
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1. An orderly and efficient conduct of investing, including adherence to investment
policies.
2. The safeguarding of assets.
3. The accuracy and completeness of the accounting records for investments.
4. The timely preparation of reliable financial information.
5. The prevention of errors.
6. The detection of fraud.
Elements of Internal Control of Investments:
Adherence to the use of sufficient elements of a system of internal control is the method
by which the City can satisfy the objective of internal control. A list of sample elements
follows:
1. Responsibility
Specific responsibility for the performance of duties should be assigned and lines
of authority and reporting clearly identified and understood.
2. Segregation
Segregation of functions reduces the risk that a person is in a position to conceal
errors. If two different people process the components of a transaction, collusion
is necessary to conceal errors or fraud. In particular, the functions that should be
considered when evaluating segregation of functions are authorization, execution,
recording, and performing reconciliations.
3. Authorization
Only the appropriate responsible individual shall authorize all transactions. The
responsibilities and limits of authorization should be clearly delineated. Delegation
of authority to authorize transactions should be handled very carefully.
4. Transfers of Investment Funds
The transferring of investment funds will be carried out exclusively by use of the
Federal Reserve Bank's electronic wire transfer system. Each Banker or Dealer
with which the City does business shall receive in writing from the City Treasurer
a listing that limits transfers of funds to pre-authorized bank accounts only.
The listing will also contain the names of City staff authorized to request such
transfers and will be updated in writing for all changes of authorized staff and bank
accounts as necessary.
Transfers from one account of the City to another shall require the request of only
one authorized staff member. Transfers from the City's account to third parties
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shall require the request of two authorized members.
5. Recording
The recording system should provide that the recording procedures, both manual
and computerized, be carried out independently of the individual doing the
investment execution to help assure that recorded transactions are complete,
valid, authorized, and properly recorded.
Signed:__________________________
City Treasurer
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CALIFORNIA DEBT AND INVESTMENT ADVISORY COMMISSION
Update for 2022
Reflects state law changes
effective as of January 1, 2022
CDIAC 22.02
LOCAL AGENCY
INVESTMENT
GUIDELINES
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California Debt and Investment
Advisory Commission
The California Debt and Investment Advisory Commission (CDIAC) pro-
vides information, education, and technical assistance on debt issuance and pub-
lic fund investments to local agencies and public finance professionals. CDIAC
also serves as the State’s clearinghouse for public debt issuance information.
FIONA MA, CPA
State Treasurer and Chair
GAVIN NEWSOM
Governor
BETTY T. YEE
State Controller
SABRINA CERVANTES
Assemblymember
COTTIE PETRIE-NORRIS
Assemblymember
STEVEN BRADFORD
Senator
PATRICIA BATES
Senator
SANDIE ARNOTT
Treasurer-Tax Collector
County of San Mateo
LAKSHMI KOMMI
Director of Debt Management
City of San Diego
ROBERT BERRY
Executive Director
Additional information concerning this report or CDIAC programs may be ob-
tained by contacting CDIAC directly via phone (916) 653-3269, fax (916) 654-
7440, e-mail (cdiac@treasurer.ca.gov) or by visiting CDIAC’s website: www.
treasurer.ca.gov/cdiac.
All rights reserved. No part of the Local Agency Investment Guidelines: Update for
2022 may be reproduced without giving written credit to CDIAC. Permission to
reprint with written credit given to CDIAC is hereby granted.
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Contents
ABOUT THE LOCAL AGENCY GUIDELINES ........................1
SUMMARY OF STATUTORY AND FEDERAL REGULATORY CHANGES ....3
CHAPTER I. THE ANNUAL INVESTMENT POLICY ...................4
A. Should local agencies produce an investment policy? Should the
investment policy be presented to the local agency’s legislative body? .....4
B. When should the investment policy be reviewed and updated? How
should the investment policy be rendered to the legislative body? .......5
C. What information should be included in the investment policy? ........6
D. How is the limit on a political contribution determined
when selecting brokers and dealers? ..............................7
E. What constraints can county pools place on voluntary depositors? ......8
CHAPTER II. FUND MANAGEMENT ..............................9
A. Which investments are permissible? Which are prohibited? ..........10
B. What requirements must a financial institution satisfy
before a local agency may deposit its money in it? ..................14
C. When must the composition and credit rating of
investments contained in a local agency investment
portfolio be in compliance with state law? ........................15
D. Must bond proceeds be invested in the securities set forth in statute? ....16
E. How does the Municipal Advisor (MA) Rule
affect investment of bond proceeds? ..............................17
F. Are all U.S. Agency bonds legal investments
for California local agencies? .................................18
G. What are supranationals? ....................................19
H. Can a local agency invest in an investment
pool administered by another state? ............................20
I. What are “medium-term notes”? ..............................20
J. Are bonds issued by departments and financing authorities of the
State of California permissible investments for local agencies? .........22
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K. What are the rules regarding the use of reverse repurchase agreements
and securities lending agreements? Are “shorting” strategies allowed? ....22
L. What are the rules regarding the use of
mutual funds and money market funds? ........................24
M. What are the rules affecting the investment of
tax and revenue anticipation note (TRAN) and
grant anticipation note (GAN) proceeds? .......................25
N. What is an appropriate safekeeping arrangement for securities? .......26
O. How does the Municipal Advisor (MA) Rule affect a local
agency’s relationship with an investment advisor? .................27
P. What are the rules regarding the payment of interest earned
on non-general fund deposits to an agency's general fund? ..........28
Q. Should local agencies invest in financial futures and option
contracts? If so, in what manner should they be utilized? ............28
R. How long should a local agency retain trade ticket information? ......29
CHAPTER III. REPORTING REQUIREMENTS ......................31
A. What specific information regarding portfolio investments
needs to be included in the report to the legislative body? ...........32
B. Should the report include market value
measures for individual securities? .............................34
How should the market value of the portfolio be determined? ........34
How frequently should market value be checked? .................35
C. Should an analysis of cash flows be prepared by the local agency
in order to validate the six-month liquidity certification? ............36
D. What tools can be used to measure interest rate risk? ...............37
E. What action should the legislative body take with the report? ........40
F. How should agencies address difficulties in meeting
the 30-day requirement for submitting quarterly
investment reports to the legislative body? .......................40
CHAPTER IV. TREASURY OVERSIGHT COMMITTEES ...............42
A. What options are available for structuring
the county treasury oversight committee? .......................42
B. Does the appointment of the treasurer to the county
treasury oversight committee create a conflict of interest? ...........44
C. What is the role of the county treasury oversight committee? ........45
D. Should other local agencies have treasury oversight committees? ......45
CALIFORNIA GOVERNMENT CODE ............................ 47
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GLOSSARY ...............................................112
INDEX OF STATUTORY CHANGES
EFFECTIVE 1996 TO PRESENT ...............................125
INDEX ...................................................133
FIGURES
FIGURE 1: Allowable Investment Instruments Per State
Government Code (as of January 1, 2022)–
Applicable to All Local Agencies .........................12
FIGURE 2: Government Code Requirements for Local Agency
Investment in Money Market and Mutual Funds ...........25
FIGURE 3: Calculation of Weighted Average Maturity ................38
FIGURE 4: Duration—Gain/Loss of Market Value Matrix
for a $1000,000,000 Portfolio ..........................39
FIGURE 5: Approaches to Establishing the County
Treasury Oversight Committee .........................44
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1LOCAL AGENCY INVESTMENT GUIDELINES
About the Local Agency
Investment Guidelines
The Local Agency Investment Guidelines is intended to aid local officials in their
efforts to implement existing laws pertaining to the investment of public funds.
Each year, CDIAC staff convenes a working group of public- and private-sector
professionals to support its efforts to revise and update these Guidelines.
THOSE PARTICIPATING IN THE 2022 GUIDELINES INCLUDE:
• Constantine Baranoff, Attorney, Lozano Smith
• Bill Blackwill, Managing Director, Stifel, Nicolaus & Company, Inc.
• Deborah Higgins, President, Higgins Capital Management
• John Johnson, Chief Deputy Treasurer, San Bernardino County
• Carol Lew, Shareholder, Stradling, Yocca, Carlson & Rauth, P.C.
• Philip Marr, Senior Portfolio Manager, City of Los Angeles
• Kent Morris, MBA, CTP, Chief Investment Officer, City of San Diego
• Laura Parisi, CPA, CFIP, City Treasurer, City of Laguna Beach
• Rick Phillips, CCM, President and Chief Investment Officer, FHN Financial
Main Street Advisors
This document briefly describes each issue, offers an interpretation of the mini-
mum compliance requirements, and provides consensus recommendations where
the working group deemed them necessary. These interpretations represent the
best judgment of the professionals involved and are intended only as a guide for
local agencies in their compliance. Agencies should rely only on their legal coun-
sel for legal advice.
The Local Agency Investment Guidelines: Update for 2022 reflects current invest-
ment statutes. It is divided into chapters on investment policy, fund manage-
ment, reporting requirements, and the treasury oversight committee. Please note
that one issue may not fit neatly into the following four chapters.
Generally speaking, all local agencies are subject to the reporting, fund manage-
ment, and investment policy requirements. Only county governments may be
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2LOCAL AGENCY INVESTMENT GUIDELINES
subject to the county oversight committee requirements. Any jurisdiction that
assumes it is not covered by these provisions should seek legal counsel. California
Government Code Section 53600 states:
As used in this article, “local agency” means a county, city, city and county, in-
cluding 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.
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3LOCAL AGENCY INVESTMENT GUIDELINES
Summary of Statutory and Federal
Regulatory Changes
This report provides current information on the Government Code sections that
affect the daily investment practices of California local agencies. There were no
approved changes to the local agency investment related codes during the 2021
Legislative session. Therefore, the Local Agency Investment Guidelines: 2022 Up-
date reflects the most current investment statutes.
However, the 2022 Local Agency Investment Guidelines (LAIG) does reflect
minor changes which include minor formatting and grammatical corrections as
well as the addition of a discussion in Chapter 2 on securities issued by depart-
ments or authorities of the State of California. In addition, a paragraph related
to a 2020 temporary federal rule change (IRS Notice 2020-25) that extended the
holding period for variable rate debt subject to a qualified tender purchased by
the issuing agency was deleted. The time-limited authority of the temporary rule
change expired.
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4LOCAL AGENCY INVESTMENT GUIDELINES
Chapter I. The Annual Investment Policy
A good investment policy encompasses the cash, treasury, and investment man-
agement functions of an agency. It serves as a guide for setting and achieving
program objectives, defines rules and establishes benchmarks, and reduces the
exposure to liability of both the investment staff and the governing board. It
is also important to note that rating agencies pay close attention to an agency’s
investment policy and portfolio in determining its credit rating.
From this point forward, all references to the word “section” refers to the Califor-
nia Government Code unless otherwise stated.
I. A Should local agencies produce an investment policy?
Should the investment policy be presented to the local
agency’s legislative body? [Section 53646(a)]1
The investment policy serves as the foundation of a local agency’s investment
goals and priorities. If the investment policy is carefully researched, effectively
drafted, and reviewed regularly to assure that it continues to meet the agency’s
goals/priorities for its portfolio, it can help protect the assets of the organization.
The existence of an approved investment policy demonstrates that the governing
body is performing its fiduciary responsibilities, thereby, inspiring trust and con-
fidence among the public that it serves.
MINIMUM LEGAL REQUIREMENTS:
Section 53646(a)(1) states that the treasurer of a county government may annually
render to their board of supervisors and oversight committee an investment policy,
which the board shall review and approve at a public meeting. In addition, the board
shall review and approve any changes to the investment policy at a public meeting.
Section 53646(a)(2) states that the treasurer or chief fiscal officer of any other
local agency may annually render to their legislative body and any oversight com-
mittee an investment policy, that the legislative body shall consider at a public
1 All statutory references are to the California Government Code unless otherwise noted.
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5LOCAL AGENCY INVESTMENT GUIDELINES
meeting. This raises questions about whether or not the policy should be adopted
officially by the legislative body, and the time during the year that this “consid-
eration” should take place.
CONSENSUS RECOMMENDATION:
An investment policy should always be in place. While not required by statute, it
is in the best interest of the local agency to present and discuss the policy with
the agency’s legislative body or oversight committee, and then have the policy ap-
proved by a vote of the legislative body. A public vote signifies that the legislative
body shares fiduciary responsibility with the treasurer, increases the authority and
legitimacy of the investment policy, and provides transparency and disclosure.
I. B When should the investment policy be reviewed and
updated? How should the investment policy be rendered
to the legislative body? [Section 53646(a)]
The size and complexity of the investment policy, portfolio, agency and the agen-
cy’s staff are factors that may affect the frequency of the investment policy review
and revision.
MINIMUM LEGAL REQUIREMENT:
Section 53646(a) provides that if an investment policy is submitted to the lo-
cal agency’s legislative body, it must be an agenda item at a public meeting. If
submitted to a county board of supervisors, the board is required to review and
approve the investment policy and any changes to it at the public meeting. The
statute does not place the same specific approval requirements on other local
agencies, but it does require consideration. The statute does not specify, however,
when during the year that consideration or approval should occur.
CONSENSUS RECOMMENDATION:
Both the Association of Public Treasurers of the United States & Canada and the
Government Finance Officers Association have established policy standards that
recommend investment policies be reviewed annually. At a minimum, the inter-
nal treasury staff should conduct a review annually. Ideally, the review should be
timed to coincide with the end of the state legislative cycle so that consideration
may be given to any changes in statute that may impact the agency’s policy.
An update in the investment policy is warranted if treasury staff’s review results
in a material change in policy due to either a change in statute or a change in the
agency’s goals and objectives for safety, liquidity and yield. A change in statute,
however, may not necessarily require a change in the policy. Many agencies’ policies
are already more restrictive than statute. Likewise, an agency may choose to update
its policy to restrict the purchase of a new investment product that is allowable by
statute but that the agency deems to be too risky for its investment portfolio.
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Although rendering the investment policy to the legislative body or oversight
committee is not required, it is highly recommended. If it is done, it should
be done annually, on an established schedule, such as after the annual review
and update.
For newly-elected legislative body members, election terms may not coincide with
the investment policy review. But, because of the fiduciary responsibility of the
legislative body, any newly-elected members should be made aware of the exis-
tence of the investment policy and its contents as soon as possible.
I. C What information should be included in the
investment policy? [Section 27133]
MINIMUM LEGAL REQUIREMENTS:
Except for county governments, the California Government Code does not contain
any provisions specifying what must be included in the investment policy of a local
agency. Section 27133 provides that county investment policies must contain:
• A list of securities or other in-
struments in which the county
treasury may invest, according to
the law, including the maximum
percentage by type of security,
and the maximum term of any
security purchased;
• The manner of calculating and
apportioning the authorized costs
of investing, depositing, banking,
auditing, reporting, handling, and
managing of funds;
• Limits on the receipt of honoraria,
gifts, and gratuities for county
treasury oversight members from
advisors, brokers, dealers, bankers,
or other persons with whom the
county treasury conducts business;
• Criteria for selecting brokers and
dealers (including prohibitions
against selecting any broker, dealer,
or security firm within any consec-
utive 48-month period of making
a campaign contribution exceeding
the limitations contained in Rule
G-37 of the Municipal Securities
Rulemaking Board);
• A requirement that the treasurer
provide the county treasury
oversight committee with an
investment report as required
by the Board of Supervisors;
• Terms and conditions under
which other local agencies that are
not required to deposit funds may
deposit funds in the county trea-
sury if they so choose; and
• Criteria for considering requests
to withdraw funds from the
county treasury.
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7LOCAL AGENCY INVESTMENT GUIDELINES
I. D How is the limit on a political contribution
determined when selecting brokers and dealers?
[Section 27133 (c) and MSRB Rule G-37]
The county treasury shall not select brokers and dealers who individually, or as a
firm, have contributed more than the current limit established under Municipal
Securities Regulatory Board (MSRB) Rule G-37.
MINIMUM LEGAL REQUIREMENT:
The county treasury is prohibited from selecting those brokers, brokerage firms,
dealers, or securities firms having made political contributions within the last four
years, which exceed the amount set forth in MSRB Rule G-37. For 2022, the limit
is $250. This limit applies to the local treasurer, any member of the governing board
of the local agency, or any candidate for those offices.
In addition to the provisions outlined in Section 27133 and MSRB Rule
G-37, local agencies, the state, and the Fair Political Practices Commission
(FPPC) may adopt additional standards on acceptable political contribution
limits. For reference, the local treasurer, any member of the governing board
of the local agency, and treasury staff are required to report any gift of $50 or
more on his or her annual Form 700 submission to the FPPC.
The last two of the above elements directly refer to the duties counties have in
maintaining a local government investment pool.
CONSENSUS RECOMMENDATION:
Although statute does not specify the contents of the investment policy for local
agencies other than counties, it should include at a minimum, the first five ele-
ments required of counties. In addition, the policy should specify the funds to
which the policy will and will not apply. For instance, bond proceeds are usually
guided by the bond documents and thus, may not be a part of the investment
policy. Similarly, pension funds are guided by other code sections and may have
different investment objectives.
The Association of Public Treasurers of the United States & Canada offers an
Investment Policy Program that provides public investors with guidance and
technical assistance in developing a comprehensive written investment policy
at www.aptusc.org. The California Municipal Treasurers Association (CMTA)
has sample investment policies that were certified through CMTA's Investment
Policy Certification Program. Additional sources for recommended elements of
an investment policy can be found in CDIAC’s California Public Fund Invest-
ment Primer and Investment Policy Reporting Practices: An Informational
Guide, and the Government Investment Officers Association’s Investment Pol-
icy Certification Program and Application.
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8LOCAL AGENCY INVESTMENT GUIDELINES
CONSENSUS RECOMMENDATION:
All treasury staff should be knowledgeable of the specific state and local laws and
ordinances governing their receipt of political contributions, gifts, and honoraria.
Although the MSRB Rule G-37 applies to the local treasurer and the governing
board of the local agency, treasury staff are likely subject to additional rules set forth
by the FPPC and the local agency. If there is no policy on the receipt of political
contributions, gifts, or honoraria at the local agency level, establish one and educate
all agency employees who affect treasury decisions.
I. E What constraints can county pools place on
voluntary depositors? [Section 27133(g)]
County treasurers have difficulty predicting withdrawals of voluntary funds made
by pool participants. As a result, questions commonly arise regarding how county
pools should treat funds from voluntary depositors. In the absence of informa-
tion on a depositor’s cash flow, an unanticipated withdrawal can create potential
liquidity problems for the pool.
MINIMUM LEGAL REQUIREMENT:
State law does not require county pools to accept voluntary deposits.
CONSENSUS RECOMMENDATION:
Allow voluntary deposits only under a clearly written contract or memorandum
of understanding. This agreement should spell out the exact rules for partici-
pating in the pool and provide the county treasurer with reasonable predefined
discretion to establish the frequency and amount of voluntary funds that can be
removed from the pool at a particular time. Another option is to ban voluntary
deposits altogether if the county has confidence that other local agencies have
reasonable investment alternatives.
B-13
9LOCAL AGENCY INVESTMENT GUIDELINES
Chapter II. Fund Management
For the investment of county funds in a county treasury, Section 27000.3 estab-
lishes the Board of Supervisors as a fiduciary that is subject to the prudent inves-
tor standard unless it delegates its investment duties to the county treasurer. For
other local agencies’ funds invested in the county treasury, the county treasurer
serves as a fiduciary and is subject to the prudent investor standard.
Except as provided for in Section 27000.3, Section 53600.3 declares as a
trustee each person, treasurer, or governing body authorized to make invest-
ment decisions on behalf of local agencies. As trustees these individuals are
subject to the prudent investor standard. That is, they shall act with care,
skill, prudence, and diligence under the circumstances then prevailing when
investing, reinvesting, purchasing, acquiring, exchanging, selling, and man-
aging funds. Section 53600.5 further stipulates that the objectives of any
person investing public funds is to, first, safeguard principal; second, to meet
the liquidity needs of the depositor; and lastly, to achieve a return or yield on
the funds under its control (Section 27000.5 specifies the same objectives for
county treasurers and boards of supervisors).
Risk is inherent throughout the investment process. There is investment risk as-
sociated with any investment activity and opportunity risk related to inactivity.
Market risk is derived from exposure to overall changes in the general level of
interest rates while credit risk is the risk of loss due to the failure of the issuer of
a security. The market value of a security varies inversely with the level of interest
rates. If an investor is required to sell an investment with a five percent yield in
a comparable seven percent rate environment, that security will be sold at a loss.
The magnitude of that loss will depend on the amount of time until maturity.
Purchasing certain allowable securities with a maturity of greater than five years
requires approval of the governing board (see Section 53601). Part of that ap-
proval process involves assessing and disclosing the risk and possible volatility
associated with longer-term investments.
Another element of risk is liquidity risk. Instruments with extraordinary or spe-
cial call features, sinking fund redemption structures, or those issued by little
known issuers, are examples of “story bonds” and often are thinly traded. Their
uniqueness often makes finding prospective buyers in a secondary market more
difficult and, consequently, the securities’ marketability and prices may be dis-
B-14
10LOCAL AGENCY INVESTMENT GUIDELINES
counted. However, under certain market conditions, gains may also be possible
with these types of securities.
Default risk represents the possibility that the borrower may be unable to repay
the obligation as scheduled. Generally, securities issued by the federal government
and its agencies are considered the most secure, while securities issued by private
corporations, or negotiable certificates of deposit issued by commercial banks
have a greater degree of risk. Securities with additional credit enhancements, such
as bankers’ acceptances, collateralized repurchase agreements, and collateralized
bank deposits, are somewhere between the two on the risk spectrum.
The vast majority of local agency portfolios are managed with a buy and hold
investment strategy. Investments are purchased with the intent and capacity
to hold them until maturity. At times, market forces or operations may dictate
exchanging one security for another or selling a security before maturity.
Continuous analysis and fine tuning of the investment portfolio are considered
part of prudent investment management. This passive investment strategy is
different from one in which securities are purchased with the intent to sell them
before maturity at a profit or the use of leverage to enhance yield.
California Government Code contains specific provisions regarding the types
of investments and practices permitted after considering the broad require-
ment of preserving principal and maintaining liquidity before seeking yield.
These provisions are intended to promote the use of reliable, diverse, and safe
investment instruments to better ensure a prudently managed portfolio worthy
of public trust.
II. A Which investments are permissible? Which are prohibited?
[Sections 16340, 16429.1, 27133, 53601, 53601.6, 53601.8,
53635, 53635.2, 53635.8, 53638, 53684, and 57603]
MINIMUM LEGAL REQUIREMENT:
Local agencies may invest only in those instruments specified in State law.
Sections 16340, 16429.1, 27133, 53601, 53601.6, 53601.8, 53635, 53635.2,
53635.8, 53638, 53684, and 57603 include a number of requirements on
how and where public money may be invested. Figure 1 provides a synopsis
of the permitted investment instruments and limitations on each, in which
all local agencies may invest.
Prohibited investments include securities not listed in Figure 1, as well as inverse
floaters, range notes, and interest only strips derived from a pool of mortgages.
This restriction does not apply to local agency investments in shares of beneficial
interest issued by diversified management companies registered under the Invest-
B-15
11LOCAL AGENCY INVESTMENT GUIDELINES
ment Company Act of 1940 that are authorized for investment pursuant to sub-
division (l) of Government Code Section 53601
Section 53601.6(b) prohibits investment by a local agency in any security that
could result in a zero-interest accrual if held to maturity. However, beginning
January 1, 2020, Section 53601.6(b), as amended by the Legislature, authorized
local agencies to invest in securities issued by, or backed by the United States gov-
ernment that could result in zero- or negative-interest accrual if held to maturity,
in the event of, and for the duration of, a period of negative market interest rates.
A local agency may hold these instruments until their maturity date. This lim-
ited code exception allows local agencies the option of buying and holding onto
zero- or negative-interest accrual United States government securities, if it would
preserve more principal. This provision will sunset January 1, 2026.
Section 53601 provides that public agencies may invest in bonds issued by the
local agency itself. In 2008, the Legislature added Section 5925 to clarify that
the purchase of bonds by the local agency that issued the bonds does not cancel
or otherwise affect the bonds. This addressed concerns that the purchased bonds
would be considered defeased or refunded under certain Treasury rules. With the
addition of Section 5925 the repurchased or acquired bonds may be treated as
outstanding bonds under state law to the extent provided by the issuer or the
documents defining the rights of the bondholders.
In 2019, the Legislature added Section 57600 et seq. authorizing local agen-
cies to form a public bank. Furthermore, under 57603, local agencies that do
not pool money in deposits or investments with other local agencies that have
separate governing bodies as well as local agencies that pool money in deposits
or investments with other local agencies, including local agencies that have the
same governing body, are permitted to invest in debt securities or other obliga-
tions of a public bank.
CONSENSUS RECOMMENDATION:
Local agencies should include the list of permissible securities in the investment
policy and modify the list to meet its unique needs. These modifications may in-
clude additional restrictions on the type and amount of specific authorized securities
to reflect current federal tax and securities regulations and an agency’s risk tolerance.
The addition of Section Code 5925 authorizing state and local agencies to pur-
chase their own bonds was intended to be complementary to Internal Revenue
Service (IRS) Notice 2008-41 and 2008-88 that allowed municipal issuers to
temporarily hold certain types of their own tax-exempt debt without extinguish-
ment or loss of tax-exempt status. However, these IRS provisions were meant
to be temporary and sunset on December 31, 2010, with some remaining ex-
ceptions for certain variable rate debt subject to a qualified tender. Given the
incongruity between Section 5925 and IRS rules, a local agency should seek legal
guidance on the potential tax implications of purchasing its own debt especially
if that debt does not clearly fall within the remaining IRS exceptions.
B-16
12LOCAL AGENCY INVESTMENT GUIDELINES
INVESTMENT
TYPE
MAXIMUM
MATURITYC
MAXIMUM
SPECIFIED
% OF
PORTFOLIOD
MINIMUM
QUALITY
REQUIREMENTS
GOV'T
CODE
SECTIONS
Local Agency Bonds 5 years None None 53601(a)
U.S. Treasury Obligations 5 years None None 53601(b)
State Obligations—
CA And Others 5 years None None 53601(c)
53601(d)
CA Local Agency Obligations 5 years None None 53601(e)
U.S Agency Obligations 5 years None None 53601(f)
Bankers’ Acceptances 180 days 40%E None 53601(g)
Commercial Paper—Non-Pooled FundsF
(under $100,000,000 of investments)
270 days
or less
25% of the
agency’s moneyG
Highest letter and
number rating by an
NRSROH
53601(h)(2)(c)
Commercial Paper—Non-Pooled Funds
(min. $100,000,000 of investments)
270 days
or less
40% of the
agency’s moneyG
Highest letter and
number rating by an
NRSROH
53601(h)(2)(c)
Commercial Paper—
Pooled FundsI
270 days
or less
40% of the
agency’s moneyG
Highest letter and
number rating by an
NRSROH
53635(a)(1)
Negotiable Certificates of Deposit 5 years 30%J None 53601(i)
Non-negotiable Certificates of Deposit 5 years None None 53630 et seq.
Placement Service
Deposits 5 years 50%K None 53601.8 and 53635.8
Placement Service
Certificates of Deposit 5 years 50%K None 53601.8 and 53635.8
Repurchase Agreements 1 year None None 53601(j)
Reverse Repurchase Agreements and
Securities Lending Agreements 92 daysL 20% of the base
value of the portfolio NoneM 53601(j)
Medium-Term NotesN 5 years
or less 30%“A” rating category or
its equivalent or better 53601(k)
Mutual Funds And Money
Market Mutual Funds N/A 20% MultipleP,Q 53601(l) and
53601.6(b)
Collateralized Bank DepositsR 5 years None None 53630 et seq.
and 53601(n)
Mortgage Pass–Through and
Asset–Backed Securities
5 years
or less 20%“AA” rating category or
its equivalent or better 53601(o)
County Pooled
Investment Funds N/A None None 27133
Joint Powers Authority Pool N/A None MultipleS 53601(p)
Local Agency Investment Fund (LAIF) N/A None None 16429.1
Voluntary Investment Program FundT N/A None None 16340
Supranational ObligationsU 5 years
or less 30%“AA” rating category or
its equivalent or better 53601(q)
Public Bank Obligations 5 years None None 53601(r), 53635(c)
and 57603
FIGURE 1
ALLOWABLE INVESTMENT INSTRUMENTS PER STATE GOVERNMENT
CODE (AS OF JANUARY 1, 2022)A APPLICABLE TO ALL LOCAL AGENCIESB
See “Table of Notes for Figure 1” on the next page for footnotes related to this figure.
B-17
13LOCAL AGENCY INVESTMENT GUIDELINES
A Sources: Sections 16340, 16429.1, 27133,
53601, 53601.6, 53601.8, 53630 et seq., 53635,
53635.8, and 57603.
B Municipal Utilities Districts have the authority
under the Public Utilities Code Section 12871 to
invest in certain securities not addressed here.
C Section 53601 provides that the maximum term
of any investment authorized under this section,
unless otherwise stated, is five years. However,
the legislative body may grant express authority to
make investments either specifically or as a part of
an investment program approved by the legislative
body that exceeds this five year remaining maturity
limit. Such approval must be issued no less than
three months prior to the purchase of any security
exceeding the five-year maturity limit.
D Percentages apply to all portfolio investments
regardless of source of funds. For instance, cash
from a reverse repur-chase agreement would be
subject to the restrictions.
E No more than 30 percent of the agency’s money
may be in bankers’ acceptances of any one
commercial bank.
F Includes agencies defined as a city, a district,
or other local agency that do not pool money in
deposits or investment with other local agencies,
other than local agencies that have the same
governing body.
G Local agencies, other than counties or a city and
county, may purchase no more than 10 per-
cent of the outstanding commercial paper and
medium-term notes of any single issuer.
H Issuing corporation must be organized and operat-
ing within the U.S., have assets in excess of $500
million, and debt other than commercial paper
must be in a rating category of "A" or its equivalent
or higher by a nationally recognized statistical rat-
ing organization, or the issuing corporation must
be organized within the U.S. as a special purpose
corporation, trust, or LLC, have program wide
credit enhancements, and have commercial paper
that is rated “A-1” or higher, or the equivalent, by a
nationally recognized statistical rating agency.
I Includes agencies defined as a county, a city
and county, or other local agency that pools
money in deposits or investments with other local
agencies, including local agencies that have the
same governing body. Local agencies that pool
exclusively with other local agencies that have the
same governing body must adhere to the limits set
forth in Section 53601(h)(2)(C).
J No more than 30 percent of the agency’s money
may be in negotiable certificates of deposit that
are authorized under Section 53601(i).
K Effective January 1, 2020, no more than 50
percent of the agency’s money may be invested in
deposits, including certificates of deposit, through
a placement service as authorized under 53601.8
(excludes negotiable certificates of deposit
authorized under Section 53601(i)). On January
1, 2026, the maximum percentage of the portfolio
reverts back to 30 percent. Investments made
pursuant to 53635.8 remain subject to a maximum
of 30 percent of the portfolio.
L Reverse repurchase agreements or securities
lending agreements may exceed the 92-day
term if the agreement includes a written codicil
guaranteeing a minimum earning or spread for the
entire period between the sale of a security using
a reverse repurchase agreement or securities
lending agreement and the final maturity dates of
the same security.
M Reverse repurchase agreements must be made
with primary dealers of the Federal Reserve Bank
of New York or with a nationally or state chartered
bank that has a significant relationship with the
local agency. The local agency must have held
the securities used for the agreements for at
least 30 days.
N “Medium-term notes” are defined in Section 53601
as “all corporate and depository institution debt
securities with a maximum remaining maturity of
five years or less, issued by corporations organized
and operating within the United States or by
depository institutions licensed by the United States
or any state and operating within the United States.”
O No more than 10 percent invested in any one
mutual fund. This limitation does not apply to
money market mutual funds.
P A mutual fund must receive the highest ranking
by not less than two nationally recognized rating
agencies or the fund must retain an investment
advisor who is registered with the SEC (or exempt
from registration), has assets under management
in excess of $500 million, and has at least
five years' experience investing in instruments
authorized by Sections 53601 and 53635.
Q A money market mutual fund must receive the
highest ranking by not less than two nationally
recognized statistical rating organizations or
retain an investment advisor registered with the
SEC or exempt from registration and who has
not less than five years' experience investing in
money market instruments with assets under
management in excess of $500 million.
R Investments in notes, bonds, or other obligations
under Section 53601(n) require that collateral be
placed into the custody of a trust company or the
trust department of a bank that is not affiliated
with the issuer of the secured obligation, among
other specific collateral requirements.
S A joint powers authority pool must retain an
investment advisor who is registered with the
SEC (or exempt from registration), has assets
under management in excess of $500 million,
and has at least five years' experience investing
in instruments authorized by Section 53601,
subdivisions (a) to (o).
T Local entities can deposit between $200 million
and $10 billion into the Voluntary Investment
Program Fund, upon approval by their governing
bodies. Deposits in the fund will be invested in the
Pooled Money Investment Account.
U Only those obligations issued or unconditionally
guaranteed by the International Bank for
Reconstruction and Development (IBRD),
International Finance Corporation (IFC), and
Inter-American Development Bank (IADB), with a
maximum remaining maturity of five years or less.
TABLE OF NOTES FOR FIGURE 1
B-18
14LOCAL AGENCY INVESTMENT GUIDELINES
II. B What requirements must a financial
institution satisfy before a local agency
may deposit its money in it? [Section 53635.2]
Section 53635.2 states that all local agency money may be invested in investments
set forth in 53601 or deposited for safekeeping in state or national banks, public
banks, savings associations, federal associations, credit unions, or federally insured
industrial loan companies in this state. It also specifies certain requirements that
such financial institutions must satisfy to hold local agency money.
MINIMUM LEGAL REQUIREMENT:
To be eligible to receive local agency money, a financial institution must receive
an overall rating of not less than “satisfactory” from the appropriate federal su-
pervisory agency for meeting the criteria specified in Section 2906 of Title 12 of
the U.S. Code (Community Reinvestment Act of 1977). The Community Re-
investment Act of 1977 (Act) requires financial institutions to demonstrate their
commitment to meeting the credit needs of local communities in which they
are chartered to do business. For the purpose of the Act, the appropriate federal
supervisory agency includes:
2 CDIAC's Issue Brief: Rule 144A Securities, provides a summary of securities in this class.
As a result of amendments to Government Code Sections 53601.8 and 53635.8,
local agencies should review portfolio limitations for CDs and negotiable CDs
in their investment policies.
