BILL ANALYSIS
C.S.S.B. 1128
By: Ellis (Cuellar, Henry)
May 12, 1995
Committee Report (Substituted)
BACKGROUND
Under current law, the treasury can invest in mutual funds and
obligations of any state agency or political subdivision but only
using the proceeds from bond sales. There are no restrictions on
the purchase of derivatives by the treasurer. Although the
treasury can make prudent investments in derivatives that will
provide a good return to the state, some of these investments may
be subject to interest rate swings and can be highly volatile. As
proposed, C.S.S.B. 1128 would prohibit some derivatives in which
the Treasurer may invest and places a five percent cap on the total
which may be invested in derivatives.
The bill also addresses Treasury Revenue Anticipation Notes (TRANs)
which are issued by the Treasure to manage temporary cash flow
shortfalls caused by a mismatch in the timing of revenues and
expenditures in the General Revenue Fund. The bill would delete
the requirement that the interest rate paid on a TRAN issue be one
percent (1%) less than the interest yield earned on funds invested
by the Treasurer. The elimination of this 1% is extremely
important in that the recent and current environment of rising
interest rates could severely limit the State's ability to do a
TRAN issue this fall. If the Treasurer can not issue short term
debt in September, the Treasury could experience serious cash flow
problems.
PURPOSE
As proposed, C.S.S.B. 1128 sets forth regulations regarding the
handling of funds by the state treasurer, including rating
requirements for regulated financial institutions to serve as state
depositories, collateral requirements to secure state deposits, and
reporting requirements.
RULEMAKING AUTHORITY
It is the committee's opinion that this bill grants rulemaking
authority to the Treasurer in Section 5 of this bill.
SECTION BY SECTION ANALYSIS
SECTION 1. Amends Section 404.021, Government Code, to add (c) any
state or federal credit union doing business in this state to the
list of institutions eligible to be a state depository.
(d) States that deposits of eligible institutions must be
covered by the FDIC or the National Credit Union Share Insurance
Fund (NCUSIF).
SECTION 2. Amends Chapter 404C, Government Code, by adding Section
404.0212, as follows:
Sec. 404.0212. DEPOSITORY RATING UNDER CERTAIN FEDERAL LAW.
(a) Defines "regulated financial institution."
(b) Requires a regulated financial institution that accepts
a deposit from the treasurer to report to the treasurer the
rating assigned to the financial institution.
(c) Requires a regulated financial institution to make a
report annually, by August 1, and not later than the 30th
day after the financial institution is notified that the
assigned rating has been changed.
(d) Prohibits the treasurer from selecting as a depository
a regulated financial institution that has been assigned a
rating below "outstanding record of meeting community credit
needs" or "satisfactory record of meeting community credit
needs."
(e) Requires the treasurer to take immediate action to
transfer all state funds subject to the treasurer's control
that are on deposit with an institution whose rating has
changed to a rating below the required rating to a qualified
financial institution.
(f) Requires the depository contract between a regulated
financial institution and the treasurer to authorize the
withdrawal without penalty of the state funds subject to the
treasurer's control that are on deposit with the institution
whose rating has changed to a rating below the required
rating.
SECTION 3. Amends Section 404.022, Government Code, by adding
Subsection (j), to authorize the State Depository Board (board) to
execute a simplified version of a depository agreement with an
eligible institution desiring to hold $98,000 or less in state
deposits that are fully insured by the Federal Deposit Insurance
Corporation (FDIC). Authorizes the treasurer to give the
institution contingent approval as a depository until the board's
next meeting.
SECTION 4. Amends Chapter 404C, Government Code, by adding Section
404.0221, as follows:
Sec. 404.0221. ELIGIBLE COLLATERAL. (a) Defines "public
agency."
(b) Sets forth obligations included as collateral eligible
to be pledged with the treasurer to secure state deposits.
(c) Prohibits the market value of the collateral pledged
from being less than 125 percent of the amount of the state
deposits to be secured if the collateral consists of
securities with a declining principal balance.
(d) Provides that eligible collateral includes only a
security with fixed, stated rates.
(e) Authorizes a loss sustained by a depository that has
secured its deposits by collateral to be enforced against
the collateral.
(f) Authorizes the treasurer, in a judgment that is final
and not subject to review, to reject at any time collateral
tendered by a state depository without assigning a reason
for the rejection.
