BILL ANALYSIS C.S.S.B. 1128 By: Ellis State Affairs 4-26-95 Committee Report (Substituted) BACKGROUND Currently, the State Depository Board has the responsibility to review and approve applications from banks to be state depositories. 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. 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 does not grant any additional rulemaking authority to a state officer, institution, or agency. SECTION BY SECTION ANALYSIS SECTION 1. 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 2. 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 3. 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 4. 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 (6). Makes conforming changes. (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. (d) Deletes 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. (e) Prohibits the treasury from purchasing certain types of 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. Deletes existing subsection prohibiting more than 20 percent of aggregate funds from being in depository institutions other than banks. (f) Authorizes the treasurer to contract with registered investment advisors and other consultants to assist in investment management and to pay fees directly from investment earnings. Deletes existing subsection authorizing the treasurer to invest the gross proceeds from obligations in certain obligations or funds. (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 5. 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 6. Amends the heading of Chapter 404D, Government Code, as follows: SUBCHAPTER D. COLLATERAL, DEPOSITS, AND WITHDRAWALS SECTION 7. Amends the heading of Section 404.031, Government Code, as follows: Sec. 404.031. COLLATERAL REQUIREMENTS. SECTION 8. 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 9. Amends the heading of Section 404.032, Government Code, as follows: Sec. 404.032. DEPOSITS. SECTION 10. Amends Sections 404.032(a) and (d), Government Code, to make conforming changes. SECTION 11. Amends Section 404.043, Government Code, to authorize, rather than require, the treasurer to employ security officers to provided services for the treasury. SECTION 12. 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 13. 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 14. 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 15. 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 16. 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 17. 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 18. 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 19. 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 20. 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 21. 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 22. 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 23. 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 24. 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 25. Amends Section 404.105, Government Code, to make conforming changes. SECTION 26. 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 27. 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 28. Repealer: Sections 404.0245(e), 404.0245(f), 404.025, and 404.061, Government Code (relating to Crude Oil and Natural Gas Futures Contracts-Eligible Security-Collateral-State Warrants Payable to U.S. Postal Service). Repealer: Section 2, Chapter 234, V.T.C.S. (Public Funds Collateral Act). SECTION 29. (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 30. 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, until January 1, 1996. SECTION 31. Emergency clause. Effective date: upon passage.