Some investments, such as straight floaters or floating rate notes that are not
otherwise prohibited, have the potential to result in zero-interest accrual. Be-
fore purchasing these types of investments, the local agency should evaluate all
possible outcomes, and, as a safeguard, should consider including in its invest-
ment policy a statement establishing an acceptable positive spread or floor for all
securities, which pay interest based on a spread to an index.
Also, while not expressly prohibited by State law, unregistered securities, such as
Rule 144A securities, may not be purchased by local agencies that do not meet the
threshold of $5 million investments and $100 million in securities. On August 26,
2020 the Securities and Exchange Commission expanded the definition of Quali-
fied Institutional Buyers (QIB)2 to include any institution that qualifies as an ac-
credited investor under Rule 501(a) under the Securities Act that are not otherwise
stated in the definition of “qualified institutional buyer” provided they satisfy the
$100 million threshold.
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15LOCAL AGENCY INVESTMENT GUIDELINES
II. C When must the composition and credit rating of investments
contained in a local agency investment portfolio be in
compliance with state law? [Section 53601]
California Government Code provides a description of the types of instruments
permissible for local agency investment and specifies the timing of compliance
with state law. Questions arise concerning the timing of any test of compliance
with these requirements.
MINIMUM LEGAL REQUIREMENT:
Where Section 53601specifies a percentage restriction on a certain category of
investment, this share of the investment portfolio must be in compliance with
state law at the time that investment is purchased. The law does not specify
that the entire portfolio must be in compliance when new instruments are pur-
chased. It also does not require “rebalancing” when subsequent maturities, sales,
withdrawals, or similar non-purchase activities result in the remaining portfolio
having one or more of the categories of investment rise above the percentage
restrictions applicable at the time of purchase.
CONSENSUS RECOMMENDATION:
The portfolio must be in compliance with statute at the time that the investment
is purchased. It is recommended that the portfolio be monitored, as practical,
CONSENSUS RECOMMENDATION:
A local agency should contact the appropriate federal supervisory agency to de-
termine if its financial institution meets the overall rating requirement.
Local agencies should be aware that in some instances ratings from federal su-
pervisory agencies may not be current, as financial institutions are evaluated only
every year or two. Additional inquiry may be necessary to obtain updated infor-
mation if the last published rating is more than one year old.
• The Comptroller of the Currency
with respect to national banks;
• The Board of Governors of the Fed-
eral Reserve System with respect to
state chartered banks that are mem-
bers of the Federal Reserve system
and bank holding companies;
• The Federal Deposit Insurance
Corporation (FDIC) with respect
to state chartered banks, public
banks, and savings banks that are
not members of the Federal Reserve
system and the deposits of which
are insured by the FDIC; and
• The Director of Office of Thrift
Supervision with respect to savings
associations (the deposits of which
are insured by the FDIC) and sav-
ings holding companies.
B-20
16LOCAL AGENCY INVESTMENT GUIDELINES
II. D Must bond proceeds be invested in the securities
set forth in statute? [Section 53601(m)]
Section 53601(m) allows greater flexibility with respect to the types of invest-
ments that may be made with bond proceeds. Specifically, the law permits
money from bond proceeds, obligations under a lease, installment sales, or
other agreements of a local agency to be invested in any security that meets
the statutory provisions governing the issuance of the bond or other agree-
ments made by the issuing agency. In so doing, this section of the code
recognizes that outstanding contracts between issuers and bond holders may not
comply with the investment statutes and gives local agencies greater discretion in
how to invest bond proceeds.
MINIMUM LEGAL REQUIREMENT:
Bond proceeds may be invested in accordance with statutes or they may be in-
vested in alternative vehicles if authorized by bond documents.
CONSENSUS RECOMMENDATION:
The agency’s investment policy should either require that bond proceeds be in-
vested in accordance with statutes, reference applicable bond documents (such as,
the indenture or rating agency requirements), or specify the types of investments
authorized for bond proceeds. Bond proceeds may be invested in instruments
with maturities longer than five years. Applying the five-year maturity limitation
found in statute may result in less yield. When investing bond proceeds, maturi-
ties should match the cash flow needs of the project or fund.
for subsequent changes in percentages resulting from non-purchase activity or
changes in credit rating of existing securities.
In the event the portfolio or individual investments are deemed to be out of
compliance with either statute or the investment policy, the local agency
should have procedural guidelines in place that outline actions to take under
various scenarios. Due to its fiduciary responsibility, early communication with
and involvement of the legislative body concerning a major or critical event is of
utmost importance. Therefore, the procedural guidelines should identify circum-
stances under which communication and discussion of the treasurer’s analysis
and recommended course of action to the legislative body or oversight commit-
tee is warranted.
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17LOCAL AGENCY INVESTMENT GUIDELINES
3 Information on the MA Rule can be found at the SEC and GFOA websites.
As a part of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Pub. L. 111-203) (Dodd-Frank Act), the Securities and Exchange Com-
mission (SEC) enacted regulations addressing the apparent conflict of interest
between municipal bond underwriters providing both underwriting and advice
on the investment of bond proceeds for the same debt issue. These regula-
tions were incorporated in the Municipal Advisor Rule (MA Rule). The MA
Rule states that broker-dealers providing advice to government clients have a
fiduciary duty to their clients and must be registered as a municipal advisor. In
order to avoid becoming a fiduciary to municipal issuers, many broker-dealers,
who have a significant municipal underwriting business, have adopted policies
prohibiting brokers from providing investment advice. The MA Rule provides
specific exemptions to public agencies seeking to receive investment advice
from broker-dealers, including receiving advice through a request for proposal
(RFP) process or by entering into a formal relationship with an independent
registered municipal advisor for advice.
MINIMUM LEGAL REQUIREMENT:
The MA Rule places no legal obligations on public agencies. The regulations ad-
dress only the responsibilities of broker-dealers with respect to the bond proceeds.
CONSENSUS RECOMMENDATION:
Although the MA Rule does not specifically regulate the investment of bond
proceeds by a local agency, it has materially affected the investment processes
of many agencies. For example, treasury staff may have to adopt procedures,
including the use of a mini-RFP that would exempt their brokers-dealer from
being defined as a fiduciary. Local agency treasury staff should understand the
MA Rule and its exemptions; have knowledge of the limitations of their broker-
dealer firms as a result of the MA Rule; and address the MA Rule by adopting a
policy regarding the investment of bond proceeds. The SEC and the Government
Finance Officers Association (GFOA) offer more information.3
II. E How does the Municipal Advisor (MA) Rule
affect investment of bond proceeds?
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18LOCAL AGENCY INVESTMENT GUIDELINES
There has been a lot of discussion about the risk profile of certain products and
derivatives issued by U.S. Agencies and U.S. government sponsored enter-
prises (GSEs). These Agencies and GSEs issue both traditional fixed-income
securities (notes and bonds) as well as more complex, structured products
including customized mortgage- and asset-backed securities and derivatives.
The State’s investment laws, however, place no restrictions on these types of
investments other than the prohibitions against inverse floaters, range notes,
and interest-only strips derived from mortgage pools. Until January 1, 2026,
local agencies are authorized to invest in securities, issued by, or backed by,
the United States government that could result in zero- or negative-interest
accrual if held to maturity, in the event of, and for the duration of, a period
of negative market interest rates. A local agency may hold these instruments
until their maturity dates.
In recent years, some GSE debt has been privatized and is now structured like
corporate debt yet still falls under the limits of 53601(f) and 53601.6. The most
commonly traded GSE debt includes that from the Federal Home Loan Bank
(FHLB), Federal Farm Credit Bank (FFCB), Federal Home Loan Mortgage Cor-
poration (Freddie Mac), Federal National Mortgage Association (Fannie Mae)
and Federal Agricultural Mortgage Corporation (Farmer Mac). Other less com-
mon GSEs include Government National Mortgage Association (Ginnie Mae),
Community Development Corporation (CDC), Student Loan Marketing As-
sociation (Sallie Mae)4, Small Business Administration (SBA), Overseas Private
Investment Corporation (OPIC), and Tennessee Valley Authority (TVA ).
MINIMUM LEGAL REQUIREMENT:
Obligations, including bonds, notes, certificates of participation, or other instru-
ments issued as U.S. Agencies or GSE debt are permissible investments under
Section 53601(f). These investments are, however, subject to the prohibition
against inverse floaters, range notes, and interest-only strips derived from a pool
of mortgages in Section 53601.6. Until January 1, 2026, local agencies are au-
thorized to invest in securities, issued by, or backed by, the United States govern-
ment that could result in zero- or negative-interest accrual if held to maturity, in
the event of, and for the duration of, a period of negative market interest rates. A
local agency may hold these instruments until their maturity dates.
4 SLMA (Sallie Mae) terminated its ties to the federal government in 2004; bonds issued prior to 2005 are
GSE debt; bonds issued in 2005 and after are corporate debt issued by the SLM Corporation.
II. F Are all U.S. Agency bonds legal investments for California
local agencies? [Sections 53601(f) and 53601.6]
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19LOCAL AGENCY INVESTMENT GUIDELINES
CONSENSUS RECOMMENDATION:
Local agencies should institute restrictions that recognize the different character-
istics and risk profile of the variety of U.S. Agency and GSE debt instruments.
Factors such as the repayment pledge, size of the issue, prominence of the issuer in
the market, and the complexity of the issue (such as call features, timing of interest
and principal payments, or other options) will impact the risk profile and, thus, the
balance of safety, liquidity, and yield in a local agency’s portfolio. With SBA loans
or pools, for example, the principal and interest may be guaranteed by the U.S.
Government, but the prepayment or premium risk can be substantial. Investments
in these types of products should only be entered into with a clear awareness, by
both the legislative body and treasurer, of the risks involved and only if the local
agency's staff have sufficient expertise and resources to manage such investments.
II. G What are supranationals? [Section 53601 (q)]
A supranational organization is formed by a group of countries through an in-
ternational treaty with specific objectives such as promoting economic develop-
ment. Supranational organizations also issue debt in the United States. The most
commonly recognized supranational debt is issued by the International Bank for
Reconstruction and Development (IBRD or World Bank).
Section 53601 (q) allows local agencies to invest in bonds issued by one of three
supranationals: World Bank, International Finance Corporation (IFC) and Inter-
American Development Bank (IADB), which were established by international
treaties, incorporated into U.S. federal law by Congressional Acts and headquar-
tered in Washington, D.C. Currently, these entities carry the highest credit rat-
ings (AAA) based on their financial structure, policies, performance and capi-
tal support from shareholders. Securities issued by these supranationals include
benchmark bonds, global bonds, structured notes, plain fixed and floating rate
notes, discount notes as well as green bonds
MINIMUM LEGAL REQUIREMENT:
In order for local agencies to invest in bonds issued by supranationals, the
bonds must meet the following criteria:
• Maturity of five years or less;
• Eligible for purchase and sale
within the US;
• In a rating category of "AA" or its
equivalent or better by a nationally
recognized statistical rating
orginization (NRSRO); and
• Cannot exceed 30 percent of the
agency's investment portfolio.
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20LOCAL AGENCY INVESTMENT GUIDELINES
II. H Can a local agency invest in an investment pool
administered by another state? [Section 53601 (d)]
Section 53601 is prescriptive of the types of investments permissible for local
agency investment. It specifies, among other things, the issuer of the security,
the type of obligation and the maturity of the security.
MINIMUM LEGAL REQUIREMENT:
Section 53601 (d) allows local agencies to invest in the debt of another state or
department, board, agency or authority and 53601(p) allows joint powers authorities
(JPA) established pursuant to Section 6509.7 to invest in securities and obligations
authorized under 53601 (a)-(q) as long as each member of the JPA has an equal
proportional interest in the purchased securities. Furthermore, members of the JPA
may include public agencies outside of California. However, local agencies are not
permitted to invest in an investment pool administered by another state.
CONSENSUS RECOMMENDATION:
Local agency permissible investments do not include investment pools adminis-
tered by another state as an investment option.
II. I What are “medium-term notes?” [Section 53601(k)]
Until recently, the statutes defined medium-term notes as those instruments
meeting certain term-length and quality requirements. Amendments to Section
53601(k) have attempted to clarify some of the ambiguity surrounding this defi-
nition. A variety of reasons account for this past confusion. One is that the SEC
treats “corporate notes” slightly differently than “medium-term notes.” Another
is that brokers often refer to corporate obligations that have an original term to
maturity longer than five years as corporate rather than medium-term notes, even
though the remaining term to maturity for these notes may be less than five years.
MINIMUM LEGAL REQUIREMENT:
Section 53601(k) defines medium-term notes as “all corporate and depository
institution debt securities with a maximum remaining maturity of five years or
less, issued by corporations organized and operating in the United States.” There-
fore, investments in any corporate or depository institution debt securities that
mature within five years from the time of purchase are legal as long as they meet
the minimum quality standards. Moreover, the statute specifies that local agencies
may not classify investments as medium-term notes if they satisfy the definition of
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21LOCAL AGENCY INVESTMENT GUIDELINES
• Organized - An entity organized as
a corporation in the United States.
• Operating - Engaged in business
activities for which it was organized
and maintaining a functioning office
(other than a representative office).
• Licensed - Permitted by the appro-
priate regulatory agency to oper-
ate and conduct business in the
United States (federal license) or a
specific state (state license).
Given that even the above interpretations do not provide certainty, local agencies
should establish a method of determining whether a purchase of medium-term
notes meets the requirements of Section 53601(k) in consultation with their
legal counsel. The following provides additional general guidance and recom-
mendations to consider:
other allowable investments authorized under state law. For example, a local agency
could not consider a security that satisfies the definition of commercial paper as a
medium-term note in its portfolio. In addition, a local agency, other than a county
or a city and a county, may invest no more than 10% of its total investment assets
in the commercial paper and the medium-term notes of any single issuer.
CONSENSUS RECOMMENDATION:
With many companies and depository institutions operating worldwide, the interpre-
tation of the phrases “organized and operating in the United States” and “licensed by
the United States or any state” comes into question. The terms organized, operating,
and licensed are not specifically defined by statutes nor are they legal terms that hold
specific meaning. For the purpose of applying Section 53601(k), the following inter-
pretations, based upon usage and context, are offered as guidance to local agencies.
• If an issuing entity is incorporated
in the U.S., but is a subsidiary of a
foreign-owned parent company the
stability of either the parent compa-
ny or the economy of the country
of the parent company should be
considered when purchasing debt
issued by these types of entities.
• Alternately, a local agency may
hold securities in a U.S. company
that is subsequently purchased by
or merges with a foreign company
(for example, the InBev merger
with Anheuser Busch in 2008).
The local agency should monitor
the merger or purchase to deter-
mine if it remains a prudent for
the agency to hold the security.
• Identifying the venue for any
legal recourse in the event of a
bankruptcy or credit event would
assist the local agency in deter-
mining whether the organization
is organized and operating in the
U.S. If the security is backed by
assets that are in the U.S., then
the investor may attempt to at-
tach a claim on them in a U.S.
court in the event of a bankruptcy
or default. If the security is not
backed by assetsin the U.S., then
the initial financing documents
of the underlying security may
provide a possible source to assist
with determining the legal venue.
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22LOCAL AGENCY INVESTMENT GUIDELINES
II. J Are bonds issued by departments and financing
authorities of the State of California permissible
investments for local agencies?[Section 53601(c)]
Securities issued by the State of California are permissible investments for lo-
cal agencies under Section 53601(c). However, questions arise when considering
whether bonds issued by departments or financing authorities of the State are also
permissible under this section.
MINIMUM LEGAL REQUIREMENTS:
Section 53601(c) permits a local agency to invest in registered state warrants or
treasury notes or bonds of this state, including bonds payable solely out of the
revenues from a revenue-producing property owned, controlled, or operated by
the state or by a department, board, agency, or authority of the state.
CONSENSUS RECOMMENDATION:
There are two conditions that a bond could meet to be a permissible investment
under Section 53601(c). The first part of Section 53601(c), ”state warrants, trea-
sury notes and bonds of this state”, refers to bonds issued by the State of Califor-
nia, for instance, general obligation bonds. This was the operative code section
prior to the state’s issuance of revenue bonds.
The last part of the code section broadens the definition of permissible investments
to include, “bonds payable solely out of the revenues from a revenue-producing
property owned, controlled, or operated by the state or a department, board, agen-
cy, or authority of the state”. This describes state-issued revenue bonds. Issuance by
a state authority or instrumentality alone is inadequate to meet the conditions in
Section 53601(c) as the source of revenue for repayment must meet the qualifier in-
cluded in the code section. For a security issued by a state authority or department,
are the underlying agreements considered property owned/controlled/operated by
the state? In general, if a public agency intends to purchase bonds issued by a state
authority or department that are not clearly revenue bonds, an agency should con-
sult counsel on the permissibility of such an investment.
II. K What are the rules regarding the use of reverse
repurchase agreements and securities lending agreements?
Are shorting strategies allowed? [Section 53601(j)]
The intent of Section 53601(j) is to limit the imprudent use of reverse repurchase
agreements (reverse repos) and securities lending agreements. In 1995, the Leg-
islature, concerned about the use of reverse repurchase agreements for enhancing
yield, imposed a number of restrictions on local governments.
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23LOCAL AGENCY INVESTMENT GUIDELINES
Section 53601(j) also applies the above restrictions to securities lending agreements
with the exception that a local agency portfolio may not hold more than 20 percent
of its base value in reverse repos and securities lending agreements combined.
Section 53601(j)(5) provides specific definitions for repurchase agreements, re-
verse repurchase agreements, and securities lending agreements. Agreements not
meeting these specific definitions are therefore not authorized.
CONSENSUS RECOMMENDATION:
Both reverse repurchase agreements and securities lending agreements may be
used to take advantage of certain short-term opportunities to improve yield and
mitigate cash flow shortages. They should be entered into only when there is a
clear understanding by both the legislative body and treasurer of the risks inher-
ent in these types of agreements. The agency’s staff must have sufficient expertise
in the arrangement and management of these transactions.6
Although reverse repurchase agreements and securities lending agreements can
be an effective short-term portfolio management tool in certain circumstances,
they should not be confused with "short selling" or "margin selling." Reverse
repurchase agreements are used to address cash flow concerns by entering into an
agreement in which a counterparty will buy securities from a local agency. At the
end of the agreement, the counterparty that purchased the securities will resell
the securities to the local agency at a specified date and price. With a securities
lending agreement, securities owned by the local agency are loaned to a bor-
rower who provides an agreed-upon return and collateral to the local agency. At
the conclusion of the agreement, the loaned securities are returned to the local
agency and the collateral is returned to the borrower.
"Short selling" or "margin selling" is a practice where a margin account is estab-
lished with delivery versus payment (DVP) settlement and securities are loaned
by a broker/dealer to the local agency. The loaned securities may be immediately
• Reverse repos cannot constitute
more than 20 percent of the “market
value” of an agency’s portfolio;5
• Reverse repos are limited to 92 days
unless the minimum spread between
the rate on investment and cost of
funds is guaranteed in writing; and
• Securities used to make reverse
repos must be held for a minimum
of 30 days prior to the transaction.
5 For reverse repos purchased under Section 53601, the calculation is based upon the “base value” of the
agency’s portfolio, which is defined as the dollar amount obtained by totaling all cash balances in the portfo-
lio from all sources, excluding any amounts from reverse repos or similar borrowing methods.
6 Please see CDIAC Issue Brief, Securities Lending Agreements, for a detailed discussion of these types of
transactions.
MINIMUM LEGAL REQUIREMENTS:
Section 53601(j) imposes the following restrictions on reverse repos:
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24LOCAL AGENCY INVESTMENT GUIDELINES
II. L What are the rules regarding the use
of mutual funds and money market funds?
[Sections 53601(l) And 53601.6(b)]
7 Mutual fund as defined in Government Code Section 53601(1)(1).
8 Nationally Recognized Statistical Rating Organization.
Local agencies have the authority to invest in shares of mutual funds as described
in Section 53601 (l) and 53601.6 (b) and in money market mutual funds as
specified in the federal Investment Company Act of 1940. The permissible in-
vestments and strategies of the mutual fund or money market fund should be
reviewed to determine whether or not they adhere to the parameters contained
in both federal and state law.
MINIMUM LEGAL REQUIREMENT:
Local agencies can invest in shares of mutual funds that invest in the securities
and obligations as authorized by subdivisions (a) to (k), inclusive, and subdivi-
sions (m) to (q), inclusive, of Section 53601 and that comply with the invest-
ment restrictions of Section 53630. Local agencies can also invest in shares of
mutual funds that are defined as money market mutual funds that follow regu-
lations specified by the SEC under the Investment Company Act of 1940 (15
U.S.C. Sec. 80a-1, et seq.). The purchase price of shares shall not include any
commission that the fund manager may charge and shall not exceed 20 percent
of the agency’s funds that may be invested pursuant to this Section 53601.
In addition, no more than 10 percent of the agency’s funds may be invested in
shares of any single mutual fund.7 Both mutual and money market mutual funds
require that they have attained the highest ranking or the highest letter and nu-
merical rating provided by not less than two NRSROs.8 In addition they have
retained an investment advisor registered or exempt from registration with the
SEC with not less than five years’ experience managing their specific category of
fund and have assets under management in excess of $500,000,000.
CONSENSUS RECOMMENDATION:
The investment policy should specify criteria for selection of both mutual
funds and money market funds by the investment official. Local agencies
sold with the intent of purchasing the securities back when market prices are
lower to close out the margin position, thus profiting on the decline in value of
the securities. Shorting strategies carry a high degree of risk of not only a zero re-
turn, but significant loss of asset value. They do not meet the risk-limiting intent
of the legislature in the adoption of 53601(j), and are not considered a prudent
investment for the public portfolio.
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25LOCAL AGENCY INVESTMENT GUIDELINES
II. M What are the rules affecting the investment of
tax and revenue anticipation note (TRAN) and
grant anticipation note (GAN) proceeds?
[Sections 53821.5, 53841.5, 53852.5 and 53859.02(b)]
Existing statutes prevent agencies from using the proceeds of their temporary
borrowing, specifically TRANs and GANs, to purchase long-term securities in
order to achieve higher investment yields in a manner which could limit liquid-
ity needed to ensure sufficient cash to repay the temporary borrowing when due.
MINIMUM LEGAL REQUIREMENT:
Government Code Sections 53821.5, 53841.5, 53852.5 and 53859.02(b) pro-
hibit the investment of the proceeds of temporary borrowing in securities that have
terms exceeding those of the temporary borrowing itself. In other words, proceeds
from a temporary borrowing due June 20 may not be invested in securities that
CONDITIONS ALLOWING FOR INVESTMENT
MONEY
MARKET
FUNDS
MUTUAL
FUNDS
I. Must receive the highest ranking or the highest letter and
numerical rating by no less than two nationally recognized rating
services;
—or—
Must retain an investment advisor who is registered or exempt
from registration with the SEC and has at least five years'
experience investing in specified securities and managing
assets in excess of $500 million.A
II. Must abide by the same investment restrictions and
regulations that apply to public agencies in California [Section
53601(a-k, m-o)].
III. Must follow regulations specified by the SEC under the
investment company act of 1940 (15 U.S.C. Section 80a-1,
et seq.).
FIGURE 2
GOVERNMENT CODE REQUIREMENTS FOR LOCAL AGENCY
INVESTMENT IN MONEY MARKET AND MUTUAL FUNDS
A The requirement for mutual funds is an investment advisor with experience investing in securities and
obligations authorized in Sections 53601 and 53635. For money market funds, the advisor must have
experience in managing the types of investments that can be purchased by money market funds as
specified in SEC Regulation 2a-7.
should review the permissible investments and strategies of the mutual fund
or money market fund to determine whether or not they adhere to both
federal and state law.
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26LOCAL AGENCY INVESTMENT GUIDELINES
Sections 53601 and 53608 address the appropriate safekeeping arrangements
for securities. While a third party institution is the standard used in safekeeping
arrangements, securities may be held by the same firm from which they were
purchased as long as the securities for safekeeping are in the name of or under
the control of the local agency and kept in a legally separate trust department.
MINIMUM LEGAL REQUIREMENT:
Section 53601 specifically allows local agencies to use a counterparty bank’s trust
department or separate safekeeping department for the physical delivery of a security
if the security is held in the name of the local agency. Section 53608 authorizes
general safekeeping arrangements that allows local agencies to use for deposit for
safekeeping a federal or state association (as defined by Section 5102 of the Financial
Code), a trust company or a state or national bank located within this state or with
the Federal Reserve Bank of San Francisco or any branch thereof within this state,
or with any Federal Reserve bank or with any state or national bank located in any
city designated as a reserve city by the Board of Governors of the Federal Reserve
System, the bonds, notes, bills, debentures, obligations, certificates of indebtedness,
warrants, or other evidences of indebtedness in which the money of the local agency
is invested pursuant to this article or pursuant to other legislative authority. The local
agency shall take from such financial institution a receipt for securities so deposited.
CONSENSUS RECOMMENDATION:
Industry standard is to set up a third-party (an institution other than the party
that sold the agency the investment) safekeeping agreement. In order for the
securities to be held by the same institution that sold the security, they must be
II. N What is an appropriate safekeeping arrangement
for securities? [Sections 53601 and 53608]
mature after June 20. The minimum legal requirements are clear for securities that
have an identifiable term to maturity. However, the law is ambiguous when an
agency invests the proceeds of temporary borrowing in items that do not have a
specific maturity date, such as investments in county pools or other funds that may
have an average maturity that is longer than the temporary borrowing.
CONSENSUS RECOMMENDATION:
The proceeds of temporary borrowing can be placed in investments that have
no specific term to maturity so long as the proceeds can be removed within the
term of the temporary borrowing without a penalty. Therefore, cash equivalent
shares in liquid funds such as LAIF or county pools—where an agency has rela-
tively quick access to its deposits—are legitimate investments for the proceeds of
temporary borrowing, as long as withdrawals in amounts sufficient to repay the
temporary borrowing when due are not restricted or penalized.
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27LOCAL AGENCY INVESTMENT GUIDELINES
II. O How does the Municipal Advisor (MA) Rule affect
a local agency’s relationship with an investment
advisor? [Section 53600.3]
The MA Rule states that broker-dealers providing advice to government clients on
the investment of bond proceeds have a fiduciary duty to their clients and must be
registered as a municipal advisor. In order to avoid becoming a fiduciary to mu-
nicipal issuers, many broker-dealers, who have a significant municipal underwrit-
ing business, have adopted policies prohibiting brokers from providing investment
advice. The MA Rule provides specific exemptions to public agencies seeking to
receive investment advice from broker-dealers, including receiving advice through
a request for proposal (RFP) process or by entering into a formal relationship with
another independent registered municipal advisor who provides investment advice.
MINIMUM LEGAL REQUIREMENT:
The MA Rule places no legal obligations on public agencies. The regulations
address only the responsibility of broker-dealers with respect to bond proceeds.
It is important to note that a local agency’s fiduciary responsibilities cannot be
delegated regardless of the fiduciary standards imposed on other members of the
municipal market. Section 53600.3 provides that a finance officer or treasurer
can delegate duties to an external investment manager via a principal-agent rela-
tionship, but they cannot delegate fiduciary responsibility.
CONSENSUS RECOMMENDATION:
Local agencies rely on municipal advisors to help make decisions about issuing
municipal securities and investing bond proceeds. Registered investment advisors
hold a fiduciary responsibility to their clients by virtue of their registration with
the SEC under the Investment Advisor Act of 1940. Nonetheless, the fiduciary
responsibility that ultimately rests with the legislative body and the treasurer can-
not be wholly delegated to an external investment manager.
Under the MA Rule, when an investment adviser consents to act in the capacity of
an Independent Registered Municipal Advisor (IRMA), the local agency is able to
exchange information with broker-dealers that do not have a fiduciary duty to the
agency. When a local agency retains an IRMA, it agrees to consult the IRMA when
considering information provided by broker-dealers. Further, when a local agency
has an IRMA they should communicate that information to the market. Local
agencies should ensure that the professionals they use are registered with the SEC
and MSRB by checking the MSRB’s Municipal Advisor Registration webpage.
kept in a separate area of the institution such as its trust department. The security
must be in the local agency’s name or “perfected” by transferring the security
through a signed agreement that contains a description of the security.
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28LOCAL AGENCY INVESTMENT GUIDELINES
II. P What are the rules regarding the payment of
interest earned on non-general fund deposits to an
agency's general fund? [Section 53647]
II. Q Should local agencies invest in financial futures
and option contracts? If so, in what manner
should they be utilized? [Sections 53601.1]
Many local agencies have the opportunity to earn interest on funds held in gov-
ernmental accounts other than the general fund.
MINIMUM LEGAL REQUIREMENT:
Section 53647 provides that interest earned on a local agency's deposits shall be
paid quarterly to the general fund of the agency unless otherwise directed by law.
Alternatively, if directed by the governing body of the local agency, interest shall
be paid to the fund containing the principle upon which the interest accrued.
CONSENSUS RECOMMENDATION:
Although all interest earned on its deposits should be paid to the agency's general
fund on a quarterly basis, the governing body may direct that the interest be al-
located to the fund in which the interest earning principle was deposited. It is
important to note that other directives provided in law or contract for the payment
of interest to a specific fund (e.g., funds held by a trustee) are overriding exceptions.
In addition to the permitted investments in Section 53601 such as treasuries,
agencies, money markets, medium-term notes, and pooled investments, local
agencies are permitted to invest in financial futures and option contracts in rela-
tion to any of these authorized investments. Local agencies can use a financial
futures contract to potentially hedge risk because the buyer/seller are obligated to
purchase/sell an asset at a predetermined future date and price thereby limiting a
local agency's exposure to price fluctuations.9 Financial options contracts, which
allows the buyer to buy or sell an obligation at a specified price for a specified
time, are more risky and usually expire with a zero value.10
MINIMUM LEGAL REQUIREMENT:
Section 53601.1 states that the authority of a local agency to invest funds pur-
suant to Section 53601 includes, in addition thereto, authority to invest in fi-
9 Nicole Sargent. How are Futures Used to Hedge a Position? Investopedia (January 29, 2018). Accessed
December 2019.
10 Beth Gaston Moon. Understanding Options Risk. InvestorPlace (April 12, 2012). Accessed December 2019.
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29LOCAL AGENCY INVESTMENT GUIDELINES
II. R How long should a local agency
retain trade ticket information?
Pursuant to SEC’s Rules 17a-3 and 17a-4 detailing the record-keeping require-
ments for broker-dealers, trade blotters or records of sales and purchases are re-
quired to be retained for six years. Trade confirmations, on the other hand, are
required to be kept for three years. Given that there is no specific state require-
ment requiring a period of time that trade ticket information should be retained,
local agencies may consider adopting such guidelines.
MINIMUM LEGAL REQUIREMENT:
There are no existing legal requirements pertaining to the retention of trade tickets.
CONSENSUS RECOMMENDATION:
Trade ticket information includes the price, yield, Committee on Uniform
Securities Identification Procedures (CUSIP) reference number of the se-
curity as well as net money including principal, accrued interest, and total
money. It also identifies the broker-dealer with whom the trade was done. It
is important to retain trade ticket information for several reasons, most im-
portantly for compliance and audit reasons. In addition, if there are any ques-
nancial futures or financial option contracts in any of the investment categories
enumerated in that section.
CONSENSUS RECOMMENDATION:
Although the language in Section 53601.1 is very broad in its application to
execute option and futures contracts on any investment categories enumerated in
Section 53601, extreme care should be taken when using these strategies. Option
and futures strategies are complicated and should only be used to hedge matched
positions in securities currently held in the portfolio as a means to limit the risk
of adverse price movements of a given security. Option and futures contracts
should not be utilized in the public portfolio as a high-yield strategy.
An imprudent high-yield options and future strategy involves taking “naked”
positions. “Naked” positions are those option and futures contract strategies
placed on securities that are not covered by matched positions held in the
portfolio. A “naked” position will require acquisition of securities in the
marketplace at the prevailing market price in order to close out the position,
which could result in unlimited risk and large asset losses. A high-risk, high-
yield option and futures strategy is not consistent with the prudent investor
standards established in Section 53600.3 and safety-liquidity-yield objectives
established under Section 53600.5.
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30LOCAL AGENCY INVESTMENT GUIDELINES
tions regarding a particular trade, it would be beneficial to have documenta-
tion. To be prudent, trade tickets should be kept for at least six years. Local
agencies should consider adopting their own agency guidelines for retention
of financial records, including trade ticket information.
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31LOCAL AGENCY INVESTMENT GUIDELINES
Chapter III. Reporting Requirements
Reporting requirements and recommendations are imposed on local agencies in
Sections 53646 and 53607.
Section 53646 states that the treasurer or chief fiscal officer of a local agency
may file reports on the status of their investment portfolios with their respec-
tive legislative body, internal auditor, and chief executive officer. These reports
generally are intended to provide the legislative body the ability to meet its
fiduciary obligations as a trustee and to increase the disclosure of the agency’s
investment activities to those outside the agency. Section 53646 states that if
the quarterly investment portfolio report is submitted, it must contain, among
other things, a listing of investments, fund balances, activity, and return on
investments made by the local agency. Quarterly reports should reflect the cur-
rent positions and past performance of a portfolio of investments for the period
of time under consideration.
Section 53646(e) states that for local agency funds that have been placed in a
county investment pool, LAIF, FDIC-insured bank deposits, National Credit
Union Shared Insurance Fund-insured accounts in a credit union, accounts
insured or guaranteed pursuant to California Financial Code Section 14858, or
some combination of the above, the treasurer may substitute the most recent
account statement received from those entities in lieu of the information on these
investments that is otherwise required by this section. Section 53646(f) states
that securities, investments, or monies held by a school district or county office of
education in individual accounts that are less than twenty-five thousand dollars
($25,000) may be excluded from the report.
Local agency treasurers to whom the authority to invest or reinvest funds or to
sell or exchange securities has been delegated by the legislative body of a local
agency are required by Section 53607 to submit a monthly report of transactions
to the legislative body.
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32LOCAL AGENCY INVESTMENT GUIDELINES
III. A What specific information regarding portfolio investments
needs to be included in the report to the legislative
body? [Section 53646(b)(1-4) and 53607]
Section 53646 specifically encourages treasurers to prepare the quarterly invest-
ment report to enable the legislative body to perform its fiduciary duty and pro-
vide full disclosure of the public entity's investment activities.