(g) Provides that collateral is not required for deposits to
the extent that the deposits are insured by the FDIC.
SECTION 5. Amends Section 404.024, Government Code, as follows:
Sec. 404.024. AUTHORIZED INVESTMENTS. (a) Makes no changes.
(b) Requires state funds not deposited in state depositories
to be invested by the treasurer in obligations of a state or
an agency, or political subdivision of a state and mutual
funds or other investment pools secured by obligations that
are described by Subdivisions (1) through (9). Makes
conforming changes.
(10) is added to include obligations of a state or an
agency, county, city, or other political subdivision of a
state;
(11) is added to authorize the Treasurer to invest in
mutual funds secured by obligations that are described by
Subdivisions (1) through (6).
(c) Authorizes investments in direct security repurchase
agreements and reverse security repurchase agreements to be
made with state or national banks doing business, rather
than domiciled, in this state and states that the term of
any reserve security repurchase agreement may not exceed 90
days after the date the reverse security repurchase
agreement is delivered.
(d) Deletes part of a provision authorizing the board to
contract with a depository for the payment of interest on
time or demand deposits at a rate not to exceed a rate that
is lawful under rules and regulations of the board of
directors of the Federal Savings and Loan Insurance
Corporation and adds the National Credit Union
Administration Board.
(e) Prohibits the Treasury from purchasing certain types of
investments. Deletes existing subsection prohibiting more
than 20 percent of aggregate funds from being in depository
institutions other than banks.
(f) Prohibits the Treasury from purchasing derivative
investments in an amount that at the time of purchase will
cause the aggregate value of the investments to exceed five
percent of the treasury's total investments. Allows the
Treasurer by rule to define the derivative investments other
than those in (e).
(g) Makes no changes.
(h) Redesignates existing Subsection (j). Deletes existing
Subsection (h) prohibiting state investment in South Africa.
(i) Redesignates existing Subsection (k) and makes
conforming changes.
SECTION 6. Amends Section 404.0245(c), Government Code, as
follows:
(c) Prohibits the principal amount of state funds invested and
outstanding in hedging transactions on any one day from
exceeding $500,000 with a maximum risk of loss of $5,000,000
in a biennium.
SECTION 7. Amends the heading of Chapter 404D, Government Code, as
follows:
SUBCHAPTER D. COLLATERAL, DEPOSITS, AND WITHDRAWALS
SECTION 8. Amends the heading of Section 404.031, Government Code,
as follows:
Sec. 404.031. COLLATERAL REQUIREMENTS.
SECTION 9. Amends Sections 404.031(b), (e), (g), and (j),
Government Code, as follows:
(b) Requires the Treasurer to require that additional
collateral be pledged immediately or deposits reduced if the
market value of the securities pledged by a depository becomes
less than the amount of funds on deposit in the depository.
(e) Provides that the custodian with whom a depository may
deposit securities, rather than a bank, is for all purposes
the bailee or agent of the treasurer. Makes conforming
changes.
(g) Makes conforming changes.
(j) Authorizes the treasurer to sell or convert the securities
to money if a state depository fails to credit a deposit made
by the Treasurer. Deletes a provision requiring this money to
be disbursed on certain warrants drawn by the comptroller.
SECTION 10. Amends the heading of Section 404.032, Government
Code, as follows:
Sec. 404.032. DEPOSITS.
SECTION 11. Amends Sections 404.032(a), Government Code, to make
conforming changes.
SECTION 12. Amends Section 404.043, Government Code, to authorize,
rather than require, the Treasurer to employ security officers to
provided services for the Treasury.
SECTION 13. Amends Section 404.047, Government Code, to require
the Treasurer to keep records, rather than legal vouchers,
distinguishing between the receipts and disbursements of each
fiscal year.
SECTION 14. Amends Section 404.048, Government Code, to require
the Treasurer, as required by the Governor, rather than specifying
a time frame, to submit a statement of the balance of money
remaining in the Treasury. Makes conforming changes.
SECTION 15. Amends Sections 404.052(b), (d), and (f), Government
Code, to require the payment of interest and principal due on an
obligation of the municipality, district, or political subdivision
to be on deposit with the Treasurer within five business days
before the date of maturity. Requires any charges incurred for
later receipt of funds to be assessed to the municipality,
district, or political subdivision. Requires the Treasurer to
request the Comptroller to issue a warrant for the payment of
amounts due on receipt of those amounts by the treasurer. Deletes
provisions setting forth requirements for the warrant. Makes
conforming changes.