MINIMUM LEGAL REQUIREMENTS:
If the treasurer or chief fiscal officer of a local agency elects to submit or if the
legislative body mandates the submission of a quarterly investment report to the
legislative body pursuant to Section 53646, it must do so within 30 days after the
end of the quarter and include the following information:
11 Refer to CDIAC publication "California Public Fund Investment Primer" for definitions of
investment types.
12 “Dollar amount invested” is defined as cost, however, best practice uses amortized cost or book value. Confu-
sion exists as to the meaning of the words “held by the local agency” found in Government Code Section
53646(b)(1). Several standards have been suggested to clarify this phrase, including “ownership,” “control,”
“under direct management by,” “possession,” and “accountability for the funds.” Each of these suggestions would
lead to different determinations as to the specific funds required to be reported. The apparent intent of the
Legislature in enacting this requirement was to provide for comprehensive disclosure of local agency investments.
• Type of investment (i.e. U.S.
Treasury security, commercial
paper);11
• Issuer name;
• Date of maturity;
• Par amount;
• Dollar amount invested in all secu-
rities, and investments and monies
held by the local agency;12
• A description of the funds, invest-
ments, and programs (including
lending programs) managed by
contracted parties (i.e. LAIF, invest-
ment pools, outside money manag-
ers, and securities lending agents);
• Current market value as of the
date of the report of all funds
held by the local agency and un-
der the management of any out-
side party that is not also a local
agency or LAIF and the source of
the valuation;
• A statement of compliance with
the investment policy or an expla-
nation for non-compliance; and
• A statement of the local agency’s
ability to meet its pool’s expendi-
ture requirements for the next six
months, as well as an explanation
of why sufficient money will not
be available if that is the case.
The legislative body of the local agency may elect to require this report on a
monthly basis. Furthermore, the legislative body may require the treasurer to
provide additional information beyond that listed above.
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33LOCAL AGENCY INVESTMENT GUIDELINES
1. A listing of individual securities held
at the end of the reporting period
by authorized investment category.
2. Average life and final maturity of all
investments listed.
3. Coupon, discount or earnings rate.
4. Par value, amortized book value and
market value.
5. Percentage of the portfolio
represented by each
investment category.
6. A description of the funds,
investments, and programs
(including lending programs)
managed by contracted parties (i.e.
LAIF, investment pools, outside
money managers, and securities
lending agents).
7. A statement of compliance with the
investment policy or an explanation
for non-compliance.
8. A statement of the local agency’s
ability to meet its pool’s expenditure
requirements for the next six
months, as well as an explanation
of why sufficient money will not be
available if that is the case.
Local agency funds that have been placed in a county investment pool, LAIF,
FDIC insured bank deposits, National Credit Union Shared Insurance Fund-
insured accounts in a credit union, accounts insured or guaranteed pursuant to
California Financial Code Section 14858, or some combination of the above,
may substitute the most recent account statement received from those entities in
lieu of the information recommended above.
In addition to the reporting requirement set forth by Section 53646, a local
agency treasurer who has been delegated authority to invest or reinvest funds
of the local agency by the legislative body under Section 53607 must submit a
report to the legislative body accounting for transactions made during the month.
This reporting requirement is separate and distinct from the quarterly report
submitted under Section 53646. If the legislative body has delegated authority to
the treasurer and has elected to require the quarterly report under Section 53646
If the local agency’s legislative body delegates, to the local agency’s treasurer, its
authority to invest or reinvest the agency’s funds or sell or exchange the agency’s
securities, the treasurer shall make a monthly report of those transactions to the
legislative body, pursuant to Section 53607. The delegation of authority may be
made for a period of one year. The requirement to submit the transaction report
lasts until the authority is revoked or expires. In contrast to the specific information
required in the quarterly report under Section 53646(b), the contents of the
monthly report of transactions required under Section 53607 are not enumerated.
CONSENSUS RECOMMENDATION:
Based upon the public benefits achieved by reporting, it is recommended that the
treasurer or designated official provide the local agency’s legislative body a quarterly
investment report that provides a clear picture of the status of the current investment
portfolio. The quarterly investment report should include the following:
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34LOCAL AGENCY INVESTMENT GUIDELINES
III. B Should the report include market value measures
for individual securities? [Section 53646(b)(1)]
The market value of each security in a portfolio must be computed before deter-
mining the portfolio’s overall market value.
MINIMUM LEGAL REQUIREMENT:
Section 53646(b)(1) states: “With respect to all securities held by the local agen-
cy, and under management of any outside party that is not also a local agency or
the LAIF, the report shall also include a current market value as of the date of the
report, and shall include the source of this same valuation.”
CONSENSUS RECOMMENDATION:
The law is not clear whether “all” securities implies the market value of the over-
all portfolio or each security. The level of detail to be presented in the report
depends on the portfolio activity and the audience. The report for internal trea-
sury staff and the oversight committee should list the individual market value
for each security. This approach gives a more complete picture of the health of
a portfolio and brings individual investment performance to the attention of
those responsible for compliance oversight. For the legislative body, the report
should be a summary with aggregate market value listed and include a footnote
stating that data on particular investments is available upon request.
HOW SHOULD THE MARKET VALUE OF
THE PORTFOLIO BE DETERMINED?
In establishing market value of the portfolio as required by Section 53646(b)(1),
the GFOA recommends that local entities obtain independent third party assess-
ment of investments and risk from a reputable source.
The most common approach is to request pricing information from the agency’s
safekeeping service, custodial service, or trustee. Agencies may need to contract
with pricing service companies for more complex securities. These companies
specialize in giving the current market price for a broad range of securities.
An alternative way to determine the value of securities in a portfolio is to perform
an in-house analysis by collecting information from different sources such as
dealer quotes, online computer information, and certain publications that provide
on a monthly basis, it may be very practical and efficient to merge the elements of
the quarterly report with the month’s transactions and provide a combined report
on a monthly basis. While the elements of each reporting requirement may be
different they may be combined in one report.
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35LOCAL AGENCY INVESTMENT GUIDELINES
price estimates. These sources may not be as up-to-date or accurate as a pricing
service, but they offer a relatively inexpensive method to make price estimates.
Finally, to assess the value of securities where specific prices are not available, a
treasurer can either tie the spread of a recent investment to a benchmark security
that is easy to value or use a matrix pricing formula. A matrix pricing formula
displays the prices of a variety of different securities which are then used as a
basis for approximating the value of the security in question. These formulas are
particularly useful for short-term securities that mature between 90 and 180 days.
MINIMUM LEGAL REQUIREMENT:
Section 53646(b)(1) provides that the agency shall include the current market
value as of the reporting period date and the source of the valuation.
CONSENSUS RECOMMENDATION:
To provide the most unbiased method of reporting current market values, the
local agency should obtain an independent valuation of the portfolio from
a reputable source, such as, a broker or other financial institution, custodial
bank, available publications or other pricing services. The independent sources
should not be a party to the transaction. For example, the broker that sold the
security should not be used to provide the valuation. The agency should use
the best sources of market price information available. Prices for securities are
estimates that carry a certain degree of error regardless of the approach used
and will fluctuate over time due to market conditions. It is imperative that lo-
cal officials pay extra attention to estimates on complex, infrequently traded, or
highly customized securities.
HOW FREQUENTLY SHOULD MARKET VALUE BE CHECKED?
MINIMUM LEGAL REQUIREMENT:
None. Government Code does not specify frequency of market valuation.
CONSENSUS RECOMMENDATION:
Frequency of market valuation will be dependent on the complexity of the se-
curities in the portfolio and the frequency of trading. For infrequent or passive
investors, market value should be “marked-to-market” quarterly at a minimum.
For a more active portfolio, the industry standard is monthly.
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36LOCAL AGENCY INVESTMENT GUIDELINES
III. C Should an analysis of cash flows be prepared by the
local agency in order to validate the six-month
liquidity certification? [Section 53646]
A public agency is required to include a statement indicating that the projected
cash flow is adequate to meet expected obligations over the next six months or
provide an explanation as to why sufficient money may or may not be available.
MINIMUM LEGAL REQUIREMENT:
Section 53646(b)(3) addresses the requirement for the local agency to include a
statement denoting the ability of the local agency to meet its pool’s expenditure
requirements for the next six months or provide an explanation as to why suf-
ficient money may or may not be available. There are no other requirements for
identifying cash flows and setting liquidity targets at the local agency.
Section 53646(c) requires the treasurer or chief fiscal officer to report whatever addi-
tional information or data may be required by the legislative body of the local agency.
CONSENSUS RECOMMENDATION:
An analysis of cash flows is not required. However, the treasurer should be
prepared to discuss cash flow projections and methodology at the request of
legislative or oversight bodies. This analysis may list basic projections—based
on historical data, market sensitivity or other relevant information—that sup-
port the cash flow liquidity statement. There are no guarantees when it comes
to predicting future obligations. A sound justification for the expenditure state-
ment gives the finance officer added protection against decisions that originally
looked good but turned out poorly because of unforeseen circumstances.
The nature of the analysis will vary greatly depending on the size, sophistication,
and complexity of the local agency staff and portfolio. Best practices dictate that
cash flow statements should be prepared on a regular basis. However, in some agen-
cies it may not be practicable or necessary, for instance, for LAIF-only participants.
An analysis of cash flows is the precursor to portfolio management and should be
prepared and updated, as needed, at least for internal investment staff use.
Those who manage investment pools need to pay close attention to the needs
and accuracy of the requests of participants to ensure accurate cash flow projec-
tions. Incomplete information about a pool’s investors not only compromises the
legitimacy of the six-month cash flow statement, but also adds substantially to
the liquidity risk of the pool.
In the case of investment pools, all participants’ cash flow needs must be taken
into account in preparing the six month cash flow statement. The pool admin-
istrator or manager should keep close tabs on mandatory and voluntary pool
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37LOCAL AGENCY INVESTMENT GUIDELINES
III. D What tools can be used to measure interest rate risk?
Interest rate risk, also known as market risk, is the risk that a security’s value or
price will decline as interest rates rise in the general market. Weighted average
maturity (WAM ) and duration are commonly used measures of interest rate risk.
WAM measures the portfolio’s “average life.” Duration considers all of the cash
flow receipts not just the last cash flow as in WAM and provides an approximate
percentage change in the value of a security or portfolio for a given change in
interest rates.13 Some local agencies have inquired whether they should include
this information in their report.
MINIMUM LEGAL REQUIREMENT:
Existing statutes do not require local agencies to report an interest rate risk mea-
sure in their portfolios. Section 16480.7 requires the State Treasurer to submit a
quarterly report to the Pooled Money Investment Board that includes the weighted
average maturity of the investments in the Pooled Money Investment Account.
CONSENSUS RECOMMENDATION:
Local agencies should consider including the WAM or duration measurement
in the report. The type of duration measure (e.g. modified and/or effective dura-
tion) used will depend on the type of investments being analyzed and the capac-
ity of the agency to perform or source the calculations. While duration will pres-
ent greater precision than WAM in the measurement of interest rate risk, given
the need for specialized software to perform calculations or an external source for
duration information, an agency may find greater utility in the easier to calcu-
late WAM. The decision on which metric to use will be based on the needs and
resources of the local agency.
Local agencies also should consider whether their investment policies should
provide guidance on acceptable ranges or limits for the respective measure used.
These figures trigger a number of valuable considerations about the status of the
portfolio for both internal and external purposes including liquidity, cash flow,
and average maturity (for example, WAM). WAM is a relatively simple calcula-
participants’ cash flows needs and establish clear criteria for the deposit and with-
drawal of their funds. Also, the pool administrator or manager should obtain
expected deposit/disbursement information from pool participants at the time
of major fund deposits or updates of cash flow projections.
13 For further information regarding duration, please see CDIAC’s publications California Public Fund
Investment Primer and Duration Basics.
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38LOCAL AGENCY INVESTMENT GUIDELINES
PAR
VALUE
SECURITY
DESCRIPTION
DAYS TO
MATURITY
BOOK
VALUE
DAYS BY
BOOK VALUE
$1,350,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
Repurchase Agreements
Local Agency Inv. Fund
Fed Natl. Mtg. Assn.
Fed Home Loan Bank
U.S. Treasury Note
Fed Natl. Mtg. Assn.
Fed Farm Credit Bank
1
1
185
550
720
822
910
$1,350,000
5,000,000
4,886,108
5,000,000
4,985,156
5,000,000
4,988,941
1,350,000
5,000,000
903,930,041
2,750,000,000
3,589,312,500
4,110,000,000
4,539,936,255
TOTAL $31,210,206 15,899,528,796
FIGURE 3
CALCULATION OF WEIGHTED AVERAGE MATURITY
Duration is a more complex computation and requires the proper software to
perform the specific calculations for each security and then for the entire portfo-
lio. Three types of duration are commonly used.
MACAULAY DURATION. The simplest method of calculating duration which
measures the number of years required to recover the true cost of a security and
is the only type of duration measurement quoted in “years.”
MODIFIED DURATION. Builds upon Macaulay duration to measure the price
sensitivity of an investment to interest rate changes and assumes the cash flows
of an investment do not change as interest rates change. Modified duration is
quoted as a percentage of value change as interest rates change. Figure 4 is an
example of a basic modified duration application.
EFFECTIVE DURATION. Further refines modified duration using an iterative estima-
tion process and is typically used with floating rate, asset-backed, and pass-through
securities and more generally, with securities that have call option features. Effective
duration takes into account embedded options of a security (e.g., call features or
sinking fund schedule) and adjusts the price of the investment to reflect changes in
the value of those embedded options. Thus, effective duration requires simulations
of many possible interest rate scenarios to calculate the duration to call and provides
a wider assessment of risk for a portfolio containing more than fixed rate securities.
Due to the complexity of calculating effective duration, no example appears below.
tion which may be determined by dividing the sum of the days to maturity mul-
tiplied by the book value for each security by the total book value of the portfolio.
Figure 3 shows an example of how WAM is calculated:
WAM =
∑ Days to Maturity Multiplied
by Book Value of Each Investment =15,899,528,796 =
509 Days
or 1.42
YearsTotal Book Value $31,210,206
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39LOCAL AGENCY INVESTMENT GUIDELINES
PORTFOLIO MODIFIED DURATION
1.2 2.7 5.0 6.0
RATE CHANGE.25%
.50%
1.50%
2.00%
5.00%
$300,000
600,000
1,800,000
2,400,000
6,000,000
$675,000
1,350,000
4,050,000
5,400,000
13,500,000
$1,250,000
2,500,000
7,500,000
10,000,000
25,000,000
$1,500,000
3,000,000
9,000,000
12,000,000
30,000,000
FIGURE 4
DURATION—GAIN/LOSS OF MARKET VALUE MATRIX
FOR A $100,000,000 PORTFOLIO
Modified duration measures the approximate change in the market value of
assets as a result of a change in market interest rates. Thus, for a portfolio
with a market value of $100,000,000 and a duration of 1.2, as interest rates
increase by 1.5 percent, the portfolio’s market value would be expected to
decrease by $1,800,000. Specifically:
$100,000,000 x 1.2 x 0.015 =$1,800,000
portfolio size duration interest rate increase portfolio market
value decrease
$100,000,000 x 1.2 x 0.02 =$2,400,000
portfolio size duration interest rate increase portfolio market
value increase
Conversely, for the same portfolio, if interest rates were to decrease by 2 percent,
the portfolio’s market value increases by approximately $2,400,000. Specifically:
Securities or portfolios with higher duration carry more interest rate risk and
have higher price volatility (i.e., sensitivity of the security’s price to changes in
market interest rates) than those with lower durations. For example, if the same
$100,000,000 portfolio had a duration of 2.7, a 1.5 percent increase in market
interest rates will produce a greater change in the portfolio’s market value:
For a 2 percent decrease in interest rates:
$100,000,000 x 2.7 x 0.015 =$4,050,000
portfolio size duration interest rate increase portfolio market
value decrease
$100,000,000 x 2.7 x 0.02 =$5,400,000
portfolio size duration interest rate increase portfolio market
value decrease
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40LOCAL AGENCY INVESTMENT GUIDELINES
III. F How should agencies address difficulties in meeting the
30-day requirement for submitting quarterly investment
reports to the legislative body? [Section 53646(b)]
It can be difficult for an agency to collect all the appropriate information for the
report, have an oversight committee (if a jurisdiction has one) review or approve
it, and present it to the legislative body within 30 days of the quarter’s end. Vari-
ous factors such as the length and diversity of the portfolio, size of staff, and type
and availability of computer software can influence the amount of time it takes
to compile a report.
MINIMUM LEGAL REQUIREMENT:
Section 53646(b) requires that if the quarterly investment report is submitted to
the legislative body, it may be rendered within 30 days of the end of the quarter.
III. E What action should the legislative body take
with the report? [Section 53646]
Section 53646(b) states that the “treasurer or chief fiscal officer may render a
quarterly report to the chief executive officer, internal auditor, and the legisla-
tive body” within 30 days of the quarter’s end. Questions arise as to whether
the legislative body needs to discuss and approve the report during a regular
meeting, have it placed on the consent calendar, or only receive a copy.
MINIMUM LEGAL REQUIREMENT
Section 53646(b) only states that the report may be rendered to the legislative
body. It does not require the legislative body to take action on this report.
CONSENSUS RECOMMENDATION
If presented to the legislative body of the local agency, it should discuss the report
as necessary and take action on the report in public session. The report could be
listed as a consent calendar item or as a non-consent calendar item, depending on
the preferences of the legislative body. Possible actions of the governing body on
the report could include: receiving and filing the report, approving or disapprov-
ing the report (with or without amendments), or asking staff for further informa-
tion/clarification. In addition, if presented to an investment oversight body, the
oversight body should discuss the reports at their own meetings.
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41LOCAL AGENCY INVESTMENT GUIDELINES
CONSENSUS RECOMMENDATION:
A report, as complete as possible, should be submitted within the allotted 30
days. If current values for certain investments are not available within the time
frame to complete the report in a timely fashion, submit the report on time and
indicate in the report the most recent valuation and its date and then submit
updated values to the legislative body at the soonest possible date thereafter. It
should be available for individual legislative body members to review within 30
days of quarter end. This may include providing a copy to each member, includ-
ing it in agenda materials for a public meeting, or actually presenting the report
at a public meeting of the legislative body.
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42LOCAL AGENCY INVESTMENT GUIDELINES
Chapter IV. Treasury
Oversight Committees
Section 27131 and 27132 through 27132.4 consider the formation, compo-
sition, and role of a county treasury oversight committee. These code sections
provide that the function of the treasury oversight committee is to monitor and
review the county investment policy by conducting or causing an annual audit
and discussing its findings at a public meeting. The rationale behind the creation
of an oversight committee is to give local agencies and private sector citizens a say
in the policies governing the investment pool.
IV. A What options are available for structuring the county
treasury oversight committee? [Sections 27131 and
27132 through 27132.4]
The statutes governing the structure of county treasury oversight committees are
meant to bring together a representative and knowledgeable committee while
limiting conflicts of interest with the treasurer and the treasury functions sub-
ject to oversight. However the composition is subject to specific requirements
that can make it difficult for local agencies to recruit and staff a committee.
Specifically, the statutes prohibit individuals from employment with or securing
employment within one year of serving on a county treasury oversight commit-
tee with underwriting, bond counsel or broker-dealer firms doing business with
the county treasurer. Committee members are also prohibited from making in-
dividual political contributions to, or being employed by an entity that makes
political contributions to, or from doing any fund raising on behalf of any can-
didate for office of the governing board of any agency that deposits funds in the
county treasury in the previous three years.
MINIMUM REQUIREMENT:
Section 27131(a) states that the board of supervisors in any county that invests
surplus money may establish a treasury oversight committee. If established, the
committee must consist of three to eleven members, the exact number deter-
mined by the board of supervisors in consultation with the county treasurer.
Members must be appointed from the following categories:
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43LOCAL AGENCY INVESTMENT GUIDELINES
• Be employed by an entity that
has contributed to the campaign
of a candidate for the office of
local treasurer;
• Be employed by an entity that has
contributed to the campaign of a
candidate for membership on a
legislative body of any local agency
that has deposited funds in the
county treasury in the previous
three years or during the period
the employed person is a member
of the committee;
• Directly or indirectly raise money
for a candidate for local treasurer
or a member of the governing
board of any local agency that
has deposited funds in the county
treasury while a member of the
committee; and
• Secure employment with, or be
employed by, bond underwriters,
bond counsel, security brokerages
or dealers, or financial services
firms, with whom the treasurer is
doing business during the period
that the person is a member of the
committee or for one year after
leaving the committee.
CONSENSUS RECOMMENDATION:
County legislative bodies should decide if an oversight committee is necessary
and if they should have private sector individuals from the restricted firm types
serve on the committee. If so, the county may choose one of three options to
compose the committee (Figure 5).
If the committee is composed of public and private sector members (Option 1),
the members, for their term of service and one year following, cannot work for
firms doing business with the treasurer. As a way to obtain the participation of
private sector professions employed by firms doing business with the treasurer, a
county may create an advisory board of the county treasury oversight commit-
tee (Option 2). However, a county that chooses Option 2 and forms an advi-
1. County treasurer.
2. County auditor, auditor-con-
troller, or finance director as
the case may be.
3. A representative appointed by
the board of supervisors.
4. A representative selected by a
majority of the presiding officers
of the governing bodies of the
school districts and community
college districts in the county.
5. County superintendent of
schools or their designee.
6. A representative selected by a
majority of the presiding of-
ficers of the legislative bodies of
the special districts that are re-
quired or authorized to deposit
funds in the county treasury.
A majority of the public members of the committee shall have expertise in or
an academic background in public finance. The other public members shall
be economically diverse and bipartisan in political registration. Committee
members cannot:
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44LOCAL AGENCY INVESTMENT GUIDELINES
VARIOUS OPTIONS AVAILABLE TO LOCAL GOVERNMENTS
1. A committee of both public and private sector members.
2. A committee of public sector officials that has an advisory
board made up of private sector professionals and citizens.
3. A committee that only consists of individuals who work
for agencies that have funds invested in the pool.
FIGURE 5
APPROACHES TO ESTABLISHING THE COUNTY
TREASURY OVERSIGHT COMMITTEE
IV. B Does the appointment of the treasurer to the county treasury
oversight committee create a conflict of interest?
[Sections 27131 and 27132]
Since the oversight committee’s central task is to oversee the treasurer’s policies,
some believe that allowing the treasurer to sit on the oversight committee rep-
resents a conflict of interest. Others claim that a treasurer who donates money
to their own campaign cannot be on the county treasury oversight committee
because the law bars those who contribute to the campaign of someone run-
ning for treasurer while serving on the committee from participation.
MINIMUM LEGAL REQUIREMENT:
None. Sections 27131 and 27132 do not specify whether or not the county treasurer
should be a member of the oversight committee. Section 27132 specifically lists the
county treasurer as a potential member of the county treasury oversight committee.
CONSENSUS RECOMMENDATION:
The question of whether or not a county treasurer should sit on the treasury
oversight committee must be made by the county board of supervisors and the
treasurer. Their answer should consider the advantages and disadvantages of
having someone with the treasurer’s influence and expertise sit on the commit-
tee and the future employment implications to the treasurer since any person
who serves on a county treasury oversight committee is prohibited from seeking
employment with the financial services industry for one year after leaving the
sory board whose membership criteria is less stringent than the criteria used to
compose an oversight committee is advised to consult legal counsel. Finally, the
county may establish an oversight committee composed exclusively of individu-
als unaffiliated with private sector firms doing business with the treasurer. The
easiest way to do so is to draw members of the committee from the public agen-
cies investing funds with the county treasurer (Option 3).
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45LOCAL AGENCY INVESTMENT GUIDELINES
IV. C What is the role of the county treasury oversight
committee? [Sections 27134 and 27137]
MINIMUM LEGAL REQUIREMENT:
Sections 27134 and 27137 limit the oversight committee’s functions to monitor-
ing and reviewing the county treasury’s compliance with the investment policy and
reporting provisions of the Government Code through an annual audit.
CONSENSUS RECOMMENDATION:
The statutes address concerns that individuals serving on the treasury oversight
committees may try to micro-manage decisions that should be left to the treasurer.
Considerations by the committee regarding the risk and structure of a portfolio
are permitted in the law, however, any attempts to direct individual investment
decisions, select individual investment advisors, brokers, or dealers, or impinge on
the day-to-day operations of the county treasurer are discouraged. The local agency
should clearly stipulate that the responsibilities of the treasury oversight committee
are to focus on investment policy issues and to audit the portfolio for compliance
with the policy.
committee. It should not in any way hinge on whether a treasurer donated mon-
ey to his or her own campaign. Contributing money to one’s own campaign
does not represent a legitimate conflict of interest in the context of the treasury
oversight committee.
Specifying that the treasurer does not serve as the chair of the oversight commit-
tee is one approach to lessening the “conflict of interest” concern.
IV. D Should other local agencies have
treasury oversight committees?
It is not uncommon to find treasury oversight committees in cities and other
local agencies even though the law does not require them to have such a
committee. An important issue in the decision to establish a committee is the
level of discretion accorded the agency treasurer in making investment decisions:
the more discretion, the greater the need for oversight procedures. However,
even in situations where an agency has a great deal of discretion, some believe
an oversight committee merely duplicates work that can be better performed
by the governing board or auditors. Others support the view that an oversight
committee provides valuable information to the investment staff and involves
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46LOCAL AGENCY INVESTMENT GUIDELINES
members of the community in an important government function. If other local
agencies decide that they want to engage an oversight committee, its role with
respect to reviewing investment policies and quarterly investment reports should
be clearly specified.
MINIMUM LEGAL REQUIREMENT:
There are no legal requirements for local agencies to have oversight committees.
CONSENSUS RECOMMENDATION:
Local agencies that are not counties should consider if an oversight commit-
tee is appropriate based on its current oversight procedures, complexity of its
portfolio, frequency with which it purchases securities, and skill level of its
staff. The limitations and restrictions associated with membership on a county
treasury oversight committee do not apply to committees formed by other lo-
cal government entities.
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47LOCAL AGENCY INVESTMENT GUIDELINES
CODE
SECTION
TITLE
DESCRIPTION
ACQUISITION OF BONDS
5925 Repurchase investment
LOCAL AGENCY INVESTMENT FUND (LAIF)
16340 Voluntary Investment Program Fund
16429.1 Creation, maintenance, and operation
16429.2 Local investment advisory board
16429.3 Deposits; prohibited transfers and loans; impoundment or seizure
16429.4 Right of withdrawal
COUNTY TREASURER - DUTIES GENERALLY
27000 Custody and payment of moneys
27000.1 Investment of county funds; delegation and revocation of
authority by board of supervisors; responsibility for transactions
27000.3 Prudent investor standard; use in transactions with public funds
27000.5 Objectives; managing public funds
27000.6 Effective date of specified provisions; candidate eligibility and
continuing education programs; county ordinances; authority to
repeal ordinances
27000.7 Eligibility for offices of county treasurer and tax collector; criteria;
application of section
27000.8 County treasurers and tax collectors serving on
January 1, 1996; service for remaining term; continuing
education; certification; violation
27000.9 Continuing education; requirements beginning in 2000;
certification; violation
27001 Certificates of auditor; filing; preservation
27002 Accounts of receipts and expenditures; requisites
27002.1 Photographic records of receipts and expenditures
27003 Separate accounts; general account
California Government Code
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48LOCAL AGENCY INVESTMENT GUIDELINES
27005 Disbursements on warrants; checks or
electronic funds transfers; exception
27006 Disbursements on warrants based on orders; payment of warrants
27007 Possession of money; special deposits
27008 Certificates of auditor necessary for receipt of money
27009 Receipt for deposit of moneys into county treasury
27010 Receipt of gifts and bequests
27011 Deposit of private money prohibited; penalty
27012 Conferences between controller and treasurers regarding
administration of applicable law; expenses
27013 Administrative cost of investing, depositing or handling funds;
reimbursement of county
COUNTY TREASURY OVERSIGHT COMMITTEES
27130 Legislative findings and declarations
27131 Establishment; determinations of size and membership
27132 Membership; pool of candidates
27132.1 Member employment by campaign contributors
27132.2 Member fundraising
27132.3 Member employment in financial services industry
27132.4 Open meetings; Ralph M. Brown Act
27133 Periodic investment policy; preparation by treasurer;
committee review and oversight
27134 Periodic audits by committee; article compliance
27135 Costs of compliance; reimbursement
27136 Withdrawal of funds from county treasury pool;
requests; evaluation; approval criteria
27137 Day-to-day operations and decisions; committee involvement
INVESTMENT OF SURPLUS
53600 Local agency
53600.3 Prudent investor standard; investments on behalf of local agencies
53600.5 Objectives; managing public funds
53600.6 Legislative findings and declarations;
solvency and creditworthiness
53601 Local agencies; authorized investments
53601.1 Investment in financial futures or financial option contracts
53601.2 Limited liability corporation
53601.5 Investments; qualified purchase agent
53601.6 Prohibited investments
53601.8 Investment in placement service assisted deposits, including
certificates of deposit
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49LOCAL AGENCY INVESTMENT GUIDELINES
53602 Investment in legal investments for savings banks;
securities of public districts
53603 Direct purchase of securities
53604 Sale or exchange of securities; reinvestment of proceeds
53605 Sale of securities; application of proceeds to original purposes
53606 Cancellation of bonds issued by purchaser; resale
53607 Delegation of duties to treasurer; monthly report
53608 Deposit of securities; receipt; delegation of authority
53609 Eligible securities for investment of funds held by local agency
pursuant to deferred compensation plans
53610 Proposition 1A receivables; purchase by local agency
57603 Investments in public bank obligations
HEALTH FUND INVESTMENTS
53620 Investment funds designated for employee
retiree health benefits' payments
53621 Delegation of the governing body's investment
authority to designated officers
53622 Funds to pay employee retiree health benefits; discharge
of duties of the governing body or designated officer
DEPOSIT OF FUNDS
16340 The Voluntary Investment Program Fund
53630 Definitions
53630.1 Legislative findings and declarations;
solvency and creditworthiness
53630.5 Additional definitions
53631 Deposits to pay principal, interest or warrants of bonds; electronic
funds disbursement
53632 Classes of deposits
53632.5 Classes of security for deposits
53633 Determination of amounts to be deposited in each class
53634 Transfers from inactive to active deposits
53635 Local agency investments; commercial paper;
concentration limits
53635.2 Deposit of money belonging to or in custody of local agency
53635.7 Agency consideration when borrowing funds
in excess of $100,000
53635.8 Investment in placement service assisted deposits, including
certificates of deposit
53636 Deposited money as in treasury of local agency
53637 Selection of depositary; interest
53638 Maximum deposits
53639 Expense of transporting money
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50LOCAL AGENCY INVESTMENT GUIDELINES
53640 Checks, drafts, and other exchange
53641 Receipt or other evidence of deposit
53642 Withdrawals; check or order
53643 Deposit by treasurer
53644 Withdrawals on demand; penalties; notice
53645 Interest; computation; payment
53646 Investment policy statement; review and approval;
legislative body or oversight committee; reports
53647 Interest; payment into fund
53647.5 Interest on bail money on deposit
53648 Deposits and contracts pursuant to federal law or rule
53648.5 Termination of agreement with depository
53649 Contracts with depositories; contents; filing
53651 Eligible securities to be used as security for deposits
53651.2 Eligible security; promissory note
53651.4 Report of independent certified public accountant; depository
using eligible securities; state bank; national bank; fee
53651.6 Letter of credit; terms
53652 Value required to secure active or inactive deposits; market value
53653 Waiver of security on federally insured deposits; interest
53654 Addition or substitution of securities;
withdrawal or release of securities
53655 Perfection of security interest in favor of local agencies
53656 Authorization for holding of security by agent of depository;
agents of depository; securities subject to order of depository;
exception; release of security; conditions
53657 Authorization to act as agent of depository;
application; form; fee; approval or denial
53658 Maintenance of separate pool for each depository;
security interest of local agency
53659 Placement of securities with Federal Reserve or other approved
bank; authority by contract
53660 Certification and report by agent of depository
53661 Administrator
53663 Determination of amounts to be deposited as inactive
and active deposits
53664 Individual reports; privileged status
53665 Default by depository; payment by agent of depository;
excess funds; drawing on letter of credit
53666 Liability of administrator
53667 Expenses of administrator; levy of assessment
on depositories; payments; penalty
53669 Responsibility for money on deposit
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51LOCAL AGENCY INVESTMENT GUIDELINES
53676 Treasurer’s responsibility for securities
53678 Charges for handling and safekeeping of securities
53679 Money under control or coming into possession
of officers and employees other than treasurer
53679.1 Accounting practices; declaration of existing law
53680 Money under control of tax collectors
53681 Deposit in other than prescribed manner; forfeiture of office
53682 Contracts for services by depository; requirements
53683 Consideration as costs applied pro rata against earned interest
53684 Local agencies; excess funds; investment by county treasurer
53686 Local agency fund audit reports
57600 Public bank deposits
TEMPORARY BORROWING
53821.5 Tax and Revenue Anticipation Notes
53840 County Short-term Loans
53841 Limitations on short-term borrowing
53841.5 Tax and Revenue Anticipation Notes
53850 Local agency definition
53851 Local agency borrowing power
53852 Use of proceeds
53852.5 Tax and Revenue Anticipation Notes
53859 Definitions
53859.01 Local agency borrowing power
53859.02 Grant Anticipation Notes
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52LOCAL AGENCY INVESTMENT GUIDELINES
Government Code Section 5925
5925
The purchase or other acquisition of bonds by or on behalf of the state or local
government that issued the bonds does not cancel, extinguish, or otherwise affect
the bonds and the bonds shall be treated as outstanding bonds for all purposes
except to the extent otherwise determined by the issuer or otherwise provided in
the constituent instruments defining the rights of the holders of the bonds.
Government Code Section 16340
16340
(a) (1) The Voluntary Investment Program Fund is hereby created within the
State Treasury, for the receipt of voluntary deposits from local entities.
(2) For purposes of this section, a “local entity” includes, but is not limited to,
any city, county, school district, or special district.
(b) Each local entity that is approved by its governance body to deposit moneys
in the fund shall deposit no less than a total of two hundred million dollars
($200,000,000). The total amount of moneys that may be deposited in the fund
from all eligible sources shall not exceed, at any point in time, a total of ten bil-
lion dollars ($10,000,000,000), or lesser amount as determined by the Director
of Finance, in consultation with the Treasurer.
(c) The terms and conditions of deposits made into the fund shall be set by the
Director of Finance, in consultation with the Treasurer. Those terms shall in-
clude, but not be limited to, the size of the deposit from a particular local entity,
the length of time those moneys shall be held in deposit in the fund, the avail-
ability of funds for withdrawal by the local entity depositing the funds, and the
annual rate of interest paid on deposits, as described in subdivision (e). However,
the director and the Treasurer may only permit deposits that do not exceed funds
needed to address an actual or anticipated cash shortfall in the General Fund
not exceeding the amounts of existing appropriations, including continuing and
continuous appropriations, to which resulting proceeds are to be applied.
(d) Moneys held in the Fund shall be invested by the Treasurer in investments
authorized pursuant to Sections 16430 and 16480 through the Pooled Money
Investment Account, and whenever the Controller determines that moneys in
the General Fund, after allowing for internal borrowing from other funds are,
or are expected to be, insufficient for the payment of all appropriations made by
the Legislature which are to be paid out of the moneys in the General Fund, the
State Controller may, based upon his or her estimate of the probable income to
the General Fund during the then fiscal year and the probable dates of receipt
thereof, may draw a demand or demands against appropriations made from the
General Fund to be paid in the then current fiscal year prior to the receipt of
the income, and deliver the demand or demands to the Treasurer. The Treasurer
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53LOCAL AGENCY INVESTMENT GUIDELINES
shall register the demand or demands for nonpayment and may borrow moneys
from the fund in an amount or amounts that is no greater than the demand or
demands provided. The borrowing, together with the interest owed upon the
account thereon, shall be paid exclusively from moneys in the General Fund on
probable or reasonably anticipated revenues that are expected to be forthcoming
within a short period of time, but not excepting recourse to internal borrowing
from other funds in the event insufficient moneys are available from the General
Fund. Repayment of any of those borrowings shall be considered a priority pay-
ment, equivalent to any other loan repayment made from the General Fund to
another state fund.
(e) Notwithstanding any other law, the rate of interest to be earned by the
depositors shall be the base apportionment rate based on their pro rata share
of the earnings of the Pooled Money Investment Account on a quarterly basis
at the end of each quarter plus an enhanced amount. The pro rata share shall
be determined by a dollar day participation. The base apportionment rate ap-
plied to dollar day participation in the fund shall be the quarter-to-date average
yield of the Pooled Money Investment Account for the current quarter. The
enhancement amount paid to depositors in the fund shall be determined by
the Director of Finance, in consultation with the Treasurer, and shall be added
to the base rate earned by the Pooled Money Investment Account at the time
the apportionment is made. The total interest cost described in this subdivi-
sion shall not exceed that provided for in paragraph (1) of subdivision (d) of
Section 16731.
(f) Notwithstanding Section 13340, moneys in the fund are hereby continu-
ously appropriated for payment of interest expenditures to depositors calcu-
lated in accordance with subdivision (e), other related expenses as determined
by the Department of Finance, and return of deposits to depositors according
to terms and conditions set by the Director of Finance, in consultation with
the Treasurer. The amounts paid for interest and other related expenses shall
be attributable to the fiscal year in which the borrowing occurred which is also
the fiscal year upon which the appropriations against which the demand or
demands were made.
(g) The Department of Finance shall determine the budget items to be used for
the recording and reporting of interest expenditures and other related expenses
pursuant to this section.
(h) Deposits in the fund shall be tracked separately for each participant in the state’s
accounting system, and shall be deemed to be assets of each participant. These as-
sets shall be reflected as such on each participant’s individual financial statements.
(i) These deposits are, and may only be used, to cover short-term cash needs of
the state and are, and shall be, in compliance with the provisions of Proposition
58 of March 2004 as stated in subdivision (c), Section 1.3 of Article XVI of the
California Constitution. Deposits and borrowing from the fund shall comply
with the state’s debt limit restrictions.
(j) Actions by the Director of Finance, in consultation with the Treasurer, in
implementing and administering the investment program provided for in this
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54LOCAL AGENCY INVESTMENT GUIDELINES
section and the Treasurer’s and Controller’s actions in borrowing from the fund
shall be exempt from the provisions of the Administrative Procedure Act (Chap-
ter 3.5 (commencing with Section 11340) of Part 1 of Division 3).
(k) Upon projection of insufficient cash in the General Fund, the Director of
Finance, in consultation with the Treasurer and Controller, may utilize provisions
similar to Section 16381 to facilitate the implementation of the program.
Government Code Section 16429.1-16429.4
16429.1
(a) There is in trust in the custody of the Treasurer the Local Agency Investment
Fund, which fund is hereby created. The Controller shall maintain a separate ac-
count for each governmental unit having deposits in this fund.
(b) Notwithstanding any other provisions of law, a local governmental official,
with the consent of the governing body of that agency, having money in its trea-
sury not required for immediate needs, may remit the money to the Treasurer
for deposit in the Local Agency Investment Fund for the purpose of investment.
(c) Notwithstanding any other provisions of law, an officer of any nonprofit cor-
poration whose membership is confined to public agencies or public officials,
or an officer of a qualified quasi-governmental agency, with the consent of the
governing body of that agency, having money in its treasury not required for
immediate needs, may remit the money to the Treasurer for deposit in the Local
Agency Investment Fund for the purpose of investment.
(d) Notwithstanding any other provision of law or of this section, a local agency,
with the approval of its governing body, may deposit in the Local Agency Invest-
ment Fund proceeds of the issuance of bonds, notes, certificates of participa-
tion, or other evidences of indebtedness of the agency pending expenditure of
the proceeds for the authorized purpose of their issuance. In connection with
these deposits of proceeds, the Local Agency Investment Fund is authorized to
receive and disburse moneys, and to provide information, directly with or to an
authorized officer of a trustee or fiscal agent engaged by the local agency, the Lo-
cal Agency Investment Fund is authorized to hold investments in the name and
for the account of that trustee or fiscal agent, and the Controller shall maintain a
separate account for each deposit of proceeds.
(e) The local governmental unit, the nonprofit corporation, or the quasi-govern-
mental agency has the exclusive determination of the length of time its money
will be on deposit with the Treasurer.
(f) The trustee or fiscal agent of the local governmental unit has the exclusive
determination of the length of time proceeds from the issuance of bonds will be
on deposit with the Treasurer.
(g) The Local Investment Advisory Board shall determine those quasi-governmen-
tal agencies which qualify to participate in the Local Agency Investment Fund.
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55LOCAL AGENCY INVESTMENT GUIDELINES
(h) The Treasurer may refuse to accept deposits into the fund if, in the judgment
of the Treasurer, the deposit would adversely affect the state’s portfolio.
(i) The Treasurer may invest the money of the fund in securities prescribed in
Section 16430. The Treasurer may elect to have the money of the fund invested
through the Surplus Money Investment Fund as provided in Article 4 (com-
mencing with Section 16470) of Chapter 3 of Part 2 of Division 4 of Title 2.
(j) Money in the fund shall be invested to achieve the objective of the fund
which is to realize the maximum return consistent with safe and prudent
treasury management.
(k) All instruments of title of all investments of the fund shall remain in the
Treasurer’s vault or be held in safekeeping under control of the Treasurer in any
federal reserve bank, or any branch thereof, or the Federal Home Loan Bank of
San Francisco, with any trust company, or the trust department of any state or
national bank.
(l) Immediately at the conclusion of each calendar quarter, all interest earned and
other increment derived from investments shall be distributed by the Controller to
the contributing governmental units or trustees or fiscal agents, nonprofit corpora-
tions, and quasi-governmental agencies in amounts directly proportionate to the
respective amounts deposited in the Local Agency Investment Fund and the length
of time the amounts remained therein. An amount equal to the reasonable costs
incurred in carrying out the provisions of this section, not to exceed a maximum of
5 percent of the earnings of this fund and not to exceed the amount appropriated in
the annual Budget Act for this function, shall be deducted from the earnings prior
to distribution. The amount of this deduction shall be credited as reimbursements
to the state agencies, including the Treasurer, the Controller, and the Department
of Finance, having incurred costs in carrying out the provisions of this section.
(m) The Treasurer shall prepare for distribution a monthly report of investments
made during the preceding month.
(n) As used in this section, “local agency,” “local governmental unit,” and “local
governmental official” includes a campus or other unit and an official, respec-
tively, of the California State University who deposits moneys in funds described
in Sections 89721, 89722, and 89725 of the Education Code.
16429.2
There is created the Local Investment Advisory Board consisting of five members.
The chairman shall be the State Treasurer or his or her designated representa-
tive. Two members who are qualified by training and experience in the field of
investment or finance, shall be appointed by the State Treasurer. Two members
who are treasurers, finance or fiscal officers or business managers, employed by
any county, city or local district or municipal corporation of this state, shall be
appointed by the Treasurer.
The term of office of each appointed member of the board is two years, but each
appointed member serves at the pleasure of the appointing authority. A vacancy
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56LOCAL AGENCY INVESTMENT GUIDELINES
in the appointed membership, occurring other than by expiration of term, shall
be filled in the same manner as the original appointment, but for the unexpired
term only.
Members of the board who are not state officers or employees shall not receive
a salary, but shall be entitled to a per diem allowance of fifty dollars ($50) for
each day’s attendance at a meeting of the board, not to exceed three hundred
dollars ($300) in any month. All members shall be entitled to reimbursement for
expenses incurred in the performance of their duties under this part, including
travel and other necessary expenses.
The board’s primary purpose shall be to advise and assist the State Treasurer in
formulating the investment and reinvestment of moneys in the Local Agency
Investment Fund, and the acquisition, retention, management, and disposition
of investments of the fund. The board, from time to time, shall review those
policies and advise therein as it considers necessary or desirable. The board shall
advise the State Treasurer in the management of the fund and consult the State
Treasurer on any matter relating to the investment and reinvestment of moneys
in the fund.
16429.3
Moneys placed with the Treasurer for deposit in the Local Agency Investment
Fund by cities, counties, special districts, nonprofit corporations, or qualified
quasi-governmental agencies shall not be subject to either of the following:
(a) Transfer or loan pursuant to Sections 16310, 16312, or 16313.
(b) Impoundment or seizure by any state official or state agency.
16429.4
The right of a city, county, city and county, special district, nonprofit corpora-
tion, or qualified quasi-governmental agency to withdraw its deposited moneys
from the Local Agency Investment Fund, upon demand, may not be altered,
impaired, or denied, in any way, by any state official or state agency based upon
the state’s failure to adopt a State Budget by July 1 of each new fiscal year.
Government Code Section 27000-27013
27000
The county treasurer shall receive and keep safely all money belonging to the
county and all other money directed by law to be paid to him and apply and pay
it out, rendering the account as required by law.
27000.1
Subject to Section 53607, the board of supervisors may, by ordinance, delegate
to the county treasurer the authority to invest or reinvest the funds of the county
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57LOCAL AGENCY INVESTMENT GUIDELINES
and the funds of other depositors in the county treasury, pursuant to Chapter 4
(commencing with Section 53600) of Part 1 of Division 2 of title 5. The county
treasurer shall thereafter assume full responsibility for those transactions until the
board of supervisors either revokes its delegation of authority, by ordinance, or
decides not to renew the annual delegation, as provided in Section 53607. Noth-
ing in this section shall limit the county treasurer’s authority pursuant to Section
53635 or 53684.
27000.3
(a) With regard to county funds deposited in the county treasury, the board of su-
pervisors is the agent of the county who serves as a fiduciary and is subject to the
prudent investor standard, unless a delegation has occurred pursuant to Section
53607 in which case the county treasurer shall be the agent of the county with
respect to these funds, serve as a fiduciary, and be subject to the prudent investor
standard and the board of supervisors shall not be the agent, serve as a fiduciary,
or be subject to the prudent investor standard.
(b) With regard to funds deposited in the county treasury that are deposited by
local agencies other than the county and at the discretion of those local agencies,
the county treasurer serves as a fiduciary subject to the prudent investor standard.
(c) When investing, reinvesting, purchasing, acquiring, exchanging, selling, or
managing public funds, the county treasurer or the board of supervisors, as applica-
ble, shall act with care, skill, prudence, and diligence under the circumstances then
prevailing, specifically including, but not limited to, the general economic condi-
tions and the anticipated needs of the county and other depositors, that a prudent
person acting in a like capacity and familiarity with those matters would use in the
conduct of funds of a like character and with like aims, to safeguard the principal
and maintain the liquidity needs of the county and the other depositors. Within
the limitations of this section and considering individual investments as part of
an overall investment strategy, investments may be acquired as authorized by law.
Nothing in this chapter is intended to grant investment authority to any person or
governing body except as provided in Sections 53601, 53607, and 53635.
27000.5
When investing, reinvesting, purchasing, acquiring, exchanging, selling, or man-
aging public funds, the primary objective of the county treasurer or the board of
supervisors, as the case may be, shall be to safeguard the principal of the funds
under the treasurer’s or the board’s control. The secondary objective shall be to
meet the liquidity needs of the depositor. The third objective shall be to achieve
a return on the funds under his or her control.
27000.6
The provisions of Sections 27000.7, 27000.8, and 27000.9 shall become effec-
tive only in those counties in which, prior to the first date of the period for filing
declarations of candidacy for the office of county treasurer, county tax collector,
or county treasurer-tax collector, the board of supervisors by majority vote at
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58LOCAL AGENCY INVESTMENT GUIDELINES
a regular meeting with all members present, enact an ordinance adopting the
provisions of those sections. That ordinance may be repealed by the board of
supervisors at any time.
27000.7
(a) No person shall be eligible for election or appointment to the office of county
treasurer, county tax collector, or county treasurer-tax collector of any county
unless that person meets at least one of the following criteria:
(1) The person has served in a senior financial management position in a county,
city, or other public agency dealing with similar financial responsibilities for a
continuous period of not less than three years, including, but not limited to,
treasurer, tax collector, auditor, auditor-controller, or the chief deputy or an as-
sistant in those offices.
(2) The person possesses a valid baccalaureate, masters, or doctoral degree from
an accredited college or university in any of the following major fields of study:
business administration, public administration, economics, finance, accounting,
or a related field, with a minimum of 16 college semester units, or their equiva-
lent, in accounting, auditing, or finance.
(3) The person possesses a valid certificate issued by the California Board of Ac-
countancy pursuant to Chapter 1 (commencing with Section 5000) of Division
3 of the Business and Professions Code, showing that person to be, and a permit
authorizing that person to practice as, a certified public accountant.
(4) The person possesses a valid charter issued by the Institute of Chartered
Financial Analysts showing the person to be designated a Chartered Financial
Analyst, with a minimum of 16 college semester units, or their equivalent, in
accounting, auditing, or finance.
(5) The person possesses a valid certificate issued by the Treasury Management
Association showing the person to be designated a Certified Cash Manager, with
a minimum of 16 college semester units, or their equivalent, in accounting, au-
diting, or finance.
(b) This section shall only apply to any person duly elected or appointed as a
county treasurer, county tax collector, or county treasurer-tax collector on or after
January 1, 1998.
27000.8
Any duly elected county treasurer, county tax collector, or county treasurer-tax
collector serving in that office on January 1, 1996, may serve for his or her re-
maining term of office during which period of time the requirements of this sec-
tion shall not apply. After the election of a county treasurer, county tax collector,
or county treasurer-tax collector to office, that person shall complete a valid con-
tinuing course of study as prescribed in this section, and shall during the person’s
four-year term of office on or before June 30 of the fourth year, render to the
Controller a certification indicating that the person has successfully completed
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59LOCAL AGENCY INVESTMENT GUIDELINES
a continuing education program consisting of, at a minimum, 48 hours, or an
equivalent amount of continuing education units within the discipline of treasury
management, tax collection, public finance, public administration, governmental
accounting, or directly related subjects, offered by a recognized state or national
association, institute, or accredited college or university, or the California Debt
and Investment Advisory Commission, that provides the requisite educational
programs prescribed in this section. The willful or negligent failure of any elected
county treasurer, county tax collector, or county treasurer-tax collector to comply
with the requirements of this section shall be deemed a violation of this section.
27000.9
Notwithstanding any other requirement of law, any duly appointed county of-
ficer serving in the capacity of county treasurer, county tax collector, or county
treasurer-tax collector shall, beginning in 2000, complete a valid continuing
course of study as prescribed in this section, and shall, on or before June 30 of
each two-year period, render to the Controller, a certification indicating that the
county officer has successfully completed a continuing education program con-
sisting of, at a minimum, 24 hours or an equivalent amount of continuing edu-
cation units within the discipline of treasury management, tax collection, public
finance, public administration, governmental accounting, or directly related sub-
jects, offered by a recognized state or national association, institute, or accredited
college or university, or the California Debt and Investment Advisory Commis-
sion, that provides the requisite educational programs prescribed in this section.
The willful or negligent failure of any county officer serving in the capacity of
county treasurer, county tax collector, or county treasurer-tax collector to comply
with the requirements of this section shall be deemed a violation of this section.
27001
The treasurer shall file and keep the certificates of the auditor delivered to him or
her when money is paid into the treasury.
Notwithstanding Sections 26201, 26202, and 26205, the treasurer may destroy
any certificate pursuant to this section under either of the following circumstances:
(a) The certificate has been filed for more than five years.
(b) The certificate has been filed for more than one year, and all of the following
conditions are complied with:
(1) The record, paper, or document is photographed, microphotographed, repro-
duced by electronically recorded video images on magnetic surfaces, or recorded on
optical disk or reproduced on any other medium that does not permit additions,
deletions, or changes to the original document and is produced in compliance with
Section 12168.7 for recording of permanent records or nonpermanent records if
the copy is kept or maintained for five years from the date of the document.
(2) The device used to reproduce the record, paper, or document on film or any
other medium is one that accurately reproduces the original thereof in all details.
A duplicate copy of any record reproduced in compliance with Section 12168.7
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60LOCAL AGENCY INVESTMENT GUIDELINES
for recording of permanent or nonpermanent records, whichever applies, shall be
deemed an original.
(3) The photographs, microphotographs, or other reproductions on film or any
other medium are placed in conveniently accessible files and provision is made
for preserving, examining, and using the same.
(4) The record, paper, or document is reproduced and preserved utilizing other
information technology.
27002
The treasurer shall keep an account of the receipt and expenditure of all money
received or paid out by him or her in books provided for the purpose. He or she
shall enter in the books the amount, the time, from whom, and on what account
all money was received by him or her, and the warrant number, the amount,
time, and on what account all disbursements were made by him or her.
27002.1
(a) The treasurer may, in lieu of entering in books an account of the receipt
and expenditure of all money received or paid out by him or her as provided
in Section 27002, photograph, microphotograph, photocopy, or enter into
an electronic data-processing system that utilizes optical transmission and
filing, all receipts for money received by him or her and all warrants paid out
by him or her.
(b) Every reproduction described in subdivision (a) shall be deemed and con-
sidered an original, and a transcript, exemplification, or certified copy of any of
those reproductions shall be deemed and considered a transcript, exemplifica-
tion, or certified copy, as the case may be, of the original.
(c) All reproductions described in subdivision (a) shall be properly indexed and
placed in convenient, accessible files. Each roll of microfilm shall be deemed and
constitute a book, and shall be designated and numbered, and provision shall be
made for preserving, examining, and using it. A duplicate of each roll of micro-
film shall be made and kept in a safe and separate place.
27003
The treasurer shall keep his or her books or any other authorized form of record
so that the amounts received and paid out on account of separate funds or spe-
cific appropriations are exhibited in separate and distinct accounts, and the whole
receipts and expenditures shown in one general or cash account.
27005
The treasurer shall disburse the county money and all other money placed in
his or her custody by official authority only on county warrants, checks, or
electronic fund transfers issued by the county auditor, except for the making
of legal investments.
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61LOCAL AGENCY INVESTMENT GUIDELINES
27006
The treasurer shall disburse the money in the treasury on county warrants only
when they are based on orders of the board of supervisors, upon order of the su-
perior court, or as otherwise provided by law. In the payment of the warrants he
may issue his order, check, or draft drawn upon proper funds that are on deposit
in any bank.
27007
The treasurer shall keep all money belonging to the State, or any county of the
State in his own possession until disbursed according to law. He shall not place
the money in the possession of any person to be used for any purpose, nor shall
he loan or in any manner use, or permit any person to use it, except as provided
by law. This section does not prohibit him from making special deposits for the
safe-keeping of public money, but he is liable therefore on his official bond.
27008
(a) The treasurer shall not receive money into the treasury or for deposit with
him or her as treasurer, unless it is accompanied by the certificate of the auditor.
(b) Notwithstanding subdivision (a), the auditor and treasurer may establish al-
ternate control procedures for the treasurer to receive or deposit money without
the certificate of the auditor.
27009
The treasurer shall give a receipt to each person who deposits money into the
county treasury.
27010
The treasurer may receive any money constituting gift, bequest, or devise, and
pay it out in accordance with the terms thereof, or, if none are fixed, according
to law.
27011
Any county officer who knowingly accepts or allows any deposit in the county
treasury of money from any private and unofficial source is guilty of a misde-
meanor, punishable by imprisonment in the county jail for not less than six
months nor more than one year, or by a fine of not less than five hundred dollars
($500) and not more than five thousand dollars ($5,000), or by both that fine
and imprisonment, and shall forfeit his or her office.
27012
The Controller may summon county treasurers or the authorized representa-
tive of any county treasurer to meet with the Controller or his or her duly
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authorized representatives, in those groups and at that place or those places
within the state as may be designated by the Controller for the purpose of dis-
cussing the interpretation, procedures, uniformity of operation, and efficient
administration of the Revenue and Taxation Code and the Government Code.
The actual and necessary expenses of any county officer or his or her autho-
rized representative that are incurred while traveling to and from or while
attending any meeting called pursuant to this section by the Controller shall
be a charge against the county, to be paid in the same manner as other county
charges are paid, provided that prior approval of the board of supervisors has
been obtained.
27013
Notwithstanding any other provision of law, any treasurer, or other authorized
county officer, who invests, deposits or otherwise handles funds for public agen-
cies for the purpose of earning interest or other income on such funds as permit-
ted by law, may deduct from such interest or income, before distribution thereof,
the actual administrative cost of such investing, depositing or handling of funds
and of distribution of such interest or income. Such cost reimbursement shall be
paid into the county general fund.
Government Code Section 27130-27137
27130
The Legislature finds and declares that local agencies, including school dis-
tricts, should participate in reviewing the policies that guide the investment
of those funds. The Legislature further finds and declares that by pooling de-
posits from local agencies and other participants, county treasuries operate in
the public interest when they consolidate banking and investment activities,
reduce duplication, achieve economies of scale, and carry out coherent and
consolidated investment strategies. The Legislature further finds and declares
that the creation of county treasury oversight committees will promote the
public interest by involving depositors in the management of their funds and
by enhancing the security and investment return on their funds by providing
a more stable and predictable balance for investment by establishing criteria
for the withdrawal of funds.
27131
(a) The board of supervisors in each county or city and county may, if the county
or city and county is investing surplus funds, establish a county treasury oversight
committee. The board of supervisors, in consultation with the county treasurer,
shall determine the exact size of the committee, which shall consist of from 3 to
11 members, and the categories from which the members shall be represented, as
specified in subdivisions (a) to (g), inclusive, of Section 27132. Members shall be
nominated by the treasurer and confirmed by the board of supervisors.
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63LOCAL AGENCY INVESTMENT GUIDELINES
(b) In recognition of the state and local interests served by the action made op-
tional in subdivision (a), the Legislature encourages local agencies to continue
taking the action formerly mandated by this section. However, nothing in this
subdivision may be construed to impose any liability on a local agency that does
not continue to take the formerly mandated action.
27132
The county treasury oversight committee, pursuant to Section 27131, shall con-
sist of members appointed from the following:
(a) The county treasurer.
(b) The county auditor, auditor-controller, or finance director, as the case may be.
(c) A representative appointed by the county board of supervisors.
(d) The county superintendent of schools or his or her designee.
(e) A representative selected by a majority of the presiding officers of the govern-
ing bodies of the school districts and community college districts in the county.
(f) A representative selected by a majority of the presiding officers of the legisla-
tive bodies of the special districts in the county that are required or authorized to
deposit funds in the county treasury.
(g) Up to five other members of the public.
(1) A majority of the other public members shall have expertise in, or an aca-
demic background in, public finance.
(2) The other public members shall be economically diverse and bipartisan in
political registration.
27132.1
A member may not be employed by an entity that has (a) contributed to the
campaign of a candidate for the office of local treasurer, or (b) contributed to the
campaign of a candidate to be a member of a legislative body of any local agency
that has deposited funds in the county treasury, in the previous three years or
during the period that the employee is a member of the committee.
27132.2
A member may not directly or indirectly raise money for a candidate for local
treasurer or a member of the governing board of any local agency that has depos-
ited funds in the county treasury while a member of the committee.
27132.3
A member may not secure employment with, or be employed by, bond under-
writers, bond counsel, security brokerages or dealers, or financial services firms,
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64LOCAL AGENCY INVESTMENT GUIDELINES
with whom the treasurer is doing business during the period that the person is a
member of the committee or for one year after leaving the committee.
27132.4
Committee meetings shall be open to the public and subject to the Ralph M.
Brown Act (Chapter 9 (commencing with Section 54950) of Part 1 of Division
2 of Title 5).
27133
In any county that establishes a county treasury oversight committee pursuant to
this article, the county treasurer shall annually prepare an investment policy that
will be reviewed and monitored by the county treasury oversight committee. The
investment policy shall include all of the following:
(a) A list of securities or other instruments in which the county treasury may
invest, according to law, including the maximum allowable percentage by type
of security.
(b) The maximum term of any security purchased by the county treasury.
(c) The criteria for selecting security brokers and dealers from, to, or through
whom the county treasury may purchase or sell securities or other instruments.
The criteria shall prohibit the selection of any broker, brokerage, dealer, or secu-
rities firm that has, within any consecutive 48-month period following January
1, 1996, made a political contribution in an amount exceeding the limitations
contained in Rule G-37 of the Municipal Securities Rulemaking Board, to the
local treasurer, any member of the governing board of the local agency, or any
candidate for those offices.
(d) Limits on the receipt of honoraria, gifts, and gratuities from advisors, brokers,
dealers, bankers, or other persons with whom the county treasury conducts busi-
ness by any member of the county treasury oversight committee. These limits
may be in addition to the limits set by a committee member’s own agency, by
state law, or by the Fair Political Practices Commission.
(e) A requirement that the county treasurer provide the county treasury oversight
committee with an investment report as required by the board of supervisors.
(f) The manner of calculating and apportioning the costs, authorized by Section
27013, of investing, depositing, banking, auditing, reporting, or otherwise han-
dling or managing funds.
(g) The terms and conditions under which local agencies and other entities that
are not required to deposit their funds in the county treasury may deposit funds
for investment purposes.
(h) Criteria for considering requests to withdraw funds from the county treasury,
pursuant to Section 27136. The criteria shall include an assessment of the effect
of a proposed withdrawal on the stability and predictability of the investments
in the county treasury.
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65LOCAL AGENCY INVESTMENT GUIDELINES
27134
The county treasury oversight committee shall cause an annual audit to be con-
ducted to determine the county treasury’s compliance with this article. The audit
may include issues relating to the structure of the investment portfolio and risk.
27135
The costs of complying with this article shall be county charges and may
be included with those charges enumerated under Section 27013.
27136
(a) Notwithstanding any other provision of law, any local agency, public agency,
public entity, or public official that has funds on deposit in the county treasury
pool and that seeks to withdraw funds for the purpose of investing or depositing
those funds outside the county treasury pool, shall first submit the request for
withdrawal to the county treasurer before withdrawing funds from the county
treasury pool.
(b) The county treasurer shall evaluate each proposed withdrawal for its consis-
tency with the criteria adopted pursuant to subdivision (h) of Section 27133.
Prior to approving a withdrawal, the county treasurer shall find that the proposed
withdrawal will not adversely affect the interests of the other depositors in the
county treasury pool.
27137
Nothing in this article shall be construed to allow the county treasury oversight
committee to direct individual investment decisions, select individual investment
advisors, brokers, or dealers, or impinge on the day-to-day operations of the
county treasury.
Government Code Section 53600-53610
53600
As used in this article, “local agency” means county, city, city and county, includ-
ing 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.
53600.3
Except as provided in subdivision (a) of 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 pursuant to this chapter are trustees
and therefore fiduciaries subject to the prudent investor standard. When invest-
ing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public
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funds, a trustee shall act with care, skill, prudence, and diligence under the cir-
cumstances then prevailing, including, but not limited to, the general economic
conditions and the anticipated needs of the agency, that a prudent person acting
in a like capacity and familiarity with those matters would use in the conduct of
funds of a like character and with like aims, to safeguard the principal and main-
tain the liquidity needs of the agency. Within the limitations of this section and
considering individual investments as part of an overall strategy, investments may
be acquired as authorized by law.
53600.5
When investing, reinvesting, purchasing, acquiring, exchanging, selling, or man-
aging public funds, the primary objective of a trustee shall be to safeguard the
principal of the funds under its control. The secondary objective shall be to meet
the liquidity needs of the depositor. The third objective shall be to achieve a re-
turn on the funds under its control.
53600.6.
The Legislature hereby finds that the solvency and creditworthiness of each in-
dividual local agency can impact the solvency and creditworthiness of the state
and other local agencies within the state. Therefore, to protect the solvency and
creditworthiness of the state and all of its political subdivisions, the Legislature
hereby declares that the deposit and investment of public funds by local officials
and local agencies is an issue of statewide concern.
53601.
This section shall apply to a local agency that is a city, a district, or other
local agency that does not pool money in deposits or investments with other
local agencies, other than local agencies that have the same governing body.
However, Section 53635 shall apply to all local agencies that pool money in
deposits or investments with other local agencies that have separate governing
bodies. The legislative body of a local agency having moneys in a sinking fund
or moneys in its treasury not required for the immediate needs of the local
agency may invest any portion of the moneys that it deems wise or expedient
in those investments set forth below. A local agency purchasing or obtaining
any securities prescribed in this section, in a negotiable, bearer, registered,
or nonregistered format, shall require delivery of the securities to the local
agency, including those purchased for the agency by financial advisers,
consultants, or managers using the agency’s funds, by book entry, physical
delivery, or by third-party custodial agreement. The transfer of securities to
the counterparty bank’s customer book entry account may be used for book
entry delivery.
For purposes of this section, “counterparty” means the other party to the
transaction. A counterparty bank’s trust department or separate safekeeping
department may be used for the physical delivery of the security if the security
is held in the name of the local agency. Where this section specifies a percentage
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67LOCAL AGENCY INVESTMENT GUIDELINES
limitation for a particular category of investment, that percentage is applicable
only at the date of purchase. Where this section does not specify a limitation on
the term or remaining maturity at the time of the investment, no investment
shall be made in any security, other than a security underlying a repurchase or
reverse repurchase agreement or securities lending agreement authorized by this
section, that at the time of the investment has a term remaining to maturity
in excess of five years, unless the legislative body has granted express authority
to make that investment either specifically or as a part of an investment
program approved by the legislative body no less than three months prior to
the investment:
(a) Bonds issued by the local agency, including bonds payable solely out of the
revenues from a revenue-producing property owned, controlled, or operated by the
local agency or by a department, board, agency, or authority of the local agency.
(b) United States Treasury notes, bonds, bills, or certificates of indebtedness, or
those for which the faith and credit of the United States are pledged for the pay-
ment of principal and interest.
(c) Registered state warrants or treasury notes or bonds of this state, including
bonds payable solely out of the revenues from a revenue-producing property
owned, controlled, or operated by the state or by a department, board, agency,
or authority of the state.
(d) Registered treasury notes or bonds of any of the other 49 states in addition
to California, including bonds payable solely out of the revenues from a revenue-
producing property owned, controlled, or operated by a state or by a department,
board, agency, or authority of any of the other 49 states, in addition to California.
(e) Bonds, notes, warrants, or other evidences of indebtedness of a local agency
within this state, including bonds payable solely out of the revenues from a rev-
enue-producing property owned, controlled, or operated by the local agency, or
by a department, board, agency, or authority of the local agency.
(f) Federal agency or United States government-sponsored enterprise obligations,
participations, or other instruments, including those issued by or fully guaran-
teed as to principal and interest by federal agencies or United States government-
sponsored enterprises.
(g) Bankers’ acceptances otherwise known as bills of exchange or time drafts that
are drawn on and accepted by a commercial bank. Purchases of bankers’ accep-
tances shall not exceed 180 days’ maturity or 40 percent of the agency’s moneys
that may be invested pursuant to this section. However, no more than 30 percent
of the agency’s moneys may be invested in the bankers’ acceptances of any one
commercial bank pursuant to this section.
This subdivision does not preclude a municipal utility district from investing
moneys in its treasury in a manner authorized by the Municipal Utility District
Act (Division 6 (commencing with Section 11501) of the Public Utilities Code).
(h) Commercial paper of “prime” quality of the highest ranking or of the high-
est letter and number rating as provided for by a nationally recognized statistical
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rating organization (NRSRO). The entity that issues the commercial paper shall
meet all of the following conditions in either paragraph (1) or (2):
(1) The entity meets the following criteria:
(A) Is organized and operating in the United States as a general corporation.
(B) Has total assets in excess of five hundred million dollars ($500,000,000).
(C) Has debt other than commercial paper, if any, that is rated in a rating
category of “A” or its equivalent or higher by an NRSRO.
(2) The entity meets the following criteria:
(A) Is organized within the United States as a special purpose corporation, trust,
or limited liability company.
(B) Has program wide credit enhancements including, but not limited to,
overcollateralization, letters of credit, or a surety bond.
(C) Has commercial paper that is rated “A-1” or higher, or the equivalent, by
an NRSRO. Eligible commercial paper shall have a maximum maturity of 270
days or less. Local agencies, other than counties or a city and county, that have
less than one hundred million dollars ($100,000,000) of investment assets un-
der management, may invest no more than 25 percent of their moneys in eli-
gible commercial paper. Local agencies, other than counties or a city and county,
that have one hundred million dollars ($100,000,000) or more of investment
assets under management may invest no more than 40 percent of their moneys
in eligible commercial paper. A local agency, other than a county or a city and a
county, may invest no more than 10 percent of its total investment assets in the
commercial paper and the medium-term notes of any single issuer. Counties or
a city and county may invest in commercial paper pursuant to the concentration
limits in subdivision (a) of Section 53635.