SECTION 16. Amends Section 404.055, Government Code, as follows:
Sec. 404.055. New heading: TIME AND DEMAND DEPOSITS.
Requires the treasurer to preserve records of the daily
balances of and the interest income from funds deposited in
time and demand deposit accounts in each state depository
according to the provisions of Chapters 441D and 552. Deletes
provisions requiring the treasurer to make annual reports to
the legislature and governor of the amount of income earned on
each depository. Makes conforming changes.
SECTION 17. Amends Section 404.060, Government Code, to require
the treasurer to determine the priority of payment, rather than
setting forth a procedure for determining the priority of payment
and setting forth warrants to which this section does not apply.
SECTION 18. Amends Section 404.062, Government Code, as follows:
Sec. 404.062. New heading: UNDETERMINED REMITTANCES. (a)-(c) Redesignate existing Subsections (c)-(e). Deletes
existing Subsections (a) and (b) setting forth requirements to
a daily list of certain persons remitting money.
SECTION 19. Amends Section 404.064, Government Code, as follows:
Sec. 404.064. New heading: OFFICE FEES. Requires the
treasurer to keep records, rather than an office fee book, of
the fees earned by the treasury department to be deposited to
the appropriate treasury fund.
SECTION 20. Amends Section 404.065, Government Code, as follows:
Sec. 404.065. New heading: CASH BALANCING. Requires the
treasurer to keep records, rather than a cash balancing book,
for the purpose of arriving at the daily cash balance. Makes
conforming changes.
SECTION 21. Amends Section 404.067, Government Code, as follows:
Sec. 404.067. New heading: SAFEKEEPING; INVESTMENT AGENCIES.
(a) Requires the treasurer to keep custodial records, rather
than a bond book, which shall reflect all deposits and
releases of securities held by the treasurer and belonging to
a state investment agency.
(b) Requires the treasurer to keep appropriate ledger
accounts that include a short description of each security
held in safekeeping for certain investment agencies of the
state. Makes conforming changes.
(c) Makes conforming changes.
(d) Redesignates existing Subsection (e). Deletes existing
Subsection (d) regarding controlling accounts for interest
to accrue on the bonds. Makes conforming changes.
SECTION 22. Amends Section 404.068, Government Code, as follows:
Sec. 404.068. New heading: STATE REGULATORY AGENCIES
SAFEKEEPING AND PLEDGED COLLATERAL. (a) Requires the
treasurer to keep a suitable system in which all securities
deposited with the treasurer by state depositories and other
state agencies shall be entered, rather than including
deposits by bond investment, surety, and insurance companies.
(b) Requires the treasurer to keep a securities ledger in
which appropriate accounts for each custodial agency are
kept.
SECTION 23. Amends Section 404.070, Government Code, as follows:
Sec. 404.070. New heading: VALIDITY OF VOIDED WARRANTS. (a)
Provides that a warrant issued by the comptroller in payment
of refunds from a fund in the treasury, rather than from a
suspense or trust fund, becomes void unless presented to the
treasurer for payment to the treasurer within a certain time
period. Makes conforming changes.
(b) Deletes a provision requiring a list showing the
outstanding warrants representing the transfer to show the
name of the payee and a provision requiring proper notation
to be made on each entry on the list when the legislature
makes an appropriation for the refund of the amount listed.
SECTION 24. Amends Section 404.071(e), Government Code, to require
the treasurer to provide the comptroller information necessary for
the comptroller to compute the amount of interest to be paid from
the information in accordance with the comptroller's requirements.
SECTION 25. Amends Section 404.095, Government Code, as follows:
Sec. 404.095. ELECTRONIC TRANSFER OF CERTAIN PAYMENTS. (a)-(c) Require a state agency to require a person to transfer
payment amounts, rather than specifying amounts, due in a
category of payments to the agency by electronic funds
transfer approved by the treasurer.
(d) Provides that a person's failure to transfer payment
amounts by electronic funds transfer may result in the
assessment of a penalty by the state agency equal to five
percent of the payment amount.