(i) Negotiable certificates of deposit issued by a nationally or state-chartered
bank, a savings association or a federal association (as defined by Section 5102
of the Financial Code), a state or federal credit union, or by a federally licensed
or state-licensed branch of a foreign bank. Purchases of negotiable certificates of
deposit shall not exceed 30 percent of the agency’s moneys that may be invested
pursuant to this section. For purposes of this section, negotiable certificates of
deposit do not come within Article 2 (commencing with Section 53630), except
that the amount so invested shall be subject to the limitations of Section 53638.
The legislative body of a local agency and the treasurer or other official of the
local agency having legal custody of the moneys are prohibited from investing
local agency funds, or funds in the custody of the local agency, in negotiable
certificates of deposit issued by a state or federal credit union if a member of
the legislative body of the local agency, or a person with investment decision
making authority in the administrative office manager’s office, budget office,
auditor-controller’s office, or treasurer’s office of the local agency also serves on
the board of directors, or any committee appointed by the board of directors, or
the credit committee or the supervisory committee of the state or federal credit
union issuing the negotiable certificates of deposit.
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(j)(1) Investments in repurchase agreements or reverse repurchase agreements
or securities lending agreements of any securities authorized by this section, as
long as the agreements are subject to this subdivision, including the delivery
requirements specified in this section.
(2) Investments in repurchase agreements may be made, on an investment au-
thorized in this section, when the term of the agreement does not exceed one
year. The market value of securities that underlie a repurchase agreement shall be
valued at 102 percent or greater of the funds borrowed against those securities
and the value shall be adjusted no less than quarterly. Since the market value of
the underlying securities is subject to daily market fluctuations, the investments
in repurchase agreements shall be in compliance if the value of the underlying
securities is brought back up to 102 percent no later than the next business day.
(3) Reverse repurchase agreements or securities lending agreements may be uti-
lized only when all of the following conditions are met:
(A) The security to be sold using a reverse repurchase agreement or securi-
ties lending agreement has been owned and fully paid for by the local agency
for a minimum of 30 days prior to sale.
(B) The total of all reverse repurchase agreements and securities lending agree-
ments on investments owned by the local agency does not exceed 20 percent of
the base value of the portfolio.
(C) The agreement does not exceed a term of 92 days, unless the agreement
includes a written codicil guaranteeing a minimum earning or spread for the
entire period between the sale of a security using a reverse repurchase agreement
or securities lending agreement and the final maturity date of the same security.
(D) Funds obtained or funds within the pool of an equivalent amount to that ob-
tained from selling a security to a counterparty using a reverse repurchase agree-
ment or securities lending agreement shall not be used to purchase another secu-
rity with a maturity longer than 92 days from the initial settlement date of the
reverse repurchase agreement or securities lending agreement, unless the everse
repurchase agreement or securities lending agreement includes a written codicil
guaranteeing a minimum earning or spread for the entire period between the sale
of a security using a reverse repurchase agreement or securities lending agreement
and the final maturity date of the same security.
(4)(A) Investments in reverse repurchase agreements, securities lending agree-
ments, or similar investments in which the local agency sells securities prior to
purchase with a simultaneous agreement to repurchase the security may be made
only upon prior approval of the governing body of the local agency and shall be
made only with primary dealers of the Federal Reserve Bank of New York or with
a nationally or state-chartered bank that has or has had a significant banking
relationship with a local agency.
(B) For purposes of this chapter, “significant banking relationship” means any of
the following activities of a bank:
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(i) Involvement in the creation, sale, purchase, or retirement of a local agency’s
bonds, warrants, notes, or other evidence of indebtedness.
(ii) Financing of a local agency’s activities.
(iii) Acceptance of a local agency’s securities or funds as deposits.
(5)(A) “Repurchase agreement” means a purchase of securities by the local agency
pursuant to an agreement by which the counterparty seller will repurchase the
securities on or before a specified date and for a specified amount and the coun-
terparty will deliver the underlying securities to the local agency by book entry,
physical delivery, or by third-party custodial agreement. The transfer of underly-
ing securities to the counterparty bank’s customer book-entry account may be
used for book-entry delivery.
(B) “Securities,” for purposes of repurchase under this subdivision, means
securities of the same issuer, description, issue date, and maturity.
(C) “Reverse repurchase agreement” means a sale of securities by the local agency
pursuant to an agreement by which the local agency will repurchase the securities
on or before a specified date and includes other comparable agreements.
(D) “Securities lending agreement” means an agreement under which a local agen-
cy agrees to transfer securities to a borrower who, in turn, agrees to provide col-
lateral to the local agency. During the term of the agreement, both the securities
and the collateral are held by a third party. At the conclusion of the agreement, the
securities are transferred back to the local agency in return for the collateral.
(E) For purposes of this section, the base value of the local agency’s pool portfolio
shall be that dollar amount obtained by totaling all cash balances placed in the
pool by all pool participants, excluding any amounts obtained through selling
securities by way of reverse repurchase agreements, securities lending agreements,
or other similar borrowing methods.
(F) For purposes of this section, the spread is the difference between the cost of
funds obtained using the reverse repurchase agreement and the earnings obtained
on the reinvestment of the funds.
(k) Medium-term notes, defined as all corporate and depository institution debt
securities with a maximum remaining maturity of five years or less, issued by cor-
porations organized and operating within the United States or by depository insti-
tutions licensed by the United States or any state and operating within the United
States. Notes eligible for investment under this subdivision shall be rated in a rating
category of “A” or its equivalent or better by an NRSRO. Purchases of medium-
term notes shall not include other instruments authorized by this section and shall
not exceed 30 percent of the agency’s moneys that may be invested pursuant to this
section. A local agency, other than a county or a city and a county, may invest no
more than 10 percent of its total investment assets in the commercial paper and the
medium-term notes of any single issuer.
(l)(1) Shares of beneficial interest issued by diversified management companies
that invest in the securities and obligations as authorized by subdivisions (a) to
(k), inclusive, and subdivisions (m) to (q), inclusive, and that comply with the
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investment restrictions of this article and Article 2 (commencing with Section
53630). However, notwithstanding these restrictions, a counterparty to a
reverse repurchase agreement or securities lending agreement is not required to
be a primary dealer of the Federal Reserve Bank of New York if the company’s
board of directors finds that the counterparty presents a minimal risk of default,
and the value of the securities underlying a repurchase agreement or securities
lending agreement may be 100 percent of the sales price if the securities are
marked to market daily.
(2) Shares of beneficial interest issued by diversified management companies that
are money market funds registered with the Securities and Exchange Commis-
sion under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.).
(3) If investment is in shares issued pursuant to paragraph (1), the company shall
have met either of the following criteria:
(A) Attained the highest ranking or the highest letter and numerical rating pro-
vided by not less than two NRSROs.
(B) Retained an investment adviser registered or exempt from registration
with the Securities and Exchange Commission with not less than five years’
experience investing in the securities and obligations authorized by subdivisions
(a) to (k), inclusive, and subdivisions (m) to (q), inclusive, and with assets under
management in excess of five hundred million dollars ($500,000,000).
(4) If investment is in shares issued pursuant to paragraph (2), the company shall
have met either of the following criteria:
(A) Attained the highest ranking or the highest letter and numerical rating pro-
vided by not less than two NRSROs.
(B) Retained an investment adviser registered or exempt from registration with
the Securities and Exchange Commission with not less than five years’ experience
managing money market mutual funds with assets under management in excess
of five hundred million dollars ($500,000,000).
(5) The purchase price of shares of beneficial interest purchased pursuant to this
subdivision shall not include any commission that the companies may charge
and shall not exceed 20 percent of the agency’s moneys that may be invested
pursuant to this section. However, no more than 10 percent of the agency’s funds
may be invested in shares of beneficial interest of any one mutual fund pursuant
to paragraph (1).
(m) Moneys held by a trustee or fiscal agent and pledged to the payment or
security of bonds or other indebtedness, or obligations under a lease, install-
ment sale, or other agreement of a local agency, or certificates of participation in
those bonds, indebtedness, or lease installment sale, or other agreements, may be
invested in accordance with the statutory provisions governing the issuance of
those bonds, indebtedness, or lease installment sale, or other agreement, or to the
extent not inconsistent therewith or if there are no specific statutory provisions,
in accordance with the ordinance, resolution, indenture, or agreement of the lo-
cal agency providing for the issuance.
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(n) Notes, bonds, or other obligations that are at all times secured by a valid
first priority security interest in securities of the types listed by Section 53651
as eligible securities for the purpose of securing local agency deposits having
a market value at least equal to that required by Section 53652 for the pupose
of securing local agency deposits. The securities serving as collateral shall be
placed by delivery or book entry into the custody of a trust company or the trust
department of a bank that is not affiliated with the issuer of the secured obliga-
tion, and the security interest shall be perfected in accordance with the require-
ments of the Uniform Commercial Code or federal regulations applicable to the
types of securities in which the security interest is granted.
(o) A mortgage passthrough security, collateralized mortgage obligation,
mortgage-backed or other pay-through bond, equipment lease-backed certificate,
consumer receivable passthrough certificate, or consumer receivable-backed bond.
Securities eligible for investment under this subdivision shall be rated in a rating
category of “AA” or its equivalent or better by an NRSRO and have a maximum
remaining maturity of five years or less. Purchase of securities authorized by this
subdivision shall not exceed 20 percent of the agency’s surplus moneys that may
be invested pursuant to this section.
(p) Shares of beneficial interest issued by a joint powers authority organized
pursuant to Section 6509.7 that invests in the securities and obligations authorized
in subdivisions (a) to (q), inclusive. Each share shall represent an equal proportional
interest in the underlying pool of securities owned by the joint powers authority.
To be eligible under this section, the joint powers authority issuing the shares shall
have retained an investment adviser that meets all of the following criteria:
(1) The adviser is registered or exempt from registration with the Securities and
Exchange Commission.
(2) The adviser has not less than five years of experience investing in the securities
and obligations authorized in subdivisions (a) to (q), inclusive.
(3) The adviser has assets under management in excess of five hundred million
dollars ($500,000,000).
(q) United States dollar denominated senior unsecured unsubordinated
obligations issued or unconditionally guaranteed by the International Bank for
Reconstruction and Development, International Finance Corporation, or Inter-
American Development Bank, with a maximum remaining maturity of five years
or less, and eligible for purchase and sale within the United States. Investments
under this subdivision shall be rated in a rating category of “AA” or its equivalent
or better by an NRSRO and shall not exceed 30 percent of the agency’s moneys
that may be invested pursuant to this section.
(r) Commercial paper, debt securities, or other obligations of a public bank, as
defined in Section 57600.
This section shall remain in effect only until January 1, 2026, and as of that date
is repealed.
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53601.1
The authority of a local agency to invest funds pursuant to Section 53601 in-
cludes, in addition thereto, authority to invest in financial futures or financial
option contracts in any of the investment categories enumerated in that section.
53601.2
As used in this article, “corporation” includes a limited liability company.
53601.5
The purchase by a local agency of any investment authorized pursuant to Section
53601 or 53601.1, not purchased directly from the issuer, shall be purchased
either from an institution licensed by the state as a broker-dealer, as defined in
Section 25004 of the Corporations Code, or from a member of a federally regu-
lated securities exchange, from a national or state-chartered bank, from a savings
association or federal association (as defined by Section 5102 of the Financial
Code) or from a brokerage firm designated as a primary government dealer by
the Federal Reserve bank.
53601.6
(a) A local agency shall not invest any funds pursuant to this article or pursuant
to Article 2 (commencing with Section 53630) in inverse floaters, range notes, or
mortgage-derived, interest-only strips.
(b) (1) Except as provided in paragraph (2), a local agency shall not invest any
funds pursuant to this article or pursuant to Article 2 (commencing with Sec-
tion 53630) in any security that could result in zero interest accrual if held to
maturity. However, a local agency may hold prohibited instruments until their
maturity dates. The limitation in this subdivision shall not apply to local agency
investments in shares of beneficial interest issued by diversified management
companies registered under the Investment Company Act of 1940 (15 U.S.C.
Sec. 80a-1 et seq.) that are authorized for investment pursuant to subdivision (l)
of Section 53601.
(2) Notwithstanding the prohibition in paragraph (1), a local agency may invest
in securities issued by, or backed by, the United States government that could
result in zero- or negative-interest accrual if held to maturity, in the event of, and
for the duration of, a period of negative market interest rates. A local agency may
hold these instruments until their maturity dates.
(c) This section shall remain in effect only until January 1, 2026, and as of that
date is repealed.
53601.8
Notwithstanding any other provision of this code, a local agency that has the
authority under law to invest funds, at its discretion, may invest a portion of its
surplus funds in deposits at a commercial bank, savings bank, savings and loan
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74LOCAL AGENCY INVESTMENT GUIDELINES
association, or credit union that uses a private sector entity that assists in the
placement of deposits. The following conditions shall apply:
(a) The local agency shall choose a nationally or state-chartered commercial bank,
savings bank, savings and loan association, or credit union in this state to invest
the funds, which shall be known as the “selected” depository institution.
(b) 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
are within the network used by the private sector entity for this purpose.
(c) 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.
(d) Any private sector entity used by a selected depository institution to help
place its local agency deposits shall maintain policies and procedures requiring
all of the following:
(1) The full amount of each deposit placed pursuant to subdivision (b) and the interest
that may accrue on each such deposit shall at all times be insured by the Federal
Deposit Insurance Corporation or the National Credit Union Administration.
(2) Every depository institution where funds are placed shall be capitalized at a
level that is sufficient, and be otherwise eligible, to receive such deposits pursuant
to regulations of the Federal Deposit Insurance Corporation or the National
Credit Union Administration, as applicable.
(3) 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) 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 pursuant to subdivision (c) as holding that local agency’s deposits if
those additional deposits would result in that local agency’s total amount on
deposit at that depository institution exceeding the Federal Deposit Insurance
Corporation or the National Credit Union Administration insurance limit.
(e) 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 depository institution if those additional deposits would result in that local
agency’s total amount on deposit at that depository institution exceeding
the Federal Deposit Insurance Corporation or the National Credit Union
Administration insurance limit.
(f) The selected depository institution shall serve as a custodian for each such deposit.
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75LOCAL AGENCY INVESTMENT GUIDELINES
(g) On the same date that the local agency’s funds are placed pursuant to
subdivision (b) by the private sector entity, 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
pursuant to subdivision (b).
(h) Notwithstanding subdivisions (a) to (g), inclusive, a credit union shall not act
as a selected depository institution under this section unless both of the following
conditions are satisfied:
(1) The credit union offers federal depository insurance through the National
Credit Union Administration.
(2) The credit union is in possession of written guidance or other written
communication from the National Credit Union Administration authorizing
participation of federally insured credit unions in one or more deposit placement
services and affirming that the moneys held by those credit unions while
participating in a deposit placement service will at all times be insured by the
federal government.
(i) It is the intent of the Legislature that this section shall not restrict
competition among private sector entities that provide placement services
pursuant to this section.
(j) The deposits placed pursuant to this section shall be subject to Section 53638
and shall not, in total, exceed 30 percent of the agency’s funds that may be
invested for this purpose.
(k) This section shall become operative on January 1, 2026.
53602
The legislative body shall invest only in notes, bonds, bills, certificates of in-
debtedness, warrants, or registered warrants which are legal investments for
savings banks in the State, provided, that the board of supervisors of a county
may, by a four-fifths vote thereof, invest in notes, warrants or other evidences
of indebtedness of public districts wholly or partly within the county, whether
or not such notes, warrants, or other evidences of indebtedness are legal invest-
ments for savings banks.
53603
The legislative body may make the investment by direct purchase of any issue of
eligible securities at their original sale or after they have been issued.
53604
The legislative body may sell, or exchange for other eligible securities, and rein-
vest the proceeds of, the securities purchased.
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76LOCAL AGENCY INVESTMENT GUIDELINES
53605
From time to time, the legislative body shall sell the securities so that the pro-
ceeds may be applied to the purposes for which the original purchase money was
placed in the sinking fund or the treasury of the local agency.
53606
The bonds purchased, which were issued by the purchaser, may be canceled either
in satisfaction or sinking fund obligations or otherwise. When canceled, they are
no longer outstanding, unless in its discretion, the legislative body holds then
uncanceled. While held uncanceled, the bonds may be resold.
53607
The authority of the legislative body to invest or to reinvest funds of a local
agency, or to sell or exchange securities so purchased, may be delegated for a one-
year period by the legislative body to the treasurer of the local agency, who shall
thereafter assume full responsibility for those transactions until the delegation of
authority is revoked or expires, and shall make a monthly report of those transac-
tions to the legislative body. Subject to review, the legislative body may renew the
delegation of authority pursuant to this section each year.
53608
The legislative body of a local agency may deposit for safekeeping with a federal
or state association (as defined by Section 5102 of the Financial Code), a trust
company or a state or national bank located within this state or with the Federal
Reserve Bank of San Francisco or any branch thereof within this state, or with
any Federal Reserve bank or with any state or national bank located in any city
designated as a reserve city by the Board of Governors of the Federal Reserve
System, the bonds, notes, bills, debentures, obligations, certificates of indebtedness,
warrants, or other evidences of indebtedness in which the money of the local
agency is invested pursuant to this article or pursuant to other legislative authority.
The local agency shall take from such financial institution a receipt for securities so
deposited. The authority of the legislative body to deposit for safekeeping may be
delegated by the legislative body to the treasurer of the local agency; the treasurer
shall not be responsible for securities delivered to and receipted for by a financial
institution until they are withdrawn from the financial institution by the treasurer.
53609
Notwithstanding the provisions of this chapter or any other provisions of this code,
funds held by a local agency pursuant to a written agreement between the agency
and employees of the agency to defer a portion of the compensation otherwise
receivable by the agency’s employees and pursuant to a plan for such deferral as ad-
opted by the governing body of the agency, may be invested in the types of invest-
ments set forth in Sections 53601 and 53602 of this code, and may additionally be
invested in corporate stocks, bonds, and securities, mutual funds, savings and loan
accounts, credit union accounts, life insurance policies, annuities, mortgages, deeds
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77LOCAL AGENCY INVESTMENT GUIDELINES
of trust, or other security interests in real or personal property. Nothing herein shall
be construed to permit any type of investment prohibited by the Constitution.
Deferred compensation funds are public pension or retirement funds for the
purposes of Section 17 of Article XVI of the Constitution.
53610
(a) For purposes of this section, “Proposition 1A receivable” means the right to
payment of moneys due or to become due to a local agency, pursuant to clause
(iii) of subparagraph (B) of paragraph (1) of subdivision (a) of Section 25.5 of
Article XIII of the California Constitution and Section 100.06 of the Revenue
and Taxation Code.
(b) Notwithstanding any other law, a local agency may purchase, with its rev-
enue, Proposition 1A receivables sold pursuant to Section 53999.
(c) A purchaser of Proposition 1A receivables pursuant to this section shall not
offer them for sale pursuant to Section 6588.
Government Code Section 53620-53622
53620
Notwithstanding Section 53601 or 53635, the governing body of a local agency
may invest funds designated for the payment of employee retiree health benefits
in any form or type of investment deemed prudent by the governing body
pursuant to Section 53622.
53621
The authority of the governing body to invest or to reinvest funds intended for
the payment of employee retiree health benefits, or to sell or exchange securi-
ties purchased for that purpose, may be delegated by the governing body to
designated officers.
53622
(a) Funds intended for the payment of employee retiree health benefits shall only
be held for the purpose of providing benefits to participants in the retiree health
benefit plan and defraying reasonable expenses of administering that plan.
(b) The governing body or designated officer, when making investments of the
funds, shall discharge its duties with respect to the investment of the funds.
(1) Solely in the interest of, and for the exclusive purposes of providing benefits to,
participants in the retiree health benefit plan, minimizing employer contributions
thereto, and defraying reasonable expenses of administering the plan.
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78LOCAL AGENCY INVESTMENT GUIDELINES
(2) With the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent person acting in a like capacity and familiar with these
matters would use in the conduct of an enterprise of a like character and with
like aims.
(3) Shall diversify the investments of the funds so as to minimize the risk of loss
and to maximize the rate of return, unless under the circumstances it is clearly
prudent not to do so.
Government Code Section 53630-53686
53630
As used in this article:
(a) “Local agency” means county, city, city and county, including a chartered city
or county, a community college district, or other public agency or corporation
in this state.
(b) “Treasurer” means treasurer of the local agency.
(c) “Depository” means a state or national bank, savings association or federal
association, a state or federal credit union, or a federally insured industrial loan
company, in this state in which the moneys of a local agency are deposited.
(d) “Agent of depository” means a trust company or trust department of a state or
national bank located in this state, including the trust department of a depository
where authorized, and the Federal Home Loan Bank of San Francisco, which is
authorized to act as an agent of depository for the purposes of this article pursu-
ant to Section 53657.
(e) “Security” means any of the eligible securities or obligations listed in Section
53651.
(f) “Pooled securities” means eligible securities held by an agent of depository for
a depository and securing deposits of one or more local agencies.
(g) “Administrator” means the Administrator of Local Agency Security of the
State of California.
(h) “Savings association or federal association” means a savings association, sav-
ings and loan association, or savings bank as defined by Section 5102 of the
Financial Code.
(i) “Federally insured industrial loan company” means an industrial loan com-
pany licensed under Division 7 (commencing with Section 18000) of the Finan-
cial Code, the investment certificates of which are insured by the Federal Deposit
Insurance Corporation.
(j) “Corporation” includes a limited liability company.
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79LOCAL AGENCY INVESTMENT GUIDELINES
53630.1
The Legislature hereby finds that the solvency and creditworthiness of each in-
dividual local agency can impact the solvency and creditworthiness of the state
and other local agencies within the state. Therefore, to protect the solvency and
creditworthiness of the state and all of its political subdivisions, the Legislature
hereby declares that the deposit and investment of public funds by local officials
and local agencies is an issue of statewide concern.
53630.5
(a) The definitions in Section 1750 of, and Chapter 1 (commencing with Section
99) of Division 1 of, the Financial Code apply to this section.
(b) In this article, for purposes of being a depository of moneys belonging to
or being in the custody of a local agency, the phrases “state or national bank
located in this state,” “state or national bank,” “state or national bank in this
state,” and “state or national banks in the state” include, without limitation,
any of the following:
(1) Any California branch office of a foreign (other state) state bank that the bank
is authorized to maintain under the law of its domicile and federal law.
(2) Any California branch office of a foreign (other state) national bank that the
bank is authorized to maintain under federal law.
(3) Any California branch office of a foreign (other nation) bank that the bank is
licensed to maintain under Article 3 (commencing with Section 1800) of Chap-
ter 20 of Division 1.1 of the Financial Code.
(4) Any California federal branch of a foreign (other nation) bank that the bank
is authorized to maintain under federal law.
53631
Under those conditions as the treasurer of a local agency fixes with the approval
of the legislative body, he or she may establish accounts at banks within or with-
out the state and deposit money in those accounts to the extent necessary to pay
the principal and interest of bonds to pay any warrant that has been presented
for payment, or to fund any electronic disbursement of funds from the treasury
of the local agency. This article does not apply to deposits for those purposes.
53632
There are three classes of deposits:
(a) Inactive deposits.
(b) Active deposits.
(c) Interest-bearing active deposits.
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53632.5
There are three classes of security for deposits:
(a) Securities described in subdivision (m) of Section 53651.
(b) Securities described in subdivision (p) of Section 53651.
(c) Securities enumerated in Section 53651, except for those described in subdi-
visions (m) and (p) of that section.
53633
The treasurer shall determine the amounts of money to be deposited as inac-
tive, active, and interest-bearing active deposits, except as otherwise provided
in Section 53679.
53634
The treasurer may call in money from inactive deposits and place it in active
deposits as current demands require. When there is money in his possession for
which there is no demand as inactive deposits, he may place it as active deposits.
53635
(a) This section shall apply to a local agency that is a county, a city and a
county, or other local agency that pools money in deposits or investments
with other local agencies, including local agencies that have the same govern-
ing body. However, Section 53601 shall apply to all local agencies that pool
money in deposits or investments exclusively with local agencies that have the
same governing body.
This section shall be interpreted in a manner that recognizes the distinct charac-
teristics of investment pools and the distinct administrative burdens on manag-
ing and investing funds on a pooled basis pursuant to Article 6 (commencing
with Section 27130) of Chapter 5 of Division 2 of Title 3.
A local agency that is a county, a city and county, or other local agency that pools
money in deposits or investments with other agencies may invest in commercial
paper pursuant to subdivision (h) of Section 53601, except that the local agency
shall be subject to the following concentration limits:
(1) No more than 40 percent of the local agency’s money may be invested in
eligible commercial paper.
(2) No more than 10 percent of the total assets of the investments held by a local
agency may be invested in any one issuer’s commercial paper.
(b) Notwithstanding Section 53601, the City of Los Angeles shall be subject to
the concentration limits of this section for counties and for cities and counties
with regard to the investment of money in eligible commercial paper.
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(c) A local agency subject to this section may invest in commercial paper, debt
securities, or other obligations of a public bank, as defined in Section 57600.
53635.2
As far as possible, all money belonging to, or in the custody of, a local agency,
including money paid to the treasurer or other official to pay the principal, interest,
or penalties of bonds, shall be deposited for safekeeping in state or national banks,
public banks, savings associations, federal associations, credit unions, or federally
insured industrial loan companies in this state selected by the treasurer or other
official having legal custody of the money; or may be invested in the investments
set forth in Section 53601. To be eligible to receive local agency money, a bank,
savings association, federal association, or federally insured industrial loan
company shall have received an overall rating of not less than “satisfactory” in
its most recent evaluation by the appropriate federal financial supervisory agency
of its record of meeting the credit needs of California’s communities, including
low- and moderate-income neighborhoods, pursuant to Section 2906 of Title
12 of the United States Code. Sections 53601.5 and 53601.6 shall apply to all
investments that are acquired pursuant to this section.
53635.7
In making any decision that involves borrowing in the amount of one hundred
thousand dollars ($100,000) or more, the legislative body of the local agency
shall discuss, consider, and deliberate each decision as a separate item of business
on the agenda of its meeting as prescribed in Chapter 9 (commencing with Sec-
tion 54950). As used in this section, “borrowing” does not include bank over-
drafts or security lending.
53635.8
Notwithstanding any other provision of this code, a local agency that has the
authority under law to invest funds, at its discretion, may 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. The following conditions shall apply:
(a) The local agency shall choose a nationally or state-chartered commercial bank,
savings bank, savings and loan association, or credit union in this state to invest
the funds, which shall be known as the “selected” depository institution.
(b) 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
are within the network used by the private sector entity for this purpose.
(c) 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.
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(d) Any private sector entity used by a selected depository institution to help
place its local agency deposits shall maintain policies and procedures requiring
all of the following:
(1) The full amount of each deposit placed pursuant to subdivision (b) and
the interest that may accrue on each such deposit shall at all times be insured
by the Federal Deposit Insurance Corporation or the National Credit Union
Administration.
(2) Every depository institution where funds are placed shall be capitalized at a
level that is sufficient, and be otherwise eligible, to receive such deposits pursuant
to regulations of the Federal Deposit Insurance Corporation or the National
Credit Union Administration, as applicable.
(3) 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) 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 pursuant to subdivision (c) as holding that
local agency’s deposits if those additional deposits would result in that local
agency’s total amount on deposit at that depository institution exceeding
the Federal Deposit Insurance Corporation or the National Credit Union
Administration insurance limit.
(e) 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 depository institution if those additional deposits would result in that local
agency’s total amount on deposit at that depository institution exceeding
the Federal Deposit Insurance Corporation or the National Credit Union
Administration insurance limit.
(f) The selected depository institution shall serve as a custodian for each such deposit.
(g) On the same date that the local agency’s funds are placed pursuant to
subdivision (b) by the private sector entity, 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 pursuant to subdivision (b).
(h) Notwithstanding subdivisions (a) to (g), inclusive, a credit union shall not act
as a selected depository institution under this section unless both of the following
conditions are satisfied:
(1) The credit union offers federal depository insurance through the National
Credit Union Administration.
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83LOCAL AGENCY INVESTMENT GUIDELINES
(2) The credit union is in possession of written guidance or other written
communication from the National Credit Union Administration authorizing
participation of federally insured credit unions in one or more deposit placement
services and affirming that the moneys held by those credit unions while
participating in a deposit placement service will at all times be insured by the
federal government.
(i) It is the intent of the Legislature that this section shall not restrict
competition among private sector entities that provide placement services
pursuant to this section.
(j) The deposits placed pursuant to this section shall be subject to Section 53638
and shall not, in total, exceed 30 percent of the agency’s funds that may be
invested for this purpose.
53636
Money so deposited is deemed to be in the treasury of the local agency.
53637
The money shall be deposited in any bank, savings association or federal associa-
tion, state or federal credit union, or federally insured industrial loan company
with the objective of realizing maximum return, consistent with prudent finan-
cial management, except that money shall not be deposited in any state or federal
credit union if a member of the legislative body of a local agency, or any person
with investment decision making authority of the administrative office, man-
ager’s office, budget office, auditor-controller’s office, or treasurer’s office of the
local agency, also serves on the board of directors, or any committee appointed
by the board of directors, or the credit committee or supervisory committee, of
the state or federal credit union.
53638
(a) The deposit shall not exceed the shareholder’s equity of any depository
bank. For the purposes of this subdivision, shareholder’s equity shall be
determined in accordance with Section 463 of the Financial Code, but shall be
deemed to include capital notes and debentures.
(b) The deposit shall not exceed the total of the net worth of any depository sav-
ings association or federal association, except that deposits not exceeding a total
of five hundred thousand dollars ($500,000) may be made to a savings associa-
tion or federal association without regard to the net worth of that depository, if
such deposits are insured or secured as required by law.
(c) The deposit to the share accounts of any regularly chartered credit union
shall not exceed the total of the unimpaired capital and surplus of the credit
union, as defined by rule of the Commissioner of Business Oversight, except
that the deposit to any credit union share account in an amount not exceeding
five hundred thousand dollars ($500,000) may be made if the share accounts of
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84LOCAL AGENCY INVESTMENT GUIDELINES
that credit union are insured or guaranteed pursuant to Section 14858 of the
Financial Code or are secured as required by law.
(d) The deposit in investment certificates of a federally insured industrial loan
company shall not exceed the total of the unimpaired capital and surplus of the
insured industrial loan company.
53639
Except as otherwise provided in Section 53682, the depository shall bear the
expenses of transportation of money to and from the depository.
53640
Except as otherwise provided in Section 53682, the depository shall handle,
collect, and pay all checks, drafts, and other exchange without cost to the
local agency.
53641
When money is deposited in a depository, the treasurer or other authorized of-
ficial shall take and preserve a receipt, certificate of deposit, or other evidence of
the deposit as he or she requires.
53642
The money deposited may be drawn out by check or order of the treasurer or
other official authorized to make such deposit.
53643
The treasurer may deposit any part of the money as agreed upon between the
treasurer and the depository.
53644
If an agreement is not made:
(a) Active deposits and interest thereon are subject to withdrawal upon the de-
mand of the treasurer or other authorized official, subject to any penalties which
may be prescribed by federal law or regulation.
(b) Inactive deposits are subject to notice of at least thirty days before withdrawal.
53645
Interest shall be computed and paid by the depository, as follows:
(a) For active deposits upon which interest is payable, interest shall be computed
on the average daily balance for the calendar quarter, and shall be paid quarterly.
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85LOCAL AGENCY INVESTMENT GUIDELINES
(b) For inactive deposits, interest shall be computed on a 360-day basis, and shall
be paid quarterly.
53646
(a)(1) In the case of county government, the treasurer may annually render to
the board of supervisors and any oversight committee a statement of invest-
ment policy, which the board shall review and approve at a public meeting.
Any change in the policy shall also be reviewed and approved by the board at
a public meeting.
(2) In the case of any other local agency, the treasurer or chief fiscal officer of the
local agency may annually render to the legislative body of that local agency and
any oversight committee of that local agency a statement of investment policy,
which the legislative body of the local agency shall consider at a public meeting.
Any change in the policy shall also be considered by the legislative body of the
local agency at a public meeting.
(b)(1) The treasurer or chief fiscal officer may render a quarterly report to the chief
executive officer, the internal auditor, and the legislative body of the local agency.
The quarterly report shall be so submitted within 30 days following the end of the
quarter covered by the report. Except as provided in subdivisions (e) and (f), this
report shall include the type of investment, issuer, date of maturity par and dollar
amount invested on all securities, investments and moneys held by the local agency,
and shall additionally include a description of any of the local agency’s funds, invest-
ments, or programs, that are under the management of contracted parties, including
lending programs. With respect to all securities held by the local agency, and under
management of any outside party that is not also a local agency or the State of Cali-
fornia Local Agency Investment Fund, the report shall also include a current market
value as of the date of the report, and shall include the source of this same valuation.
(2) The quarterly report shall state compliance of the portfolio to the statement of
investment policy, or manner in which the portfolio is not in compliance.
(3) The quarterly report shall include a statement denoting the ability of the local
agency to meet its pool’s expenditure requirements for the next six months, or
provide an explanation as to why sufficient money shall, or may, not be available.
(4) In the quarterly report, a subsidiary ledger of investments may be used in ac-
cordance with accepted accounting practices.
(c) Pursuant to subdivision (b), the treasurer or chief fiscal officer shall report
whatever additional information or data may be required by the legislative body
of the local agency.
(d) The legislative body of a local agency may elect to require the report specified
in subdivision (b) to be made on a monthly basis instead of quarterly.
(e) For local agency investments that have been placed in the Local Agency In-
vestment Fund, created by Section 16429.1, in National Credit Union Share
Insurance Fund-insured accounts in a credit union, in accounts insured or guar-
anteed pursuant to Section 14858 of the Financial Code, or in Federal Deposit
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86LOCAL AGENCY INVESTMENT GUIDELINES
Insurance Corporation-insured accounts in a bank or savings and loan associa-
tion, in a county investment pool, or any combination of these, the treasurer or
chief fiscal officer may supply to the governing body, chief executive officer, and
the auditor of the local agency the most recent statement or statements received
by the local agency from these institutions in lieu of the information required
by paragraph (1) of subdivision (b) regarding investments in these institutions.
(f) The treasurer or chief fiscal officer shall not be required to render a quarterly
report, as required by subdivision (b), to a legislative body or any oversight com-
mittee of a school district or county office of education for securities, invest-
ments, or moneys held by the school district or county office of education in
individual accounts that are less than twenty-five thousand dollars ($25,000).
(g) In recognition of the state and local interests served by the actions made op-
tional in subdivisions (a) and (b), the Legislature encourages the local agency offi-
cials to continue taking the actions formerly mandated by this section. However,
nothing in this subdivision may be construed to impose any liability on a local
agency that does not continue to take the formerly mandated action.
53647
(a) Interest on all money deposited belongs to, and shall be paid quarterly into
the general fund of, the local agency represented by the officer making the de-
posit, unless otherwise directed by law.
(b) Notwithstanding the provisions of subdivision (a), and except as otherwise
directed by law, if the governing body of the local agency represented by the of-
ficer making the deposit so directs, such interest shall be paid to the fund which
contains the principal on which the interest accrued.
53647.5
Notwithstanding any other provision of law, interest earned on any bail money de-
posited by a court in a bank account pursuant to Section 1463.1 of the Penal Code
and Section 53679 of this code shall, be allocated for the support of that court.
53648
Notwithstanding this article, the treasurer may deposit moneys in, and enter into
contracts with, a state or national bank, savings association or federal association,
federal or state credit union, or federally insured industrial loan company, pursu-
ant to a federal law or a rule of a federal department or agency adopted pursuant
to the law if the law or rule conflicts with this article in regulating the payment of
interest on deposits of public moneys by any of the following:
(a) Banks which are Federal Reserve System members or whose deposits are in-
sured by the Federal Deposit Insurance Corporation.
(b) Savings associations or federal associations which are federal home loan
bank members or whose deposits are insured by the Federal Savings and Loan
Insurance Corporation.
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87LOCAL AGENCY INVESTMENT GUIDELINES
(c) State or federal credit unions whose accounts are insured by the National
Credit Union Share Insurance Fund or guaranteed by the California Credit
Union Share Guaranty Corporation or insured or guaranteed pursuant to Sec-
tion 14858 of the Financial Code, unless a member of the legislative body of a
local agency, or any person with investment decision making authority of the
administrative office, manager’s office, budget office, auditor-controller’s office,
or treasurer’s office of the local agency, also serves on the board of directors, or
any committee appointed by the board of directors, or the credit committee or
supervisory committee, of the state or federal credit union.
(d) A federally insured industrial loan company.
53648.5
Upon the removal by federal law of the conflicting federal law or rule the agree-
ment between the treasurer or other authorized official and a depository may be
terminated by either party.
53649
The treasurer is responsible for the safekeeping of money in his or her custody
and shall enter into any contract with a depository relating to any deposit which
in his or her judgment is to the public advantage. The depository, and the agent
of depository to the extent the agent of depository has been notified of deposits
and the amount thereof, are responsible for securing moneys deposited pursuant
to such a contract in accordance with Section 53652. One copy of each contract
shall be filed with the auditor, controller, secretary, or corresponding officer of the
local agency. The contract shall:
(a) Fix the duration of deposits, if appropriate.
(b) Fix the interest rate, if any.
(c) Provide conditions for withdrawal and repayment.
(d) Provide for placement of pooled securities in a named agent of depository in
accordance with Section 53656.
(e) Grant authority for agent of depository to place securities for safekeeping in
accordance with Section 53659.
(f) Set forth in accordance with Section 53665 the conditions upon which the
administrator shall order pooled securities converted into money for the benefit
of the local agency, and the procedure therefor.
(g) Provide for compliance in all respects with the provisions of this article and
other applicable provisions of law.
(h) Provide, upon notice to the treasurer from the administrator, that a trea-
surer may withdraw deposits in the event a depository fails to pay the as-
sessments, fines, or penalties assessed by the administrator or may withdraw
authorization for the placement of pooled securities in an agent of depository
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88LOCAL AGENCY INVESTMENT GUIDELINES
in the event that the agent of depository fails to pay the fines or penalties as-
sessed by the administrator.
53651
Eligible securities are any of the following:
(a) United States Treasury notes, bonds, bills or certificates of indebtedness, or ob-
ligations for which the faith and credit of the United States are pledged for the pay-
ment of principal and interest, including the guaranteed portions of small business
administration loans, so long as the loans are obligations for which the faith and
credit of the United States are pledged for the payment of principal and interest.
(b) Notes or bonds or any obligations of a local public agency (as defined in the
United States Housing Act of 1949) or any obligations of a public housing agen-
cy (as defined in the United States Housing Act of 1937) for which the faith and
credit of the United States are pledged for the payment of principal and interest.
(c) Bonds of this state or of any local agency or district of the State of California
having the power, without limit as to rate or amount, to levy taxes or assessments
to pay the principal and interest of the bonds upon all property within its bound-
aries subject to taxation or assessment by the local agency or district, and in addi-
tion, limited obligation bonds pursuant to Article 4 (commencing with Section
50665) of Chapter 3 of Division 1, senior obligation bonds pursuant to Article 5
(commencing with Section 53387) of Chapter 2.7, and revenue bonds and other
obligations payable solely out of the revenues from a revenue-producing property
owned, controlled or operated by the state, local agency or district or by a depart-
ment, board, agency or authority thereof.
(d) Bonds of any public housing agency (as defined in the United States Housing
Act of 1937, as amended) as are secured by a pledge of annual contributions un-
der an annual contribution contract between the public housing agency and the
Public Housing Administration if such contract shall contain the covenant by the
Public Housing Administration which is authorized by subsection (b) of Section
22 of the United States Housing Act of 1937, as amended, and if the maximum
sum and the maximum period specified in the contract pursuant to that subsec-
tion 22(b) shall not be less than the annual amount and the period for payment
which are requisite to provide for the payment when due of all installments of
principal and interest on the obligations.
(e) Registered warrants of this state.
(f) Bonds, consolidated bonds, collateral trust debentures, consolidated deben-
tures, or other obligations issued by the United States Postal Service, federal land
banks or federal intermediate credit banks established under the Federal Farm
Loan Act, as amended, debentures and consolidated debentures issued by the
Central Bank for Cooperatives and banks for cooperatives established under the
Farm Credit Act of 1933, as amended, consolidated obligations of the federal
home loan banks established under the Federal Home Loan Bank Act, bonds,
debentures and other obligations of the Federal National Mortgage Association
or of the Government National Mortgage Association established under the Na-
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tional Housing Act, as amended, bonds of any federal home loan bank estab-
lished under that act, bonds, debentures and other obligations of the Federal
Home Loan Mortgage Corporation established under the Emergency Home Fi-
nance Act of 1970, and obligations of the Tennessee Valley Authority.
(g) Notes, tax anticipation warrants or other evidence of indebtedness issued
pursuant to Article 7 (commencing with Section 53820), Article 7.5 (commenc-
ing with Section 53840) or Article 7.6 (commencing with Section 53850) of this
Chapter 4.
(h) State of California notes.
(i) Bonds, notes, certificates of indebtedness, warrants or other obligations is-
sued by: (1) any state of the United States (except this state), or the Common-
wealth of Puerto Rico, or any local agency thereof having the power to levy
taxes, without limit as to rate or amount, to pay the principal and interest of
such obligations, or (2) any state of the United States (except this state), or the
Commonwealth of Puerto Rico, or a department, board, agency or authority
thereof except bonds which provide for or are issued pursuant to a law which
may contemplate a subsequent legislative appropriation as an assurance of the
continued operation and solvency of the department, board, agency or author-
ity but which does not constitute a valid and binding obligation for which the
full faith and credit of such state or the Commonwealth of Puerto Rico are
pledged, which are payable solely out of the revenues from a revenue-produc-
ing source owned, controlled or operated thereby; provided the obligations
issued by an entity described in (1), above, are rated in one of the three highest
grades, and such obligations issued by an entity described in (2), above, are
rated in one of the two highest grades by a nationally recognized investment
service organization that has been engaged regularly in rating state and munici-
pal issues for a period of not less than five years.
(j) Obligations issued, assumed or guaranteed by the International Bank for Re-
construction and Development, Inter-American Development Bank, the Gov-
ernment Development Bank of Puerto Rico, the Asian Development Bank, the
International Finance Corporation, or the African Development Bank.
(k) Participation certificates of the Export-Import Bank of the United States.
(l) Bonds and notes of the California Housing Finance Agency issued pursuant
to Chapter 7 (commencing with Section 51350) of Part 3 of Division 31 of the
Health and Safety Code.
(m) Promissory notes secured by first mortgages and first trust deeds which com-
ply with Section 53651.2.
(n) Any bonds, notes, warrants, or other evidences of indebtedness of a nonprofit
corporation issued to finance the construction of a school building or school
buildings pursuant to a lease or agreement with a school district entered into
in compliance with the provisions of Section 39315 or 81345 of the Education
Code, and also any bonds, notes, warrants or other evidences of indebtedness
issued to refinance those bonds, notes, warrants, or other evidences of indebted-
ness as specified in Section 39317 of the Education Code.
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90LOCAL AGENCY INVESTMENT GUIDELINES
(o) Any municipal securities, as defined by Section 3(a)(29) of the Securities Ex-
change Act of June 6, 1934, (15 u.s.c. Sec. 78, as amended), which are issued by
this state or any local agency thereof.
(p) With the consent of the treasurer, letters of credit issued by the Federal Home
Loan Bank of San Francisco which comply with Section 53651.6.
53651.2
(a) To be an eligible security under subdivision (m) of Section 53651, a promis-
sory note placed in a securities pool on or after January 1, 1987, shall comply
with all of the following provisions:
(1) Each promissory note shall be secured by a first mortgage or first trust deed
on improved 1 to 4 unit residential real property located in California, shall be
fully amortized over the term of the note, and shall have a term of no more than
30 years. Any first mortgage or first trust deed which secures a promissory note
providing for negative amortization shall be removed from the securities pool
and replaced with an eligible security under subdivision (m) of Section 53651 if
the loan to value ratio exceeds 85 percent of the original appraised value of the
security property as a consequence of negative amortization.
(2) Each promissory note shall be eligible for sale to the Federal National Mort-
gage Association, the Government National Mortgage Association, or the Federal
Home Loan Mortgage Corporation; provided, however, that up to 25 percent
of the total dollar amount of any promissory note securities pool established
pursuant to Section 53658 may consist of promissory notes with loan amounts
which exceed the maximum amounts eligible for purchase by the Federal Na-
tional Mortgage Association, the Government National Mortgage Association,
or the Federal Home Loan Mortgage Corporation, but which do not exceed: (i)
five hundred thousand dollars ($500,000) in the case of a single family dwelling;
(ii) one million dollars ($1,000,000) in the case of a 2, 3, or 4 unit dwelling.
(b) The following shall not constitute eligible securities under subdivision (m) of
Section 53651:
(1) Any promissory note on which any payment is more than 60 days past due.
(2) Any promissory note secured by a mortgage or deed of trust as to which there
is a lien prior to the mortgage or deed of trust. For the purposes of this paragraph,
no lien specified in Section 766 of the Financial Code shall be considered a prior
encumbrance unless any installment or payment thereunder (other than a rental
or royalty under a lease) is due and delinquent.
(3) Any promissory note secured by a mortgage or deed of trust as to which a
notice of default has been recorded pursuant to Section 2924 of the Civil Code
or an action has been commenced pursuant to Section 725a of the Code of
Civil Procedure.
(c) The depository may exercise, enforce, or waive any right granted to it by the
promissory note, mortgage, or deed of trust.
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91LOCAL AGENCY INVESTMENT GUIDELINES
(d) For purposes of this article, the market value of a promissory note which is
an eligible security under subdivision (m) of Section 53651, shall be determined
in accordance with the regulations adopted by the Treasurer under paragraph (2)
of subdivision (m) of Section 53651, as the regulations and statute were in effect
on December 31, 1986. However, if and when regulations on the subject are ad-
opted by the administrator, the market value shall be determined in accordance
with those regulations of the administrator.
53651.4
(a) A depository that uses eligible securities of the class described in subdivision
(m) of Section 53651 shall, within 90 days after the close of each calendar year or
within a longer period as the administrator may specify, file with the administra-
tor a report of an independent certified public accountant regarding compliance
with this article and with regulations and orders issued by the administrator un-
der this article with respect to eligible securities of that class. The report shall be
based upon the audit, shall contain the information, and shall be in the form the
administrator may prescribe. The depository shall provide a copy of the report to
the treasurer on request.
(b) If a depository that is a state bank files with the administrator, not less than
90 days before the beginning of the calendar year, a notice that it elects to be ex-
amined by the administrator instead of filing a report of an independent certified
public accountant under subdivision (a) for that calendar year, the depository
shall be exempt from subdivision (a) for that calendar year and shall for that cal-
endar year be subject to examination by the administrator regarding compliance
with this article and with regulations and orders under this article with respect to
eligible securities of the class described in subdivision (m) of Section 53651. The
administrator shall provide a report to a treasurer with deposits in the examined
state bank upon request of the treasurer.
(c) A national bank may apply to the administrator to be examined, and the
administrator, in his or her discretion, may examine a national bank for the
purposes of satisfying the requirements of subdivision (a). The administrator
shall provide a report to a treasurer with deposits in the examined national bank
upon request of the treasurer.
(d) Whenever the administrator examines a depository pursuant to subdivision
(b) or (c), the depository shall pay, within 30 days after receipt of a statement
from the administrator, a fee of seventy-five dollars ($75) per hour for each ex-
aminer engaged in the examination.
53651.6
(a) To be an eligible security under subdivision (p) of Section 53651, a letter of
credit shall be in such form and shall contain such provisions as the administrator
may prescribe, and shall include all of the following terms:
(1) The administrator shall be the beneficiary of the letter of credit.
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92LOCAL AGENCY INVESTMENT GUIDELINES
(2) The letter of credit shall be clean and irrevocable and shall provide that the
administrator may draw upon it up to the total amount in the event of the fail-
ure of the depository savings association or federal association or if the deposi-
tory savings association or federal association refuses to permit the withdrawal of
funds by a treasurer.
53652
To secure active or inactive deposits a depository shall at all times maintain with
the agent of depository eligible securities in securities pools, pursuant to Sections
53656 and 53658, in the amounts specified in this section. Uncollected funds
shall be excluded from the amount deposited in the depository when determin-
ing the security requirements for the deposits.
(a) Eligible securities, except eligible securities of the classes described in sub-
divisions (m) and (p) of Section 53651, shall have a market value of at least 10
percent in excess of the total amount of all deposits of a depository secured by
the eligible securities.
(b) Eligible securities of the class described in subdivision (m) of Section 53651
shall have a market value at least 50 percent in excess of the total amount of all
deposits of a depository secured by those eligible securities.
(c) Eligible securities of the class described in subdivision (p) of Section 53651
shall have a market value of at least 5 percent in excess of the total amount of all
deposits of a depository secured by those eligible securities. For purposes of this
article, the market value of a letter of credit which is an eligible security under
subdivision (p) of Section 53651 shall be the amount of credit stated in the letter
of credit.
53653
When in his or her discretion local conditions so warrant, the treasurer may
waive security for the portion of any deposits as is insured pursuant to federal
law, notwithstanding this article. For deposits equivalent to and not less than
the maximum amount insured pursuant to federal law for which a treasurer has
waived security under this section, a treasurer at his or her discretion may also
waive security for the interest accrued on the deposits which, when added to
the deposits, would cause the sum of the interest and deposits to exceed the
maximum amount insured pursuant to federal law, provided that the interest is
computed by the depository on the average daily balance of the deposits, paid
monthly and computed on a 360-day basis.
53654
(a) The depository may add securities to the pool or substitute securities of equal
value for those in the pool at any time, but shall not interchange classes of secu-
rity, as defined in Section 53632.5, without prior approval of the treasurer.
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93LOCAL AGENCY INVESTMENT GUIDELINES
(b) Withdrawal of securities from the pool without replacement at equal value
may be ordered only by two duly authorized officers or employees of the deposi-
tory who satisfy the requirements as may be set by the administrator.
(c) The agent of depository is responsible for the safekeeping and disbursement of
securities placed in its custody by a depository. It shall release securities only upon
presentation by the depository of the most reasonably current statement of the
total deposits subject to this article held by the depository, such statement to be
verified and countersigned by two duly authorized officers, other than those who
ordered the withdrawal of securities. A copy of this statement shall be forwarded
to the administrator concurrently by the agent of depository.
53655
A placement of securities by a depository with an agent of depository pursuant to
this article shall have the effect of perfecting a security interest in those securities
in the local agencies having deposits in that depository notwithstanding provi-
sions of the Uniform Commercial Code to the contrary and notwithstanding
that the agent of depository may be the trust department of the depository.
53656
(a) At the time the treasurer enters into a contract with the depository pursuant
to Section 53649, he or she shall authorize the agent of depository designated by
the depository, but including the trust department of the depository only when
acceptable to both the treasurer and the depository, to hold securities of the de-
pository in accordance with this article to secure the deposit of the local agency.
(b) Only those trust companies and trust departments, or the Federal Home Loan
Bank of San Francisco, which have been authorized by the administrator pursuant
to Section 53657 shall be authorized by treasurers to act as agents of depository.
(c) The securities are subject to order of the depository in accordance with Sec-
tion 53654 except when the provisions of subdivision (i) of Section 53661 and
Section 53665 are in effect.
(d) An agent of depository shall not release any security held to secure a local
agency deposit in a depository unless the administrator issues an order authoriz-
ing the release where either of the following occurs:
(1) A state or federal regulatory agency has taken possession of the depository.
(2) A conservator, receiver, or other legal custodian has been appointed for
the depository.
53657
(a) No person shall act as an agent of depository unless that person is a trust
company located in this state, the trust department of a bank located in this
state, or the Federal Home Loan Bank of San Francisco, and is authorized by the
administrator to act as an agent of depository.
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(b)(1) An application for authorization shall be in such form, shall contain such
information, shall be signed in such manner, and shall (if the administrator so
requires) be verified in such manner, as the administrator may prescribe.
(2) The fee for filing an application for authorization with the administrator shall
be five hundred dollars ($500).
(3) If the administrator finds, with respect to an application for authorization,
that the applicant is competent to act as an agent of depository and that it is rea-
sonable to believe the applicant will comply with all applicable provisions of this
article and of any regulation or order issued under this article, the administrator
shall approve the application. If the administrator finds otherwise, the adminis-
trator shall deny the application.
(4) When an application for authorization has been approved, the applicant shall
file with the administrator an agreement to comply with all applicable provisions
of this article and of any regulation or order issued under this article. The agree-
ment shall be in such form, shall contain such provisions, and shall be signed in
such manner as the administrator may prescribe.
(5) When an application for authorization has been approved, the applicant has
complied with paragraph (4), and all conditions precedent to authorizing the
applicant to act as agent of depository have been fulfilled, the administrator shall
authorize the applicant to act as agent of depository.
53658
An agent of a depository may hold and pool securities to secure deposits for one
or more depositories pursuant to Section 53656, but shall maintain a separate
pool for each said depository. Each local agency shall have an undivided security
interest in the pooled securities in the proportion that the amount of its deposits
bears to the total amount of deposits secured by the pooled securities.
53659
Whenever an agent of depository accepts securities pursuant to Section 53656 it
may, with the authorization of the depository, place such securities for safekeep-
ing with a Federal Reserve Bank or branch thereof or with any bank located in a
city designated as a reserve city by the Board of Governors of the Federal Reserve
System or with the Federal Home Loan Bank of San Francisco or with a trust
company located in this state. Authority for such placement together with the
names of the banks or, including the Federal Home Loan Bank of San Francisco,
trust companies to be so used, shall be contained in the contract between the
treasurer and the depository required in Section 53649.
53660
When deposits of a local agency are secured by pooled securities pursuant to Section
53656, the agent of depository shall make available to the treasurer for review at a
mutually agreed upon time and location all of the following information which may
be in the form of a copy of the report required in subdivision (e) of Section 53661:
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(a) A certification that there are securities in the pool in the amounts required by
Section 53652 to secure deposits.
(b) A certified report of the individual securities then on deposit in the pool with
the location and total market value thereof.
(c) The total amount of deposits then reported by the depository to be secured
by the pool.
53661
(a) The Commissioner of Business Oversight shall act as Administrator of Lo-
cal Agency Security and shall be responsible for the administration of Sections
53638, 53651, 53651.2, 53651.4, 53651.6, 53652, 53654, 53655, 53656,
53657, 53658, 53659, 53660, 53661, 53663, 53664, 53665, 53666, and 53667.
(b) The administrator shall have the powers necessary or convenient to adminis-
ter and enforce the sections specified in subdivision (a).
(c)(1) The administrator shall issue regulations consistent with law as the admin-
istrator may deem necessary or advisable in executing the powers, duties, and
responsibilities assigned by this article. The regulations may include regulations
prescribing standards for the valuation, marketability, and liquidity of the eligible
securities of the class described in subdivision (m) of Section 53651, regulations
prescribing procedures and documentation for adding, withdrawing, substitut-
ing, and holding pooled securities, and regulations prescribing the form, content,
and execution of any application, report, or other document called for in any of
the sections specified in subdivision (a) or in any regulation or order issued under
any of those sections.
(2) The administrator, for good cause, may waive any provision of any regulation
adopted pursuant to paragraph (1) or any order issued under this article, where
the provision is not necessary in the public interest.
(d) The administrator may enter into any contracts or agreements as may be
necessary, including joint underwriting agreements, to sell or liquidate eligible
securities securing local agency deposits in the event of the failure of the deposi-
tory or if the depository fails to pay all or part of the deposits of a local agency.
(e) The administrator shall require from every depository a report certified by the
agent of depository listing all securities, and the market value thereof, which are
securing local agency deposits together with the total deposits then secured by the
pool, to determine whether there is compliance with Section 53652. These re-
ports may be required whenever deemed necessary by the administrator, but shall
be required at least four times each year at the times designated by the Comptrol-
ler of the Currency for reports from national banking associations. These reports
shall be filed in the office of the administrator by the depository within 20 busi-
ness days of the date the administrator calls for the report.
(f) The administrator may have access to reports of examination made by the
Comptroller of the Currency insofar as the reports relate to national banking as-
sociation trust department activities which are subject to this article.
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(g)(1) The administrator shall require the immediate substitution of an eligible
security, where the substitution is necessary for compliance with Section 53652, if
(i) the administrator determines that a security listed in Section 53651 is not quali-
fied to secure public deposits, or (ii) a treasurer, who has deposits secured by the
securities pool, provides written notice to the administrator and the administrator
confirms that a security in the pool is not qualified to secure public deposits.
(2) The failure of a depository to substitute securities, where the administrator
has required the substitution, shall be reported by the administrator promptly
to those treasurers having money on deposit in that depository and, in addition,
shall be reported as follows:
(A) When that depository is a national bank, to the Comptroller of the Currency
of the United States.
(B) When that depository is a state bank, to the Commissioner of Business
Oversight.
(C) When that depository is a federal association, to the Office of the Comptroller
of the Currency.
(D) When that depository is a savings association, to the Commissioner of Busi-
ness Oversight.
(E) When that depository is a federal credit union, to the National Credit Union
Administration.
(F) When that depository is a state credit union or a federally insured industrial
loan company, to the Commissioner of Business Oversight.
(h) The administrator may require from each treasurer a registration report and
at appropriate times a report stating the amount and location of each deposit
together with other information deemed necessary by the administrator for ef-
fective operation of this article. The facts recited in any report from a treasurer to
the administrator are conclusively presumed to be true for the single purpose of
the administrator fulfilling responsibilities assigned to him or her by this article
and for no other purpose.
(i)(1) If, after notice and opportunity for hearing, the administrator finds that
any depository or agent of depository has violated or is violating, or that there is
reasonable cause to believe that any depository or agent of depository is about to
violate, any of the sections specified in subdivision (a) or any regulation or order
issued under any of those sections, the administrator may order the depository
or agent of depository to cease and desist from the violation or may by order
suspend or revoke the authorization of the agent of depository. The order may
require the depository or agent of depository to take affirmative action to correct
any condition resulting from the violation.
(2)(A) If the administrator makes any of the findings set forth in paragraph (1) with
respect to any depository or agent of depository and, in addition, finds that the vio-
lation or the continuation of the violation is likely to seriously prejudice the inter-
ests of treasurers, the administrator may order the depository or agent of depository
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to cease and desist from the violation or may suspend or revoke the authorization
of the agent of depository. The order may require the depository or agent of deposi-
tory to take affirmative action to correct any condition resulting from the violation.
(B) Within five business days after an order is issued under subparagraph (a), the
depository or agent of depository may file with the administrator an application
for a hearing on the order. The administrator shall schedule a hearing at least 30
days, but not more than 40 days, after receipt of an application for a hearing or
within a shorter or longer period of time agreed to by a depository or an agent of
depository. If the administrator fails to schedule the hearing within the specified
or agreed to time period, the order shall be deemed rescinded. Within 30 days
after the hearing, the administrator shall affirm, modify, or rescind the order;
otherwise, the order shall be deemed rescinded. The right of a depository or agent
of depository to which an order is issued under subparagraph (a) to petition for
judicial review of the order shall not be affected by the failure of the depository
or agent of depository to apply to the administrator for a hearing on the order
pursuant to this subparagraph.
(3) Whenever the administrator issues a cease and desist order under paragraph
(1) or (2), the administrator may in the order restrict the right of the depository
to withdraw securities from a security pool; and, in that event, both the deposi-
tory to which the order is directed and the agent of depository which holds the
security pool shall comply with the restriction.
(4) In case the administrator issues an order under paragraph (1) or (2) suspend-
ing or revoking the authorization of an agent of depository, the administrator
may order the agent of depository at its own expense to transfer all pooled securi-
ties held by it to such agent of depository as the administrator may designate in
the order. The agent of depository designated in the order shall accept and hold
the pooled securities in accordance with this article and regulations and orders
issued under this article.
(j) In the discretion of the administrator, whenever it appears to the administra-
tor that any person has violated or is violating, or that there is reasonable cause
to believe that any person is about to violate, any of the sections specified in sub-
division (a) or any regulation or order issued thereunder, the administrator may
bring an action in the name of the people of the State of California in the supe-
rior court to enjoin the violation or to enforce compliance with those sections or
any regulation or order issued thereunder. Upon a proper showing a permanent
or preliminary injunction, restraining order, or writ of mandate shall be granted,
and the court may not require the administrator to post a bond.
(k) In addition to other remedies, the administrator shall have the power and
authority to impose the following sanctions for noncompliance with the sec-
tions specified in subdivision (a) after a hearing if requested by the party deemed
in noncompliance. Any fine assessed pursuant to this subdivision shall be paid
within 30 days after receipt of the assessment.
(1) Assess against and collect from a depository a fine not to exceed two hundred
fifty dollars ($250) for each day the depository fails to maintain with the agent of
depository securities as required by Section 53652.
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(2) Assess against and collect from a depository a fine not to exceed one hundred
dollars ($100) for each day beyond the time period specified in subdivision (b) of
Section 53663 the depository negligently or willfully fails to file in the office of
the administrator a written report required by that section.
(3) Assess against and collect from a depository a fine not to exceed one hundred
dollars ($100) for each day beyond the time period specified in subdivision (e)
that a depository negligently or willfully fails to file in the office of the adminis-
trator a written report required by that subdivision.
(4) Assess and collect from an agent of depository a fine not to exceed one hun-
dred dollars ($100) for each day the agent of depository fails to comply with any
of the applicable sections specified in subdivision (a) or any applicable regulation
or order issued thereunder.
(l)(1) In the event that a depository or agent of depository fails to pay a fine
assessed by the administrator pursuant to subdivision (k) within 30 days of
receipt of the assessment, the administrator may assess and collect an addi-
tional penalty of 5 percent of the fine for each month or part thereof that the
payment is delinquent.
(2) If a depository fails to pay the fines or penalties assessed by the administrator,
the administrator may notify local agency treasurers with deposits in the depository.
(3) If an agent of depository fails to pay the fines or penalties assessed by the
administrator, the administrator may notify local agency treasurers who have
authorized the agent of depository as provided in Sections 53649 and 53656,
and may by order revoke the authorization of the agent of depository as pro-
vided in subdivision (i).
(m) The amendments to this section enacted by the Legislature during the 1999–
2000 Regular Session shall become operative on January 1, 2001.
53663
(a) Each agent of depository shall report in writing to the administrator within
two business days after any withdrawal, substitution or addition of pooled se-
curities and shall state the name and market value of the securities withdrawn,
substituted or added together with the total deposits then secured by the pool.
This information shall be available from the administrator to the treasurer
upon request.
(b) Each depository shall report in writing to the administrator weekly, giving
the total amount of all deposits held by the depository pursuant to this article.
The report shall be as of close of business on Wednesday of each week and shall
be delivered to the office of the administrator, deposited in the United States
mail, postage prepaid, or delivered electronically via email, or other electronic
means approved by the administrator, addressed to the office of the administra-
tor, within five business days. Where there has occurred no change in the deposits
required to be held by the depository pursuant to this article, the report required
by this subdivision need only state that fact.
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99LOCAL AGENCY INVESTMENT GUIDELINES
53664
The individual reports specified in Sections 53654, 53660, 53661, and 53663 are
not public documents and are not open to inspection by the public.
53665
If a depository fails to pay all or part of the deposits of a local agency secured by
pooled securities in accordance with the contract provided for in Section 53649,
and on demand of its treasurer or other authorized official and the treasurer files
a report with the administrator, or if the depository fails:
(a) In case the pooled securities consist of securities other than securities of
the class described in subdivision (p) of Section 53651, the administrator shall
order the agent of depository holding the pooled securities to convert into
money that portion of the pooled securities necessary to produce an amount
equal to the sum of (i) the deposits of the local agency, (ii) any accrued interest
due on the deposits, and (iii) the reasonable expenses of the agent of depository
in complying with the order of the administrator and to pay the sum of items
(i) and (ii) to the treasurer in satisfaction of the deposits. The agent of deposi-
tory shall be reimbursed out of the proceeds of the conversion for its reason-
able expenses in complying with the order of the administrator, as approved
by the administrator. Any excess moneys resulting from the conversion shall
be retained by the agent of depository as part of the securities pool until the
depository substitutes for the excess moneys securities having a market value
sufficient to bring the total of pooled securities up to the amount required by
Section 53652.
(b) In case the pooled securities consist of a security of the class described in
subdivision (p) of Section 53651, the administrator shall draw on the letter of
credit an amount equal to the sum of (i) the deposits of the local agency, (ii) any
accrued interest on the deposits, and (iii) the reasonable expenses of the adminis-
trator in paying the deposits and pay the sum of items (i) and (ii) to the treasurer
in satisfaction of the deposits.
53666
The only liability that shall attach to the administrator as the result of the opera-
tion of this article is that which would attach as a result of other laws of this state.
53667
(a) Expenses incurred by the administrator in carrying out the duties and respon-
sibilities assigned to the administrator by the sections specified in subdivision (a)
of Section 53661, shall be borne by the Local Agency Deposit Security Fund,
which is hereby created and continuously appropriated to the administrator for
the administration of the sections specified in subdivision (a) of Section 53661.
This fund shall consist of fines levied pursuant to Section 53661, fees collected
pursuant to the sections specified in subdivision (a) of Section 53661, and assess-
ments levied pursuant to this section.
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100LOCAL AGENCY INVESTMENT GUIDELINES
(b) Each fiscal year the administrator shall levy an assessment on a pro rata
basis on those depositories which at any time during the preceding fiscal year
held local agency deposits. The total assessment levied on all of those deposito-
ries shall be in an amount which, when added to the amount of fines and fees
that the administrator estimates will be collected during the fiscal year when
the assessment is levied, is sufficient in the judgment of the administrator to
meet the expenses of the administrator in administering the sections specified
in subdivision (a) of Section 53661 and to provide a reasonable reserve for
contingencies. The basis of the apportionment of the assessment among the
depositories assessed shall be the proportion that the average amount of local
agency deposits held by each of those depositories bears to the average total
amount of local agency deposits held by all of those depositories as shown by
the reports of depositories to the administrator for the preceding fiscal year,
as required in subdivision (e) of Section 53661; provided, however, that the
amount of the assessment levied on each of those depositories shall be not less
than twenty-five dollars ($25).
(c) The administrator shall notify each depository by mail of the amount
levied against it. The depository shall pay the amount levied within 20 days
after such notice into the Local Agency Deposit Security Fund for the admin-
istration of the sections specified in subdivision (a) of Section 53661. If pay-
ment is not made to the administrator within such time, the administrator
shall assess and collect, in addition to the annual assessment, a penalty of 5
percent of the assessment for each month or part thereof that the payment is
delinquent. If a depository fails to pay the assessment or penalties assessed by
the administrator, the administrator may notify local agency treasurers with
deposits in the depository.
53669
The treasurer or other authorized official is not responsible for money while it is
deposited pursuant to this article.
53676
The treasurer is not responsible for securities delivered to and receipted for by any
bank, savings and loan association, credit union, federally insured industrial loan
company, or trust company.
53678
The charges for the handling and safekeeping of any such securities are not a charge
against the treasurer but shall be paid by the depository owning the securities.
53679
So far as possible, all money belonging to a local agency under the control of any
of its officers or employees other than the treasurer shall, and money deposited as
bail coming into the possession of a judge or officer of a superior court may, be
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101LOCAL AGENCY INVESTMENT GUIDELINES
deposited as active deposits in the state or national bank, inactive deposits in the
state or national bank or state or federal association, federal or state credit union,
or federally insured industrial loan company in this state selected by the officer,
employee, or judge of the court. For purposes of this section, an officer or em-
ployee of a local agency and a judge or officer of a superior court are prohibited
from depositing local agency funds or money coming into their possession into
a state or federal credit union if an officer or employee of the local agency, or a
judge or officer of a superior court, also serves on the board of directors, or any
committee appointed by the board of directors, or the credit committee or su-
pervisory committee, of the particular state or federal credit union. That money
is subject to this article except:
(a) Deposits in an amount less than that insured pursuant to federal law are not
subject to this article.
For deposits in excess of the amount insured under any federal law a contract
in accordance with Section 53649 is required and the provisions of this article
shall apply.
(b) Interest is not required on money deposited in an active deposit by a judge or
officer of a superior court.
(c) Interest is not required on money deposited in an active deposit by an officer
having control of a revolving fund created pursuant to Chapter 2 (commencing
with Section 29300) of Division 3 of Title 3.
(d) Interest is not required on money deposited in an active deposit by an officer
having control of a special fund established pursuant to Article 5 (commencing
with Section 29400) or Article 6 (commencing with Section 29430) of Chapter
2 of Division 3 of Title 3.