(e) Provides that a person's failure to comply with the rules
may result in the assessment of a penalty by the state agency
equal to five percent of the payment amount.
(f)-(g) Redesignate existing Subsections (e)-(f).
SECTION 26. Amends Section 404.105, Government Code, to make
conforming changes.
SECTION 27. Amends Section 404.106, Government Code, by adding
Subsection (c) to provide that the trust company has the same
investment authority as a particular participant for specific funds
held by the trust company for the participant.
SECTION 28. Amends 404.121, Government Code, by adding a new
definition (1) of "cash flow deficit", and amending (5)(a) and (b)
"Temporary cash shortfall".
SECTION 29. Amends Section 404.123(d), Government Code, to delete
provisions setting forth the requirements for determining the
interest rate on tax and revenue anticipation notes.
SECTION 30. Amends Subsections (b) and (c), Section 404.124,
Government Code.
(b) The outstanding balance of notes in any fiscal year may
not exceed the maximum temporary cash shortfall forecast by the
Treasurer for any period in the fiscal year. The Treasurer may not
issue notes in excess of the amount approved; and
(c) The committee may determine whether the notes will be
sold on a negotiated or competitive bid basis. If competitive bids
are chosen, the underwriter of any notes issued shall be selected
by the solicitation of sealed bids and an appropriate bid notice
shall be published at least one time in one or more recognized
financial publications of general circulation published within the
state and one or more publications published outside the state.
The underwriter shall be selected from the bids received unless all
bids are rejected. The Treasurer may not sell the notes in a
manner not approved.
SECTION 31. Repealer: Sections 404.0245(e), 404.0245(f), 404.025,
and 404.061, Government Code and Section 2, Chapter 234, V.T.C.S.
SECTION 32. (a) Authorizes a regulated financial institution that
is acting as a depository of funds subject to Section 404.0212 on
the effective date of this Act and that does not have an assigned
rating under 12 U.S.C. Section 2906 that satisfies the requirement
of that section to continue to hold the funds only for the period
necessary to avoid the imposition of penalty on that state.
(b) Makes application of Section 404.0212(f), Government Code,
prospective.
SECTION 33. Effective date: upon passage, except that a state
depository approved before the effective date of this Act and
operating as a state depository on the effective date of this Act
is not required to meet a requirement of Chapter 404, Government
Code, and a state or federal credit union may not be designated as
a state depository until January 1, 1996.
SECTION 34. Emergency clause.
Effective date: upon passage.
COMPARISON OF ORIGINAL TO SUBSTITUTE
The substitute adds a new Section 1 of the bill by adding a new
subsection (c) which makes credit unions eligible as a state
depository and amends (d) by adding the National Credit Union Share
Insurance Fund (NCUSIF) in addition to the FDIC as eligible
insurance funds. The NCUSIF was added throughout the bill as
needed.
On page 6 in Section 5 of the bill, number (11) of the original
bill under authorized investments has been partially deleted. This
clause would have allowed the Treasury to invest state funds in
mutual funds or other investment pools. The substitute deletes
"other investment pools".
The substitute defines on page 7, subsection (e), the types of
derivatives in which the Treasurer may not invest and (f) grants
additional rulemaking authority to the Treasurer regarding defining
derivatives in which the Treasury may invest not to exceed a five
percent cap on derivative investments.
A Subsection, on page 7 of the original, is deleted in the
substitute. This section would have authorized the Treasurer to
enter into contracts with registered outside investment advisors
and other consultants to assist in investment management.
S.B. 405 (74R) was amended to the education bill and would make an
additional $1.5 billion in payments to school districts in
September and October of this year. Two sections have been added
to the bill Sections 28 and 30 to amend statutes to make it
possible for the Treasury to issue cash management notes in order
to have sufficient cash in the general revenue fund to make extra
payments to school districts.
Section 33 was amended to state that any state or federal credit
union may not be designated as a state depository until January 1,
1996.
SUMMARY OF COMMITTEE ACTION
The committee considered SB 1128 in a formal meeting on May 12,
1995.
The committee considered a complete committee substitute for the
bill which was adopted without objection.
The bill was reported favorably as substituted, with the
recommendation that it do pass and be printed and be sent to the
Committee on Local and Consent Calendars, by a record vote of: 6
Ayes, 0 Nays, 0 PNV, 3 Absent.