53679.1
Notwithstanding any other provision of law, the accounting practices of each
county utilized prior to the effective date of this section relating to interest on
trust funds shall be deemed appropriate and to have been made under the direc-
tion of the board of supervisors of that county. This section is declaratory of the
law in existence prior to the enactment of this section.
53680
A tax collector of a local agency shall immediately deposit with the treasurer all
money under his control, unless he deposits the money in a depositary pursuant
to this article under permission and instructions of the treasurer having authority
to make such deposit.
53681
An officer or employee of a local agency who deposits money belonging to, or in
the custody of, the local agency in any other manner than that prescribed in this
article is subject to forfeiture of his office or employment.
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102LOCAL AGENCY INVESTMENT GUIDELINES
53682
Notwithstanding any other provision in this article except Section 53652, the
treasurer may deposit moneys in and enter into contracts with any depository, as
defined in subdivision (c) of Section 53630, for services to be rendered by that
depository that in the treasurer’s judgment are to the public advantage. One copy
of each contract entered into under this section shall be filed with the auditor or
corresponding officer of the local agency. The contract shall:
(a) Fix the duration of compensating deposits, if any.
(b) Fix the interest rate of that compensating deposit, if any.
(c) Specify the services to be rendered by the depository.
(d) Indicate whether the depository shall bear the expenses of transportation of
the money to and from the depository.
(e) Fix the consideration payable by the agency for such services.
(f) Specify who may deposit moneys into the treasurer’s active account and how
those persons are to make those deposits.
53683
Notwithstanding any other provision in this article, the consideration payable
by the agency as specified in subdivision (e) of Section 53682 shall be paid by
the treasurer by applying such consideration as costs applied on a pro rata basis
against the interest earned by all the agencies for which the treasurer invests.
53684
(a) Unless otherwise provided by law, if the treasurer of any local agency, or other
official responsible for the funds of the local agency, determines that the local
agency has excess funds which are not required for immediate use, the treasurer
or other official may, upon the adoption of a resolution by the legislative or gov-
erning body of the local agency authorizing the investment of funds pursuant
to this section and with the consent of the county treasurer, deposit the excess
funds in the county treasury for the purpose of investment by the county trea-
surer pursuant to Section 53601 or 53635, or Section 20822 of the Revenue and
Taxation Code.
(b) The county treasurer shall, at least quarterly, apportion any interest or
other increment derived from the investment of funds pursuant to this sec-
tion in an amount proportionate to the average daily balance of the amounts
deposited by the local agency and to the total average daily balance of de-
posits in the investment pool. In apportioning and distributing that interest
or increment, the county treasurer may use the cash method, the accrual
method, or any other method in accordance with generally accepted account-
ing principles. Prior to distributing that interest or increment, the county
treasurer may deduct the actual costs incurred by the county in administering
this section in proportion to the average daily balance of the amounts depos-
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103LOCAL AGENCY INVESTMENT GUIDELINES
ited by the local agency and to the total average daily balance of deposits in
the investment pool.
(c) The county treasurer shall disclose to each local agency that invests funds pur-
suant to this section the method of accounting used, whether cash, accrual, or
other, and shall notify each local agency of any proposed changes in the accounting
method at least 30 days prior to the date on which the proposed changes take effect.
(d) The treasurer or other official responsible for the funds of the local agency
may withdraw the funds of the local agency pursuant to the procedure specified
in Section 27136.
(e) Any moneys deposited in the county treasury for investment pursuant to
this section are not subject to impoundment or seizure by any county official or
agency while the funds are so deposited.
(f) This section is not operative in any county until the board of supervisors of
the county, by majority vote, adopts a resolution making this section operative
in the county.
(g) It is the intent of the Legislature in enacting this section to provide an
alternative procedure to Section 51301 for local agencies to deposit money
in the county treasury for investment purposes. Nothing in this section shall,
therefore, be construed as a limitation on the authority of a county and a city
to contract for the county treasurer to perform treasury functions for a city
pursuant to Section 51301.
53686
(a) Any audit conducted relating to the investment of local agency funds and
other funds by the county treasurer in the county fund maintained pursuant to
Section 53684 shall be rendered to the depositary, the auditor, the controller, the
secretary, or the corresponding officer of the local agency, the treasurer or other
official responsible for the funds of any local agency that has funds on deposit
in the county treasury, and the presiding judge of any superior court that has
ordered, pursuant to Section 3412, Section 3413, or Section 3611 of the Probate
Code, that assets of an estate be deposited with the county treasurer for deposit
or investment.
(b) Any report rendered pursuant to Section 53646 shall be provided to the trea-
surer or other official responsible for the funds of any local agency that has funds
on deposit in the county treasury.
Government Code Section 53820 – 53821.5
53820
As used in this article, “local agency” means county, city, regional park district,
school district, community college district, or any other municipal or public cor-
poration or district.
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104LOCAL AGENCY INVESTMENT GUIDELINES
53821.
Subsequent to approval of the final budget and levy of taxes, if funds are needed
for the immediate requirements of a local agency in any fiscal year to pay obliga-
tions lawfully incurred in the fiscal year and before the receipt of income for the
fiscal year sufficient to meet the payments, money may be borrowed by:
(a) The legislative body of a county on the recommendation of the auditor
and treasurer.
(b) The legislative body of the county having the largest area within the regional
park district on the recommendation of the auditor and treasurer.
(c) A school district, county board of education, or community college district
on the request of two-thirds of the members of its governing board, approved by
the county auditor and treasurer.
(d) A regional park district on the request of four-fifths of the members of its
legislative body, approved by the auditor and treasurer of the county having the
largest area within the district.
(e) The legislative body of a city on the recommendation of the city treasurer and
chief accounting officer.
(f) The legislative body of any other municipal or public corporation or dis-
trict on the recommendation of the officers performing the functions of audi-
tor and treasurer.
53821.5
Proceeds of sales or funds set aside for the repayment of any notes issued pursuant
to this article shall not be invested for a term that exceeds the term of the notes.
Government Code Section 53840-53841.5
53840
It is hereby declared the intention of the Legislature by the enactment of this article
to provide an alternative procedure under which short term loans may be procured
by those counties in which the board of supervisors has declared it to be county
policy to make advances of current operating requirements to subsidiary political
subdivisions required by law to deposit their funds in the county treasury as such
advances are authorized by the provisions of Section 25 of Article XIII of the State
Constitution. In any such county the board of supervisors, upon recommendation
of the county treasurer with the approval of the county auditor, may borrow on
July 1st or thereafter such amounts as may be required to meet current obligations
payable by the county treasury, pending collection of the revenue provided for the
year in progress. Amounts so borrowed shall be evidenced by notes signed by the
chairman of the board of supervisors, the county auditor and the county treasurer,
and the liability created thereby shall be secured by a lien on all revenue to accrue
to the county treasury from any source during the year then in progress.
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105LOCAL AGENCY INVESTMENT GUIDELINES
53841
Any amounts borrowed by a county as provided in the preceding section shall not
exceed 85 percent of the total of taxes levied for all purposes on said county’s tax
roll for the next preceding fiscal year, and at no time during the year for which
borrowed shall the unpaid total of the amounts so borrowed as shown by the
auditor’s accounts at the close of any month be allowed to remain at more than
85 percent of the uncollected balance of taxes for the current year as shown by
said accounts.
53841.5
Proceeds of sales or funds set aside for the repayment of any notes issued pursuant
to this article shall not be invested for a term that exceeds the term of the notes.
Government Code Section 53850-53851.5
53850
(a) As used in this article, “local agency” means a county, city and county, city,
school district of any type, community college district, county board of educa-
tion, or any other municipal or public corporation or district.
(b) For purposes of this article only, “local agency” also includes a charter school.
This subdivision does not make a charter school a local agency for any purpose
other than for this article.
53851
The powers conferred by this article are in addition to and an alternative to
any power conferred by any other law for borrowing by a local agency and any
amount borrowed hereunder shall not be considered in any limitation on the
amount which may be borrowed by any such local agency under any other law.
53852
On or after the first day of any fiscal year a local agency may borrow money
pursuant to this article, the indebtedness to be represented by a note or notes
issued to the lender pursuant to this article. The money borrowed may be used
and expended by the local agency for any purpose for which the local agency is
authorized to use and expend moneys, including but not limited to current ex-
penses, capital expenditures, investment and reinvestment, and the discharge of
any obligation or indebtedness of the local agency.
53852.5
Proceeds of sales or funds set aside for the repayment of any notes issued pursuant
to this article shall not be invested for a term that exceeds the term of the notes.
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106LOCAL AGENCY INVESTMENT GUIDELINES
Government Code Section 53859-53859.02
53859
As used in this article: (a) “local agency” means county, city and county, city,
school district, community college district, or any other municipal or public cor-
poration or district.
(b) “Grant anticipation note” means a note issued upon the security of speci-
fied accounts receivable from state or federal governments, including, without
limitation, grants, loans, or a combination of both, for which funds have been
appropriated and committed to a local agency.
(c) “Loan” includes, but is not limited to, a borrowing by a local agency repre-
sented or to be represented by bonds of a local agency.
53859.01
The powers conferred by this article are in addition to an alternative to any pow-
ers conferred by any other law for borrowing by a local agency and any amount
borrowed hereunder shall not be considered in any limitation on the amount
which may be borrowed by any such local agency under any other law.
53859.02
(a) A local agency may borrow money pursuant to this article, the indebtedness
to be represented by a grant anticipation note or notes issued to the lender pursu-
ant to this article. The money borrowed may be used and expended by the local
agency solely for the purpose for which the grant or loan is to be received.
(b) Proceeds of sales or funds set aside for the repayment of any notes issued pursuant
to this article shall not be invested for a term that exceeds the term of the notes.
Government Code Section 57600-57607
57600
For purposes of this division:
(a) “Local financial institution” means a certified community development
financial institution, a credit union, as defined in Section 165 of the Financial
Code, or a small bank or an intermediate small bank, as defined in Section 25.12
of Title 12 of the Code of Federal Regulations.
(b) (1) “Public bank” means a corporation, organized under the Nonprofit
Mutual Benefit Corporation Law (Part 3 (commencing with Section 7110) of
Division 2 of Title 1 of the Corporations Code) or the Nonprofit Public Benefit
Corporation Law (Part 2 (commencing with Section 5110) of Division 2 of Title
1 of the Corporations Code) for the purpose of engaging in the commercial
banking business or industrial banking business, that is wholly owned by a local
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107LOCAL AGENCY INVESTMENT GUIDELINES
agency, local agencies, or a joint powers authority formed pursuant to the Joint
Exercise of Powers Act (Article 1 (commencing with Section 6500) of Chapter 5
of Division 7 of Title 1) that is composed only of local agencies.
(2) A local agency located within a county with a population of less than 250,000
may organize a public bank only if it does so as part of a joint powers authority
formed for those purposes.
(3) For purposes of paragraph (2), population shall be based on the most recent
estimate of population data determined by the Demographic Research Unit of
the Department of Finance.
(c) “Public bank license” means a certificate of authorization to transact business
as a bank as described in Section 1042 of the Financial Code.
57601
(a) If a public bank is organized as a nonprofit mutual benefit corporation, the
articles of incorporation shall include the following purpose statement: “This
corporation is a nonprofit mutual benefit corporation organized under the
Nonprofit Mutual Benefit Corporation Law as a public bank. The purpose of
the corporation is to engage in the commercial banking business or industrial
banking business and any other lawful activities which are not prohibited to a
public bank by applicable laws or regulations.”
(b) If a public bank is organized as a nonprofit public benefit corporation, the
articles of incorporation shall include the following purpose statement: “This
corporation is a nonprofit public benefit corporation and is not organized for
the private gain of any person. It is organized under the Nonprofit Public Benefit
Corporation Law for the public purpose of engaging in the commercial banking
business or industrial banking business as a public bank.”
(c) Notwithstanding Sections 5410 and 7411 of the Corporations Code, a public
bank may make distributions to its members.
(d) All provisions of law applicable to nonprofit corporations generally, including,
but not limited to, the Nonprofit Corporation Law (Division 2 (commencing with
Section 5000) of Title 1 of the Corporations Code) shall apply to public banks.
Whenever a provision of this division applicable to public banks is inconsistent
with a provision of law applicable to nonprofit mutual benefit corporations or
nonprofit public benefit corporations generally, the provision of this division
shall apply, and the inconsistent provision of law applicable to nonprofit mutual
benefit corporations or nonprofit public benefit corporations generally shall not
apply to a public bank.
57602
(a) A public bank shall obtain and maintain deposit insurance provided by the
Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act
(12 U.S.C. Sec. 1811 et seq.).
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108LOCAL AGENCY INVESTMENT GUIDELINES
(b) In seeking and retaining insurance, a public bank may do all things and assume
and discharge all obligations required of it that are not in conflict with state law.
57603
(a) Before engaging in business, a public bank shall obtain a certificate of
authorization to transact business as a bank pursuant to Division 1.1 of the
Financial Code (commencing with Section 1000).
(b) A local agency shall comply with the requirements of Section 53638 with
respect to its deposits in a public bank unless, with the prior approval of the
Commissioner of Business Oversight, the public bank and the local agency
depositor agree otherwise.
(c) Notwithstanding Section 23010, a county may lend any of its available funds
to any public bank.
(d) Notwithstanding Section 53601, any local agency that does not pool money
in deposits or investments with other local agencies that have separate governing
bodies may invest in debt securities or other obligations of a public bank.
(e) Notwithstanding Section 53635, any local agency that pools money in
deposits or investments with other local agencies, including local agencies that
have the same governing body, may invest in debt securities or other obligations
of a public bank.
(f) Notwithstanding Section 53635.2, a public bank shall be eligible to receive
local agency money.
57604
(a) As used in this section:
(1) “Conducted in partnership with” means pursuant to a written agreement
with a local financial institution to provide financial products and services to the
public located within the jurisdiction of the public bank.
(2) “Infrastructure lending” means granting a loan or extending credit to a local
agency for the purpose of building or improving public infrastructure, including
housing projects, as defined in Section 34212 of the Health and Safety Code, and
affordable housing, as defined in subdivision (a) of Section 62250.
(3) “Local agency banking” means providing any of the following services to a
local agency:
(A) Accepting a deposit of any kind.
(B) Granting a loan or extension of credit of any kind.
(4) “Participation lending” means purchasing or selling an interest in a loan or
loans originated by or sold to a local financial institution, or originating, leading,
or directing a loan transaction involving a local financial institution pursuant to
a written agreement with the local financial institution.
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109LOCAL AGENCY INVESTMENT GUIDELINES
(5) “Person” means a person as defined in Section 127 of the Financial Code,
except that a person does not mean a local agency as defined in Section 50001 of
the Government Code, but includes any individual employed by a local agency.
(6) “Retail activities” means providing any kind of financial product or service
to a person that is typically offered or provided by a local financial institution,
including, but not limited to, all of the following:
(A) Accepting a deposit of any kind from a person, including the issuance of
shares by a credit union.
(B) Granting a loan or extension of credit, of any kind, to a person.
(7) “Wholesale lending” means granting a loan or extension of credit to a local
financial institution.
(b) Except as provided in paragraph (2) of subdivision (c), a public bank shall
conduct retail activities in partnership with local financial institutions and shall
not compete with local financial institutions.
(c) A public bank may do both of the following:
(1) Engage in all of the following banking activities:
(A) Local agency banking.
(B) Infrastructure lending.
(C) Wholesale lending.
(D) Participation lending.
(2) Engage in retail activities without partnering with a local financial institution,
if those retail activities are not offered or provided by local financial institutions
in the jurisdiction of the local agency or agencies that own the public bank.
57605
For the purposes of Section 1280 of the Financial Code, any person or entity,
including a local agency, that owns, controls, or holds an ownership interest in a
public bank is not a bank holding company by reason of that ownership interest.
57606
(a) Before submitting an application to organize and establish a public bank
pursuant to Section 1020 of the Financial Code, a local agency shall conduct a
study to assess the viability of the proposed public bank. The study shall include,
but is not limited to, all of the following elements:
(1) A discussion of the purposes of the bank including, but not limited to,
achieving cost savings, strengthening local economies, supporting commu-
nity economic development, and addressing infrastructure and housing needs
for localities.
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110LOCAL AGENCY INVESTMENT GUIDELINES
(2) A fiscal analysis of costs associated with starting the proposed public bank.
(3) An estimate of the initial amount of capital to be provided by the local agency
to the proposed public bank.
(4) Financial projections, including a pro forma balance sheet and income
statement, of the proposed public bank for at least the first five years of operation.
The financial projections shall include an estimate of the time period for when
expected revenues meet or exceed expected costs and an estimate of the total
operating subsidy that the local agency may be required to provide until the
proposed public bank generates sufficient revenue to cover its costs. In addition
to projections that assume favorable economic conditions, the analysis shall also
include a downside scenario that considers the effect of an economic recession
on the financial results of the proposed public bank. The projections may include
the downside scenario of continuing to do business with the local government’s
current banker or bankers.
(5) A legal analysis of whether the proposed structure and operations of the
public bank would likely comply with Section 6 of Article XVI of the California
Constitution, but nothing herein shall compel the waiver of any attorney-client
privilege attaching to that legal analysis.
(6) An analysis of how the proposed governance structure of the public bank
would protect the bank from unlawful insider transactions and apparent conflicts
of interest.
(b) The study may include any of the following elements:
(1) A fiscal analysis of benefits associated with starting the proposed public bank,
including, but not limited to, cost savings, jobs created, jobs retained, economic
activity generated, and private capital leveraged.
(2) A qualitative assessment of social or environmental benefits of the proposed
public bank.
(3) An estimate of the fees paid to the local agency’s current banker or bankers.
(4) A fiscal analysis of the costs, including social and environmental, of continuing
to do business with the local agency’s current banker or bankers.
(c) (1) The study required by subdivision (a) shall be presented to and approved
by the governing body of the local agency, and a motion to move forward with
an application for a public banking charter shall be approved by a majority vote
of the governing body at a public meeting prior to the local agency submitting
an application pursuant to Section 1020 of the Financial Code. In addition, the
local agency shall include a copy of the study required by subdivision (a) in the
application submitted to the Commissioner of Business Oversight.
(2) Before the local agency submits an application pursuant to Section 1020 of
the Financial Code, the motion to move forward with an application for a public
banking charter shall be subject to voter approval at the next regularly scheduled
election held at least 180 days following the vote of the governing body.
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111LOCAL AGENCY INVESTMENT GUIDELINES
(3) The voter approval requirement described in paragraph (2) shall apply to a
local agency entering into a joint powers authority formed pursuant to the Joint
Exercise of Powers Act (Article 1 (commencing with Section 6500) of Chapter
5 of Division 7 of Title 1) after the study required in subdivision (a) has been
completed and before submitting an application to organize and establish a
public bank pursuant to Section 1020 of the Financial Code.
(4) As used in paragraphs (2) and (3), “local agency” does not include a charter city.
(d) The local agency shall make available to the public the financial models
and key assumptions used to estimate the elements described in paragraphs (2)
through (4) of subdivision (a) before presenting the study to the governing body
of the local agency as required by subdivision (c).
57607
(a) The Commissioner of Business Oversight shall not issue more than two public
bank licenses in a calendar year.
(b) The Commissioner of Business Oversight shall not issue a public bank license
if issuing that public bank license would cause there to be more than 10 public
banks authorized to transact business pursuant to Division 1.1 (commencing
with Section 1000) of the Financial Code.
(c) The Commissioner of Business Oversight shall conduct a study of public
banking in California within two years after the date upon which the commissioner
issues the 10th public bank license.
(d) The Commissioner of Business Oversight shall not issue a public bank license
after the expiration of a period of seven years from the date upon which the
commissioner first promulgates regulations for the purpose of carrying out the
commissioner’s duties under this division.
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112LOCAL AGENCY INVESTMENT GUIDELINES
Glossary
A
ACTIVE MANAGEMENT STRATEGY
Investment strategy based on a manag-
er or a team of managers actively man-
aging a fund's portfolio with the goal
of outperforming benchmarks through
analytical research, forecasts, and their
own judgment and experience.
ACCRETION
The accumulation of value that occurs
during the duration or time between a
bond's issuance and maturity.
ACCRUED INTEREST
Coupon interest accumulated on a
bond or note since the last interest
payment or, for a new issue, from the
dated date to the date of delivery.
AMORTIZATION OF COSTS
Reconciliation of the purchase price
of a security and par value resulting in
net interest.
ARBITRAGE
Transactions by which securities are
bought and sold in different markets
at the same time for the sake of the
profit arising from a yield difference
in the two markets. The 1986 Tax
Reform Act made this practice by
municipalities illegal solely as a bor-
rowing tactic, except under certain
safe-harbor conditions.
ASSET ALLOCATION
The division of an investment port-
folio among different asset categories,
such as stocks, bonds, and cash.
ASSET-BACKED SECURITIES
Securities that are supported by
pools of assets, such as installment
loans or leases, or by pools of revolv-
ing lines of credits. Asset-backed
securities are structured as trusts in
order to perfect a security interest in
the underlying assets.
AVERAGE
An arithmetic mean of selected stocks
intended to represent the behavior of
the market or some component of it.
B
BANK DEPOSITS
Deposits in banks or other deposi-
tory institutions that may be in the
form of demand accounts (checking)
or investments in accounts that have
a fixed term and negotiated rate of
interest.
BANK NOTES
A senior, unsecured, direct obliga-
tion of a bank or U. S. branch of a
foreign bank.
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113LOCAL AGENCY INVESTMENT GUIDELINES
BANKERS’ ACCEPTANCE
A draft or bill or exchange accepted
by a bank or trust company. The
accepting institution, as well as the
issuer, guarantees payment of the bill.
BASIS POINTS
Refers to the yield on bonds. Each
percentage point of yield in bonds
equals 100 basis points (1/100% or
0.01%). If a bond yield changes from
7.25% to 7.39%, that is a rate of 14
basis points.
BENCHMARK
A passive index used to compare the
performance, relative to risk and
return, of an investor’s portfolio.
BOND PROCEEDS
The money paid to the issuer by the
purchaser or underwriter of a new
issue of municipal securities. These
moneys are used to finance the project
or purpose for which the securities
were issued and to pay certain costs
of issuance as may be provided in the
bond contract.
BONDS
A debt obligation of a firm or public
entity. A bond represents the agree-
ment to repay the debt in principal
and, typically, in interest on the
principal.
BOOK RETURN
Book return includes interest, amor-
tization/accretion of premiums/dis-
counts, realized gains and losses, over
a given period of time.
BOOK VALUE
The value at which an asset is carried
on a balance sheet.
BROKER
A person or firm that acts as an in-
termediary by purchasing and selling
securities for others rather than for its
own account.
BUY AND HOLD STRATEGY
A strategy based on holding all securi-
ties until maturity, regardless of fluc-
tuations in the market.
C
CALL OPTION
The terms of the bond contract giving
the issuer the right to redeem or call
an outstanding issue of bonds prior to
its stated date of maturity.
CALL RISK
The risk to a bondholder that the
bond issuer will exercise a callable
bond feature and redeem the issue
prior to maturity.
CALLABLE SECURITIES
An investment security that contains
an option allowing the issuer to
retire the security prior to its final
maturity date.
CASH FLOW
A comparison of cash receipts (rev-
enues) to required payments (debt
service, operating expenses, etc.).
CERTIFICATE OF DEPOSIT
A short-term, secured deposit in a fi-
nancial institution that usually returns
principal and interest to the lender at
the end of the loan period. Certifi-
cates of Deposit (CDs) differ in terms
of collateralization and marketability.
Those appropriate to public agency
investing include:
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114LOCAL AGENCY INVESTMENT GUIDELINES
Negotiable Certificates of Deposit
Generally, short-term debt instru-
ment that usually pays interest and is
issued by a bank, savings or federal
association, state or federal credit
union, or state-licensed branch of a
foreign bank. The majority of nego-
tiable CDs mature within six months
while the average maturity is two
weeks. Negotiable CDs are traded in
a secondary market and are payable
upon order to the bearer or initial
depositor (investor). Negotiable
CDs are insured by FDIC up to
$250,000, but they are not collateral-
ized beyond that amount.
Non-Negotiable
Certificates of Deposit
CDs that carry a penalty if redeemed
prior to maturity. A secondary mar-
ket does exist for non-negotiable
CDs, but redemption includes a
transaction cost that reduces returns
to the investor. Non-negotiable
CDs issued by banks and savings
and loans are insured by the Federal
Deposit Insurance Corporation up
to the amount of $250,000, includ-
ing principal and interest. Amounts
deposited above this amount may be
secured with other forms of collateral
through an agreement between the
investor and the issuer. Collateral
may include other securities includ-
ing Treasuries or agency securities
such as those issued by the Federal
National Mortgage Association.
CDARS (CERTIFICATE
OF DEPOSIT ACCOUNT
REGISTRY SYSTEM)
A private CD placement service that
allows local agencies to purchase
more than $250,000 in CDs from a
single financial institution (must be a
participating institution of CDARS)
while still maintaining FDIC insur-
ance coverage. CDARS is currently
the only entity providing this service.
CDARS facilitates the trading of
deposits between the California insti-
tution and other participating institu-
tions in amounts that are less than
$250,000 each, so that FDIC cover-
age is maintained.
CD PLACEMENT SERVICE
A service that allows local agencies to
purchase more than $250,000 in CDs
from a single financial institution
while still maintaining FDIC insur-
ance coverage. See “CDARS”.
COLLATERALIZATION
OF DEPOSITS
Process by which a bank or financial
institution pledges securities, or other
deposits for the purpose of securing
the repayment of deposited funds.
COMMERCIAL PAPER
An unsecured short-term promissory
note issued by corporations or munici-
palities, with maturities ranging from 2
to 270 days.
CONVEXITY
A measure of the price sensitivity of
a fixed income security to changes in
interest rates. Convexity is influenced
by such factors as the coupon rate,
maturity, and any call options that may
or may not exist. Prices rise at increas-
ing rates as yields fall and prices decline
at decreasing rates as yields rise.
CORPORATE NOTES AND BONDS
Debt instruments, typically unse-
cured, issued by corporations, with
original maturities in most cases
greater than one year and less than
ten years.
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115LOCAL AGENCY INVESTMENT GUIDELINES
COUNTY POOLED
INVESTMENT FUNDS
The aggregate of all funds from public
agencies placed in the custody of the
county treasurer or chief finance of-
ficer for investment and reinvestment.
COUPON
The annual rate of interest that a
bond’s issuer promises to pay the
bondholder on the bond’s face value; a
certificate attached to a bond evidenc-
ing interest due on a payment date.
CREDIT RATING
Various alphabetical and numerical
designations used by credit rating or
nationally recognized statistical rating
organizations (NRSROs), institutional
investors, Wall Street underwriters,
and commercial rating companies to
give relative indications of bond and
note creditworthiness.
Long-term Ratings
The three most commonly used
NRSROs are Standard & Poor's,
Fitch Ratings, and Moody's. Stan-
dard & Poor’s and Fitch Ratings
use the same system, starting with
their high¬est rating, of AAA, AA,
A, BBB, BB, B, CCC, CC, C, and
D for default. Moody’s Investors
Service uses Aaa, Aa, A, Baa, Ba, B,
Caa, and Ca. Each of the services
use pluses (+), minuses (-), or nu-
merical modifiers to indicate steps
within each category. The S&P rat-
ings from AA to CCC may be modi-
fied by the addition of a plus (+)
or minus (-) sign to show relative
standing within the major rating
categories. Moody's appends nu-
merical modifiers 1, 2, and 3 to each
generic rating classification from Aa
through Caa. The modifier 1 indi-
cates that the obligation ranks in
the higher end of its generic rating
category; the modifier 2 indicates a
mid-range ranking; and the modifier
3 indicates a ranking in the lower
end of that generic rating category.
The top four letter categories are
considered investment grade ratings.
Short-term Ratings
Standard & Poor's short-term ratings
system is A-1+, A-3, B, C, and / for
default. Fitch Ratings use F1+, F3, B,
C, and / for default. Finally, Moody's
uses P1 and P3, anything below P3 is
considered not prime.
CREDIT RISK
The chance that an issuer will be un-
able to make scheduled payments of
interest and principal on an outstand-
ing obligation. Another concern for
investors is that the market’s percep-
tion of an issuer/borrower’s credit will
cause the market value of a security to
fall, even if default is not expected.
CUSIP NUMBER
The Committee on Uniform Security
Information Procedures (CUSIP)
Number refers to a security’s identifica-
tion number assigned to each publicly
traded security by the CUSIP Service
Bureau operated by Standard & Poor’s
for the American Bankers Association.
The CUSIP Number is a nine-charac-
ter identifier unique to the issuer, the
specific issue and the maturity, if appli-
cable (the first six characters identifying
the issuer, the next two identifying the
security and the last digit providing a
check digit to validate the accuracy of
the preceding CUSIP number).
CUSTODIAN
A bank or other financial institution
that keeps custody of stock certificates
and other assets.
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116LOCAL AGENCY INVESTMENT GUIDELINES
D
DEALER
Someone who acts as a principal in all
transactions, including underwriting,
buying, and selling securities, includ-
ing from their own account.
DEFAULT RISK
The risk that issuers/borrowers will be
unable to make the required payments
on their debt obligations.
DEFEASED BOND ISSUES
Issues that have sufficient money to
retire outstanding debt when due so
that the agency is released from the
contracts and covenants in the bond
document.
DELIVERY VS. PAYMENT (DVP)
The payment of cash for securities as
they are delivered and accepted for
settlement.
DERIVATIVE
Securities that are based on, or derived
from, some underlying asset, reference
date, or index.
DISCOUNT
Discount means the difference be-
tween the par value of a security and
the cost of the security, when the
cost is below par. Investors purchase
securities at a discount when return
to the investor (yield) is higher than
the stated coupon (interest rate) on
the investment.
DISCOUNT RATE
The interest rate used in discounted
cash flow (DCF) analysis to determine
the present value of future cash flows.
The discount rate in DCF analysis
takes into account not just the time
value of money, but also the risk or
uncertainty of future cash flows; the
greater the uncertainty of future cash
flows, the higher the discount rate.
DIVERSIFICATION
The allocation of different types of as-
sets in a portfolio to mitigate risks and
improve overall portfolio performance.
DURATION
A measure of the timing of the cash
flows to be received from a security
that provides the foundation for a
measure of the interest rate sensitiv-
ity of a bond. Duration is a volatil-
ity measure and represents the ap-
proximate percentage change in price
divided by the percentage change in
interest rates. A high duration mea-
sure indicates that for a given level of
movement in interest rates, prices of
securities will vary considerably.
E
EFFECTIVE DURATION
Duration measures the weighted aver-
age of the present value of the cash
flows of a fixed-income investment.
Effective duration measures the price
sensitivity of fixed-income investments,
especially for those with embedded
option features such as call options. As
yields rise, the effective duration of a
callable investment rises to reflect the
fact that it has become less likely to be
called. The more rates rise, the longer
the effective duration will become,
approaching the duration to maturity.
The converse is true in a declining
interest rate environment (that is, the
more rates fall, the shorter the effective
duration will become, approaching the
duration to call). For securities without
an embedded option, the duration to
call, maturity, and effective duration
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117LOCAL AGENCY INVESTMENT GUIDELINES
are all the same. The calculation for
effective duration is complicated and
involves averaging the duration under
a simulation of many possible interest
rate scenarios in the future.
EVENT RISK
The risk associated with a changing
portfolio value due to a market event
causing swings in market prices and/
or spreads.
EXTENDABLE NOTES
Securities with maturity dates that
can be extended by mutual agree-
ment between the issuer and inves-
tor. When investing in these types
of securities, the maturity date plus
the stated extendable option must
not exceed the time frames that are
allowed in California Government
Code or the investment policy for
the investment type.
F
FIDUCIARY
An individual who holds something
in trust for another and bears liability
for its safekeeping.
FIRST TIER SECURITIES
Securities that have received short-
term debt ratings in the highest cat-
egory from the requisite nationally
recognized statistical-rating organiza-
tions (NRSROs), or are comparable
unrated securities, or are issued by
money market funds, or government
securities. [See SEC Rules: Paragraph
(A)(12) of rule 2A-7.]
FLOATING RATE SECURITY
A security that has a variable or “float-
ing” interest rate.
G
GOVERNMENT ACCOUNTING
STANDARDS BOARD (GASB)
A standard-setting body, associ-
ated with the Financial Accounting
Foundation, which prescribes stan-
dard accounting practices for gov-
ernmental units.
GOVERNMENT SPONSORED
ENTERPRISES (GSE)
Privately held corporations with
public purposes created by the U.S.
Congress to reduce the cost of capital
for certain borrowing sectors of the
economy. Securities issued by GSEs
carry the implicit backing of the U.S.
Government, but they are not direct
obligations of the U.S. Government.
For this reason, these securities will of-
fer a yield premium over Treasuries.
GUARANTEED INVESTMENT
CONTRACT (GIC)
An agreement acknowledging receipt
of funds for deposit, specifying terms
for withdrawal, and guaranteeing a
rate of interest to be paid.
I
IRMA
An independent registered munici-
pal advisor (IRMA) is registered as a
municipal advisor with the SEC and
MSRB and has a fiduciary duty to the
issuer(s) that he/she advises on the issu-
ance of municipal securities and invest-
ment of the proceeds of issued debt.
IRMA EXEMPTION
Pursuant to the Municipal Advisor
Rule (MA Rule), underwriters may
provide advice to municipal issu-
ers only where certain exceptions or
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118LOCAL AGENCY INVESTMENT GUIDELINES
exemptions apply. The Independent
Registered Municipal Advisor Exemp-
tion (IRMA Exemption) applies where:
(1) the issuer has retained an IRMA
that is not recently associated (within
the last two years of seeking to use
the exemption) with the underwriter,
(2) the underwriter receives a written
notice from the issuer that they are
represented by the IRMA and will rely
on their advice, and the underwriter
can reasonably rely on that notice, and
(3) the underwriter provides a written
notice to the issuer and IRMA stating
that the underwriter is not a municipal
advisor and has no fiduciary duty to
the issuer, and the issuer must have
adequate time to review that notice.
INDEX
An index is an indicator that is pub-
lished on a periodic basis that shows
the estimated price and/or yield levels
for various groups of securities.
INTEREST
The amount a borrower pays to a
lender for the use of his or her money.
INTEREST RATE RISK
Interest rate risk is the risk that an
investment's value will change due to a
change in the absolute level of interest
rates, spread between two rates, shape
of the yield curve, or any other interest
rate relationship.
INVESTMENT AGREEMENTS
Investment agreements are contracts
with respect to funds deposited by an
investor. Investment agreements are
often separated into those offered by
banks and those offered by insurance
companies. In the former case, they
are sometimes referred to as “bank
investment contracts.”
INVESTMENT OVERSIGHT
COMMITTEE
A committee of three to eleven mem-
bers formed under Section 27131 to
monitor and review a county’s invest-
ment policy by causing an annual audit
and discussing its finding at an open
meeting. Although cities and other
local agencies are not required to com-
pose an investment oversight commit-
tee, the State Legislature has declared
that all local agencies “should par-
ticipate in reviewing the policies that
guide the investment of those funds.”
INSTITUTIONAL ACCOUNT
As defined by the Financial Industry
Regulatory Authority (FINRA), an
institutional account includes one of
the following: (1) a bank, savings and
loan association, insurance company
or registered investment company; (2)
an investment adviser registered either
with the SEC under Section 203 of
the Investment Advisers Act or with
a state securities commission (or any
agency or office performing like func-
tions); or (3) any other person (wheth-
er a natural person, corporation, part-
nership, trust or otherwise) with total
assets of at least $50 million.
L
LIBOR
Acronym for “London Interbank
Offered Rate,” which represents the
average rate at which a leading bank
can obtain unsecured funding in the
London interbank market. LIBOR
serves as a benchmark for various
interest rates. Obligations of parties
to such transactions are typically
expressed as a spread to LIBOR.
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119LOCAL AGENCY INVESTMENT GUIDELINES
LIQUIDITY
The measure of the ability to convert
an instrument to cash on a given date
at full face or par value.
LIQUIDITY RISK
The risk that a security, sold prior to
maturity, will be sold at a loss of value.
For a local agency, the liquidity risk of
an individual investment may not be as
critical as how the overall liquidity of
the portfolio allows the agency to meet
its cash needs.
LOCAL AGENCY
INVESTMENT FUND
A voluntary investment fund open
to government entities and certain
non-profit organizations in Cali-
fornia that is managed by the State
Treasurer’s Office.
LOCAL GOVERNMENT
INVESTMENT POOL (LGIP)
Investment pools that range from the
State Treasurer’s Office Local Agency
Investment Fund (LAIF) to county
pools, to Joint Powers Authorities
(JPAs). These funds are not subject
to the same SEC rules applicable to
money market mutual funds.
M
MARKET RISK
The chance that the value of a security
will decline as interest rates rise. In
general, as interest rates fall, prices of
fixed income securities rise. Similarly,
as interest rates rise, prices fall. Market
risk also is referred to as systematic
risk or risk that affects all securities
within an asset class similarly.
MARKET VALUE
The price at which a security is trading
and presumably could be purchased or
sold at a particular point in time.
MATURITY
The date on which the principal or
stated value of an investment becomes
due and payable.
MEDIUM-TERM NOTE
Corporate or depository institution
debt securities meeting certain mini-
mum quality standards (as specified
in the California Government Code)
with a remaining maturity of five
years or less.
MONEY MARKET
MUTUAL FUNDS
MMF’s are mutual funds that invest
exclusively in short-term money
market instruments. MMF’s seek the
preservation of capital as a primary
goal while maintaining a high degree
of liquidity and providing income
representative of the market for short-
term investments.
MORTGAGE BACKED SECURITIES
Mortgage-backed securities (MBS) are
created when a mortgagee or a pur-
chaser of residential real estate mort-
gages creates a pool of mortgages and
markets undivided interests or par-
ticipations in the pool. MBS owners
receive a prorata share of the interest
and principal cash flows (net of fees)
that are “passed through” from the
pool of mortgages. MBS are complex
securities whose cash flow is deter-
mined by the characteristics of the
mortgages that are pooled together.
Investors in MBS face prepayment
risk associated with the option of the
underlying mortgagors to pre-pay or
payoff their mortgage. Most MBS are
issued and/or guaranteed by federal
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120LOCAL AGENCY INVESTMENT GUIDELINES
agencies and instrumentalities (e.g.,
Government National Mortgage As-
sociation (GNMA), Federal National
Mortgage Association (FNMA), and
Federal Home Loan Mortgage Corpo-
ration (FHLMC)).
MORTGAGE PASS-THROUGH
OBLIGATIONS
Securities that are created when
residential mortgages (or other mort-
gages) are pooled together and undi-
vided interests or participations in the
stream of revenues associated with the
mortgages are sold.
MUNICIPAL ADVISOR
RULE (MA RULE)
A regulation of non-dealer "municipal
advisors" such as financial advisors,
swap advisors, GIC brokers, etc. In
addition, the rule pertains to banks
and broker dealers acting as municipal
advisors. Municipal advisors have a
fiduciary responsibility to the govern-
ment agency receiving their services
and they must register with the Securi-
ties Exchange Commission (SEC).
Municipal finance professionals that
do not have a fiduciary duty to issuers
cannot provide advice to governments
unless certain exemptions are met. The
SEC has published a list of frequently
asked questions: www.sec.gov/info/
municipal/mun-advisors-faqs.pdf.
MUNICIPAL NOTES, BONDS, AND
OTHER OBLIGATIONS
Obligations issued by state and local
governments to finance capital and
operating expenses.
MUTUAL FUNDS
An investment company that pools
money and can invest in a variety of
securities, including fixed-income secu-
rities and money market instruments.
N
NET ASSET VALUE
Net asset value (NAV ) is a term used in
the mutual fund industry to determine
the average price per share of a pool or
mutual fund. How this measure var-
ies over time provides information on
whether the pool is stable or variable.
NAV is the market value of all securi-
ties in a mutual fund, less the value
of the fund’s liabilities, divided by the
number of shares in the fund outstand-
ing. Shares of mutual funds are pur-
chased at the fund’s offered NAV.
NET PRESENT VALUE
An amount that equates future cash
flows with their value in present terms.
NEW ISSUE
Securities sold during the initial distri-
bution of an issue in a primary offer-
ing by the underwriter or underwrit-
ing syndicate.
NOTE
A written promise to pay a specified
amount to a certain entity on demand
or on a specified date. Usually bearing
a short-term maturity of a year or less
(though longer maturities are issued—
see “Medium-Term Note”).
O
OPTIONS
An option is a contract that gives the
buyer the right to buy or sell an obli-
gation at a specified price for a speci-
fied time. Exchange Traded Options
are standardized option contracts
that are actively traded on the Chi-
cago Board of Exchange on a daily
basis whereas Over-the-Counter Op-
tions are traded directly between the
120 B-125
121LOCAL AGENCY INVESTMENT GUIDELINES
buyer and seller at agreed upon prices
and conditions (the former type of
option is therefore more liquid than
the latter).
P
PAR AMOUNT OR PAR VALUE
The principal amount of a note or
bond which must be paid at matu-
rity. Par, also referred to as the “face
amount” of a security, is the principal
value stated on the face of the security.
A par bond is one sold at a price of
100 percent of its principal amount.
PLACEMENT SERVICE
CERTIFICATES OF DEPOSIT
Certificates of deposit placed with
a private sector entity that assists in
the placement of certificates of de-
posit with eligible financial institu-
tions located in the United States.
PLACEMENT SERVICE DEPOSIT
Deposits at depository institutions
placed by a private sector placement
service entity.
PORTFOLIO
Combined holding of more than one
stock, bond, commodity, real estate
investment, cash equivalent, or other
asset. The purpose of a portfolio is to
reduce risk by diversification.
PREMIUM
Premium means the difference be-
tween the par value of a security and
the cost of the security, when the cost
is above par. Investors pay a premium
to purchase a security when the return
to the investor (yield) is lower than
the stated coupon (interest rate) on
the investment.
PRICE
Price is the amount of monetary con-
sideration required by a willing seller
and a willing buyer to sell an invest-
ment on a particular date.
PRINCIPAL
The face value or par value of a debt
instrument, or the amount of capital
invested in a given security.
PROSPECTUS
A disclosure document that must be
provided to any prospective purchaser
of a new securities offering registered
with the SEC that typically includes
information on the issuer, the issuer’s
business, the proposed use of pro-
ceeds, the experience of the issuer’s
management, and certain certified
financial statements (also known as an
“official statement”).
PRUDENT INVESTOR STANDARD
A standard of conduct where a per-
son acts with care, skill, prudence,
and diligence when investing, re-
investing, purchasing, acquiring,
exchanging, selling, and managing
funds. The test of whether the stan-
dard is being met is if a prudent per-
son acting in such a situation would
engage in similar conduct to ensure
that investments safeguard principal
and maintain liquidity.
PUBLIC BANK
A corporation, organized as either a
nonprofit mutual benefit corporation
or a nonprofit public benefit corpora-
tion for the purpose of engaging in
the commercial banking business or
industrial banking business, that is
wholly owned by a local agency, as
specified, local agencies, or a joint
powers authority.
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122LOCAL AGENCY INVESTMENT GUIDELINES
Q
QUALIFIED INSTITUTIONAL
BUYER
Federal regulations define qualified
institutional buyer (QIB) as any of the
following entities, acting for its own
account or the accounts of other QIBs,
that in the aggregate owns and invests
on a discretionary basis at least $100
million in securities of issuers that are
not affiliated with the entity: insurance
company, investment company, small
business investment company, a Rural
Business Investment Company, a plan
(established and maintained by a public
agency) for the benefit of its employees,
employee benefit plan, trust fund (bank
or trust company), business develop-
ment company, 501(c)(3), investment
adviser, and dealer, an institution that
qualifies as an accredited investor. 17
CFR § 230.144A and 230.145
R
REINVESTMENT RISK
The risk that interest rates may be
lower than the yield on a fixed in-
come security when the investor
seeks to reinvest interest income or
repaid principal from the security.
REPURCHASE AGREEMENTS
An agreement of one party (for exam-
ple, a financial institution) to sell secu-
rities to a second party (such as a local
agency) and simultaneous agreement by
the first party to repurchase the securi-
ties at a specified price from the second
party on demand or at a specified date.
REVERSE REPURCHASE
AGREEMENTS
An agreement of one party (for ex-
ample, a financial institution) to
purchase securities at a specified price
from a second party (such as a public
agency) and a simultaneous agreement
by the first party to resell the securities
at a specified price to the second party
on demand or at a specified date.
RISK
The uncertainty of maintaining the
principal or interest associated with an
investment due to a variety of factors.
RULE G-37 OF THE
MUNICIPAL SECURITIES
RULEMAKING BOARD
Federal regulations to sever any con-
nection between the making of politi-
cal contributions and the awarding of
municipal securities business.
S
SAFEKEEPING SERVICE
Offers storage and protection of
assets provided by an institution serv-
ing as an agent.
SAFETY
In the context of investing public
funds, safety relates to preserving the
principal of an investment in an in-
vestment portfolio; local agencies
address the concerns of safety by con-
trolling exposure to risks.
SECURITIES AND EXCHANGE
COMMISSION (SEC)
The federal agency responsible for
supervising and regulating the securi-
ties industry.
SECURITIES LENDING
AGREEMENT
An agreement of one party (for ex-
ample, a local agency) to borrow
securities at a specified price from a
second party (for example, another
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123LOCAL AGENCY INVESTMENT GUIDELINES
local agency) with a simultaneous
agreement by the first party to return
the security at a specified price to the
second party on demand or at a speci-
fied date. These agreements generally
are collateralized and involve a third
party custodian to hold the securities
and collateral. Economically similar to
reverse repurchase agreement.
SUPRANATIONAL INSTITUTIONS
International institutions formed by
two or more governments that tran-
scend boundaries to pursue mutually
beneficial economic or social goals.
There are three supranational institu-
tions that issue obligations that are
eligible investments for California
local agencies: the International Bank
for Reconstruction and Development
(IBRD), International Finance Cor-
poration (IFC), and Inter-American
Development Bank (IADB).
T
TAX AND REVENUE ANTICIPATION
NOTES (TRANS)
Notes issued in anticipation of receiv-
ing tax proceeds or other revenues at a
future date.
TOTAL RETURN
Total return includes interest, realized
gains and losses, and unrealized gains
and losses over a given period of time.
TRUSTEE, TRUST COMPANY OR
TRUST DEPARTMENT OF A BANK
A financial institution with powers
to act in a fiduciary capacity for the
benefit of the bondholders in enforc-
ing the terms of the bond contract.
U
UNDERWRITER
A dealer that purchases a new issue of
municipal securities for resale.
U.S. TREASURY OBLIGATIONS
Debt obligations of the U.S. Govern-
ment sold by the Treasury Depart-
ment in the forms of bills, notes, and
bonds. Bills are short-term obligations
that mature in one year or less and are
sold at a discount. Notes are obliga-
tions that mature between one year
and ten years. Bonds are long-term
obligations that generally mature in
ten years or more.
W
WEIGHTED AVERAGE
MATURITY (WAM)
The average maturity of all the securi-
ties that comprise a portfolio, typically
expressed in days or years.
Y
YIELD
The current rate of return on an
investment security generally ex-
pressed as a percentage of the securi-
ties current price.
YIELD CURVE
A graphic representation that shows
the relationship at a given point in
time between yields and maturity for
bonds that are identical in every way
except maturity.
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124LOCAL AGENCY INVESTMENT GUIDELINES
YIELD-TO-CALL
The rate of return to the investor
earned from payments of principal
and interest, with interest com-
pounded semi-annually at the stated
yield when the security is redeemed
on a specified call date. In addition,
if the security is redeemed at a pre-
mium call price, the amount of the
premium is also reflected in the yield.
YIELD-TO-MATURITY
The rate of return to the investor
earned from payments of principal
and interest, with interest com-
pounded semi-annually at the stated
yield as long as the security remains
outstanding until the maturity date.
YIELD-TO-WORST
For a given dollar price on a munici-
pal security, the lowest of the yield
calculated to the pricing call, par
option or maturity.
Z
ZERO-COUPON BOND
A bond on which interest is not
payable until maturity (or earlier
redemption), but compounds period-
ically to accumulate to a stated ma-
turity amount. Zero-interest bonds
are typically issued at a discount and
repaid at par upon maturity.
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125LOCAL AGENCY INVESTMENT GUIDELINES
Index of Statutory Changes
Effective 1996 to Present
1995
SB 564 AUTHOR: JOHNSTON SECTION(S): 53646
Summary of Changes: Requires treasurers to produce an annual investment
policy and provide detailed quarterly investment reports.
SB 866 AUTHOR: CRAVEN SECTION(S): 53601, 53635
AND 53859.02
Summary of Changes: Authorizes the County Board of Supervisors to delegate
investment authority to the County Treasurer and requires board to establish
a treasury oversight committee (with specific membership requirements). Re-
quires delivery of securities by book entry, physical delivery or third-party cus-
todial agreement. Specifies funds invested for repayment of notes cannot exceed
the term of the notes. Lastly, sets requirements for those elected or appointed to
county auditor, director of finance and county treasurer.
1996
SB 864 AUTHOR: CRAVEN
AND KILLEA
SECTION(S): 27000.7,
27131, 27132.1, 27132.2,
27132.3, 27136, 53601,
53601.6, 53635 AND
53646
Summary of Changes: Restricts campaign contributions by members of county
oversight committees, relaxes restrictions on repurchase agreements, increases
the amount of portfolio concentration for investment in mutual funds, and al-
lows for greater use of account statements in quarterly investment reports.
1997
No changes
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126LOCAL AGENCY INVESTMENT GUIDELINES
1998
SB 1793 AUTHOR: GREENE SECTION(S): 53601
AND 53635
Summary of Changes: Authorizes that where there is a percentage limitation for
a particular investment, that percentage is applicable only at the date of pur-
chase. In addition, investments in repurchase agreements are considered to be in
compliance if the value of the underlying securities is brought back up to 102%
no later than the next business day.
1999
AB 323 AUTHOR: BALDWIN SECTION(S): 27132.3
Summary of Changes: Prohibits a member of an oversight committee from
securing employment with a financial service company that does business with
the committee’s county treasurer for one year after leaving the committee.
AB 343 AUTHOR: CAMPBELL SECTION(S): 53635.7,
53601.2 AND 53635.2
Summary of Changes: Authorizes counties to increase the amount of com-
mercial paper (CP) held in their portfolios from 15% to 40%, removes the
31-day dollar-weighted maturity requirement for purchases above the original
15%, limits CP investments with any single issuing corporation to 10% of
the county’s surplus money, and clarifies that “borrowing” does not include
bank overdrafts.
AB 530 AUTHOR: PAPAN SECTION(S): 53601
AND 53635
Summary of Changes: Authorizes local governments to enter into securities
lending agreements provided they meet the same statutory requirements as
reverse-repurchase agreements. No more than 20% of the investment portfolio
may be comprised of securities lending agreements.
AB 1679 AUTHOR: ASSEMBLY LOCAL
GOVERNMENT COMMITTEE
SECTION(S): 53601
AND 53635
Summary of Changes: Amends the definition of medium-term notes, specifying
that these instruments shall have a remaining maximum maturity of 5 years or
less. It also emphasizes that purchases of medium-term notes shall not include
other investment instruments allowable under current state law.
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127LOCAL AGENCY INVESTMENT GUIDELINES
2000
AB 2220 AUTHOR: BATTIN SECTION(S): 53601,
53601.2, 53635 AND
53635.2
Summary of Changes: Revises the maximum maturity for bankers accep-
tances from 270 to 180 days, and prime quality commercial paper from 180
to 270 days.
AB 2539 AUTHOR: ASSEMBLY
JUDICIARY COMMITTEE
SECTION(S): 53601 AND
53635
Summary of Changes: Non-substantive, technical changes including punctuation.
2001
AB 609 AUTHOR: KELLEY SECTION(S): 53601,
53601.5, 53601.6 AND
53635
Summary of Changes: Authorizes local agencies to invest non surplus money
in a sinking fund provided that the money is not required for immediate needs.
The bill also revises the definition of commercial paper and prohibits the legisla-
tive body of a local agency and the treasurer or other official having custody of
the county’s money from investing in negotiable certificates of deposit of a state
or federal credit union if a member of the legislative body or any other specified
city officer or employee also serves on the board of directors or certain commit-
tees of that credit union.
2002
AB 2182 AUTHOR: CAMPBELL SECTION(S): 53601.7
Summary of Changes: Authorizes a county or city and county to invest in high
quality money market funds (direct obligations of the United States Treasury or
any other obligation guaranteed as to principal and interest by the United States
government, bonds, notes, debentures, or other obligations of, or securities
issued by, any federal government agency, instrumentality, or government-spon-
sored enterprise, and state treasury notes, bonds, or registered state warrants).
AB 3034 AUTHOR: ASSEMBLY
JUDICIARY COMMITTEE
SECTION(S): 53601
Summary of Changes: Non-substantive, technical changes consisting of gram-
matical and other errors without substantively changing the law.
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128LOCAL AGENCY INVESTMENT GUIDELINES
SB 1326 AUTHOR: SENATE LOCAL
GOVERNMENT COMMITTEE
SECTION(S): 53601, 53635
AND 53646
Summary of Changes: Renames the California Debt and Investment Advisory
Commission (CDIAC), deletes a requirement to select a vice-chair and secre-
tary, and requires, by May 1, 2006, a specified report to the Legislature. The bill
makes related changes in provisions relating to municipal investments.
2003
SB 787 AUTHOR: BATTIN SECTION(S): 53601 AND
53635
Summary of Changes: Authorizes local agencies to purchase asset-backed com-
mercial paper of prime quality to be of the highest ranking as provided by a
nationally recognized statistical-rating organization and that the entity issuing
the commercial paper must meet certain conditions as stated in 53601 (g).
2004
AB 969 AUTHOR: CORREA SECTION(S): 53601
Summary of Changes: Authorizes a local agency that has surplus money or a
sinking fund in its treasury to invest that money in shares of beneficial interest
issued by a JPA. In addition, the bill requires a JPA issuing the shares to retain
an investment advisor that meets specified criteria.
2005
No changes
2006
AB 1794 AUTHOR: DEVORE SECTION(S): 53635 AND
53601.7
Summary of Changes: Extends the sunset date to January 1, 2011 for local
agencies to invest in short-term unsecured promissory notes issued by corpora-
tions for maturities of 270 days or less, and amends statue to state that no more
than 10% of the total assets of the investments that a local entity makes may be
invested in any one issuer’s commercial paper.
AB 2011 AUTHOR: VARGAS SECTION(S): 53601.8 AND
53635.8
Summary of Changes: The bill authorizes the investment of up to 30% of sur-
plus funds in certificates of deposit at a commercial bank, savings bank, savings
and loan association, or credit union that uses a private sector entity that as-
sists in the placement of certificates of deposit under specified conditions, until
January 1, 2012.
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129LOCAL AGENCY INVESTMENT GUIDELINES
2007
AB 1745 AUTHOR: ASSEMBLY
REVENUE AND TAXATION
COMMITTEE
SECTION(S): 53601
Summary of Changes: This bill authorizes local agencies to invest in registered
treasury notes and bonds issued by any of the 50 states.
2008
SB 1124 AUTHOR: SENATE LOCAL
GOVERNMENT COMMITTEE
SECTION(S): 53601, 53635
AND 53635.8
Summary of Changes: Repeals the requirement for local governments to pro-
vide annual statements of investment policies, and quarterly investment reports
to the CDIAC. In addition, the bill corrects various incorrect statutory cross-
references regarding local agency investments.
SB 1498 AUTHOR: SENATE JUDICIARY
COMMITTEE
SECTION(S): 53601
Summary of Changes: Non-substantive, technical changes consisting mostly of
punctuation, correcting spelling errors, updating words, i.e., may to shall, any
to a, money to moneys, and use of acronym for Nationally Recognized Statisti-
cal Rating Organization.
SB 344 AUTHOR: MACHADO SECTION(S): 5925
Summary of Changes: Authorizes state and local governments to repurchase or
acquire instruments and outstanding bonds issued by or on their behalf.
2009
SB 113 AUTHOR: SENATE LOCAL
GOVERNMENT COMMITTEE
SECTION(S): 53601.6,
53601.8 AND 53646
Summary of Changes: Corrects an incorrect cross reference for local agency
investments in certificates of deposits and repeals requirement to submit a state-
ment of investment policy to the CDIAC.
2010
SB 1330 AUTHOR: SENATE JUDICIARY
COMMITTEE
SECTION(S): 53601
Summary of Changes: Non-substantive, technical changes consisting of changes
to references within 53601 due to re-numeration of subsections of 53601 and
changing the word subdivision to subdivisions.
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130LOCAL AGENCY INVESTMENT GUIDELINES
SB 1344 AUTHOR: KEHOE SECTION(S): 53601.8
AND 53635.8
Summary of Changes: Deletes the sunset date associated with the authorization
for local agencies to investment up to 30% of their surplus funds in certificates
of deposit 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
certificates of deposit.
2011
SB 194 AUTHOR: SENATE
GOVERNANCE AND
FINANCE COMMITTEE
SECTION(S): 53601
Summary of Changes: Authorizes local agencies to invest in negotiable certifi-
cates of deposit issued by a federally licensed branch of a foreign bank.
2012
SB 1033 AUTHOR: SENATE BUDGET
AND FISCAL REVIEW
COMMITTEE
SECTION(S): 16340
Summary of Changes: Establishes the Voluntary Investment Program Fund with-
in the State Treasury for the receipt of voluntary deposits from local entities.
2013
AB 279 AUTHOR: DICKINSON SECTION(S): 53601.8
AND 53635.8
Summary of Changes: Authorizes local agencies to invest up to 30% of
their surplus funds in deposits at a commercial or savings bank, savings and
loan, or credit union using a private sector deposit placement service until
January 1, 2017.
2014
AB 1933 AUTHOR: LEVINE SECTION(S): 53601
Summary of Changes: Authorizes local agencies to invest in United States dollar
denominated senior unsecured unsubordinated obligations issued or uncondi-
tionally guaranteed by certain banks (supranationals), and would require these
investments to be rated “AA” or better and to not exceed 30% of the agency’s
moneys that may be invested.
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131LOCAL AGENCY INVESTMENT GUIDELINES
AB 2298 AUTHOR: RODRIGUEZ SECTION(S): 53663
Summary of Changes: Authorizes state chartered financial institutions that
maintain local agency deposits to submit their weekly reports to the Adminis-
trator of Local Agency Security of the State of California electronically via email
or other electronic means approved by the administrator.
2015
AB 283 AUTHOR: DABABNEH SECTION(S): 53601.8 AND
53635.8
Summary of Changes: Extends the authority to use a private sector entity to
assist placing deposits to January 1, 2021; allows local agencies to invest up to
30% of its surplus funds in placement service certificates of deposit (CDs) and
30% in negotiable certificates of deposit; and enables a local agency to invest
up to 30% with the same deposit placement service provider. Upon the sunset
date of January 1, 2021, a public agency may no longer use a placement service
provider to place deposits; however, the private entity would be able to assist a
local agency with the placement of CDs.
2016
SB 974 AUTHOR: SENATE LOCAL
GOVERNMENT COMMITTEE
SECTION(S): 53601
Summary of Changes: Clarifies and amends the statutory rating requirements
contained in Government Code 53601. Specifically rating requirements now
refer to a rating category which is inclusive of any rating modifiers such as
“+”/”-“ or numbers and to include equivalent ratings from Nationally Recog-
nized Statistical Rating Organizations (NRSRO). The specific sections of code
that are amended are Government Code Sections 53601(h)(1)(C) Commercial
Paper, 53601(k) Medium Term Notes, 53601(o) Mortgage Passthrough Securi-
ties, and 53601(q) Supranationals.
2017
No changes
2018
AB 1770 AUTHOR: STEINORTH SECTION(S): 53601(O)
Summary of Changes: Clarifies the statutory maximum remaining maturity
requirement of five years applies to all asset-backed securities enumerated in this
subdivision and eliminates the issuer rating requirement.
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132LOCAL AGENCY INVESTMENT GUIDELINES
2019
AB 857 AUTHOR: CHIU SECTION(S): 53601(R),
53635(C) AND 53635.2
Summary of Changes: Adds to Government Code 53601: “(r) Commercial pa-
per, debt securities, or other obligations of a public bank, as defined in Section
57600.” In addition, Government Code 53635 is amended by the addition of
“(c) A local agency subject to this section may invest in commercial paper, debt
securities, or other obligations of a public bank, as defined in Section 57600.”
Lastly, Government Code 53635.2 is amended to add public banks to the list of
depository institutions.
AB 945 AUTHOR: MCCARTY SECTION(S): 53601.8
AND 53635.8
Summary of Changes: Amends a local agency’s authorization to invest and de-
posit surplus funds in deposits, certificates of deposit or another form, at speci-
fied types of financial institutions. Beginning January 1, 2020, until January 1,
2026, the percentage of surplus funds that can be invested by a city, district, or
other local agency that does not pool money in deposits or investments with
other local agencies with a different governing body increases to 50 percent. On
and after January 1, 2026, the portfolio limitation of cities, districts, and agen-
cies returns to 30 percent of the agency’s surplus funds.
2020
SB 998 AUTHOR: MOORLACH SECTION(S): 53601(H),
53601(K) AND 53601.6
Summary of Changes: Amends the authorization of local agencies, other than
counties or a city and county pursuant to subdivision (a) of Section 53635, to
invest no more than 10% of its total investment assets in commercial paper and
the medium-term notes of any single issuer. Authorizes federally recognized
Indian tribes in California to invest in JPA investment pools. Beginning January
1, 2021, until January 1, 2026, local agencies thathave $100 million or more of
investment assets, are authorized to invest up to 40% of their moneys in eligible
commercial paper. Also, beginning January 1, 2021, until January 1, 2026,
local agencies are authorized to invest in securities issued by, or backed by, the
United States government that could result in zero- or negative-interest accrual
if held to maturity, in the event of, and for the duration of, a period of negative
market interest rates. Local agencies are authorized to hold these instruments
until their maturity dates. On and after January 1, 2026, the portfolio limita-
tion of local agencies authorized under 53601(h) returns to 25% of eligible
commercial paper and local agencies are no longer permitted to invest any
funds in securities that could result in zero interest accrual if held to maturity.
2021
No changes
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133LOCAL AGENCY INVESTMENT GUIDELINES
B
BOND PROCEEDS, GC Section 53601(m), 16
BUY AND HOLD STRATEGY, 10
C
CASH FLOW
Liquidity certification, GC Section 53646(b)(3), 36
COMPLIANCE
GC Section 53601, 15
COUNTY POOLS
Cash flow projections, 36
Voluntary depositors, 8
D
DURATION, 37–39
G
GAN PROCEEDS, 25–26
GOVERNMENT CODE SECTIONS
5925 Acquisition of Bonds, 11
16340 Voluntary Investment Program Fund, 10–13
16429.1 Local Agency Investment Fund (LAIF), 10, 12–13
27000.3 County Treasurer, prudent investor, 9
27000.5 County Treasurer, objectives, 9
27131 Oversight Committees, establishment, 42–45
27132 Oversight Committees, membership, 42, 44–46
27132.4 Oversight Committees, open meetings, 42
Index
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134LOCAL AGENCY INVESTMENT GUIDELINES
27133 Oversight Committees, review and oversight, 5–6
27134 Oversight Committees, audits by, 45
27137 Oversight Committees, involvement, 45
53600.3 Investment of Surplus, prudent investor, 9, 27, 29
53600.5 Investment of Surplus, objectives, 9, 29
53601 Investment of Surplus, authorized investments, 9–16, 18–25
53601.1 Investment of Surplus, authorized investments, 28–29
53601.6 Investment of Surplus, prohibited investments, 10–11, 18–19
53601.8 Investment of Surplus, certificates of deposit placement, 10–14
53607 Transactions Reporting, 31–34
53608 Investment of Surplus, deposit of securities, 26
53635 Deposit of Funds, investments, 10–13
53635.2 Deposit of Funds, money in custody of local agency, 10, 14
53635.8 Deposit of Funds, certificates of deposit placement, 10–14
53638 Deposit of Funds, maximum deposits, 10
53646 Deposit of Funds, policy statement, 31–33, 36, 40
53684 Deposit of Funds, investment by county treasurer, 10
53821.5 Tax and Revenue Anticipation Notes, 25–26
53841.5 Tax and Revenue Anticipation Notes, 25–26
53852.5 Tax and Revenue Anticipation Notes, 25–26
53859.02 Grant Anticipation Notes, 25–26
I
INVESTMENT ADVISORS/MANAGERS, 27
INVESTMENT INSTRUMENT TYPES
Bankers’ acceptances, 10, 12–13
California local agency obligations, 12–13
Certificates of deposit (negotiable, non-negotiable
and placement service), 10, 12–13
Collateralized bank deposits, 10, 12–13
Commercial paper, 12–13, 21, 32
Corporate, GC Section 53601(k), 20–21
County pooled investment funds, 12–13
Derivatives, 18
Joint Powers Authority pool, 12–13
Local agency bonds, 12–13
Local Agency Investment Fund (laif), 12, 26, 31–34
Medium-term notes, GC Section 53601(k), 12–13, 20–21
Mortgage pass-through securities, 12–13
Mutual funds and money market mutual funds, 12–13, 24–25
Placement service deposits, 12–13
Repurchase agreements, 10, 12–13, 22–23
Reverse repurchase agreements and securities lending agreements,
GC Section 53601(l), 12–13, 22–23
SEC rule 2a-7 allowable investments, 12–13, 25
State of California obligations, 12–13, 22
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135LOCAL AGENCY INVESTMENT GUIDELINES
Supranational obligations, 12–13, 19
U.S. Agencies (GSES), GC Section 53601(f), 12–13, 18–19
U.S. Treasury obligations, 12–13
Voluntary Investment Program Fund, GC Section 16340, 12–13
INVESTMENT POLICY
Bond proceeds, GC Section 53601(m), 16
Contents of, GC Section 27133, 6–7
Market risk measures, 37–39
Oversight committees, 5–6, 42–46
Purpose of, 4
Rendering to legislative/governing body, 4–6
Statutory requirements—county, GC Section 53646(a)(1), 4
Statutory requirements—other local agencies, GC Section 53646(a)(2), 4–5
Update/review frequency, 5–6
INVESTMENT PORTFOLIO REPORT, GC Section 53646
Contents of, GC Section 53646(b)(1–4), 32–36
Dollar amount, 32
Legislative/governing body, GC Section 53646(b), 40–41
Liquidity certification, GC Section 53646(b)(3), 36–37
Market risk measures, 37–39
Market value in, 34–35
Transactions reporting, GC Section 53607, 31–34
30-day requirement, GC Section 53646(b), 40
L
LEGISLATIVE/GOVERNING BODY
Approval or action by, 40–41
Investment policy, 4–5
Investment portfolio report, GC Section 53646(b), 31–34
Oversight committee, 40, 45–46
Statutory definition, GC Section 27000.3, 9
M
MUNICIPAL ADVISOR RULE, 17
O
OVERSIGHT COMMITTEES
For non-county agencies, 45–46
Function of, GC Section 27131 and 27132, 42–45
Investment policy, 4–6
Investment report, 40–41
B-140
136LOCAL AGENCY INVESTMENT GUIDELINES
Members of (including Treasurer), GC Section 27131(a), 42-44
Statutory requirements, 42–43
P
PENSION FUNDS, 7
PROHIBITED INVESTMENTS, 10–11
PRUDENT INVESTOR STANDARD
Statutorily defined, GC Section 53600.3, 9
R
RISK, 9
Credit/default, 10
Duration, 37–39
Liquidity, 36–37
Market or interest rate, 9, 37
Measures of (WAM and duration), 37-39
S
SAFEKEEPING, 26
SAFETY, LIQUIDITY, YIELD, GC Section 27000.5 and 53600.5, 9
SEC 15 U.S. CODE SECTION 80A-I,
INVESTMENT COMPANY ACT OF 1940, 10–11, 24–25
SUPRANATIONALS, GC SECTION 53601(Q), 12–13, 19
T
TRAN PROCEEDS, 25–26
U
U.S. CODE SECTION 2906 OF TITLE 12,
COMMUNITY REINVESTMENT ACT OF 1977, 14
W
WEIGHTED AVERAGE MATURITY (WAM), 37–38
B-141
915 Capitol Mall, Room 400
Sacramento, CA 95814
phone: (916) 653-3269
fax: (916) 654-7440
e-mail: cdiac@treasurer.ca.gov
www.treasurer.ca.gov/cdiac
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