This measure sets out which securities and instruments California local agencies may buy with money in their treasuries and sinking funds, and it prescribes operational rules—delivery and custody, how maturity is measured, and when governing bodies must preauthorize longer investments. The text enumerates a long list of eligible instruments (from U.S. Treasuries to commercial paper, repurchase agreements, money market funds, and certain mortgage securities) while attaching rating, term, and concentration conditions to many categories.
Why it matters: the bill changes the practical toolkit available to municipal treasurers and pooled investment managers and imposes new mechanics and governance steps that will affect investment policy, counterparty selection, custody arrangements, and compliance workflows. Agencies, advisers, and counterparties will need to reconcile existing policies with the statute’s custody, rating, concentration, and repurchase-transaction rules to avoid technical violations and manage operational risk.
At a Glance
What It Does
Lists permitted investments for local agencies and attaches operational constraints—custody/delivery rules, maturity measurement from settlement, and limits tied to ratings and percentages. It lets agencies use repurchase and securities-lending agreements under tightly defined conditions and creates separate rules for pooled and non-pooled funds.
Who It Affects
City and district treasurers and investment officers, joint powers authorities and pool managers, banks and primary dealers that act as counterparties, money market and mutual fund managers, and public agencies holding trustee or bond-fund accounts.
Why It Matters
The statute clarifies permissible instruments but couples expanded options with compliance mechanics that raise operational and governance burdens. Treasurers will need to align investment policies, custodial relationships, and vendor contracts to comply with the new delivery, collateral and concentration rules.
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What This Bill Actually Does
The statute builds a comprehensive rulebook for what local agencies may hold and how they must hold it. It begins with an applicability carveout: the section governs agencies that do not pool funds with other agencies that have separate governing bodies; pooled arrangements with separate governing bodies fall under a different statutory section.
From there it sets a uniform requirement that securities purchased by an agency be delivered to the agency by book entry, physical delivery, or via a third‑party custodian; transferring a security into a counterparty bank’s customer book‑entry account is an authorized form of book‑entry delivery. The statute explicitly defines “counterparty” and permits a counterparty bank’s trust or safekeeping department to act as the custodian so long as the security is held in the agency’s name.
The bill standardizes how terms and limits are measured: an investment’s remaining maturity is counted from settlement to final maturity, not from the trade date, and purchases may not create forward settlements more than 45 days out. Except where a specific term limit is stated, no security may be purchased with more than five years remaining to maturity unless the legislative body has given express prior authorization—either for that specific investment or as part of a preapproved investment program adopted at least three months beforehand.The statute then enumerates permissible instruments and attaches specific constraints to many of them.
U.S. Treasuries, certain state and local bonds, federal agency and government‑sponsored enterprise obligations, and bonds of other states appear as baseline safe options. For higher‑risk or market‑sensitive instruments the law imposes concrete requirements: bankers’ acceptances are capped by maturity and by a percentage of investible moneys and per‑bank limits; commercial paper must meet issuer size and rating criteria and has a hard maximum term, with tighter concentration limits for most local agencies than for counties; negotiable certificates of deposit are allowed but subject to an overall cap and a conflict‑of‑interest prohibition if agency officials sit on a credit union’s governing committees.Repurchase agreements, reverse repurchase agreements, and securities lending are allowed but tightly circumscribed.
Repurchase agreements must be fully evidenced and collateralized at a minimum haircut and marked to market at least quarterly (with daily price volatility addressed by prompt margining). Reverse repurchase and securities‑lending transactions require prior governing‑body approval, ownership of the underlying security for at least 30 days before a sale under a reverse repo, portfolio caps on outstanding reverse repo exposure, short maximum terms (with narrow exceptions), and counterparties limited to Federal Reserve primary dealers or banks with a qualifying “significant banking relationship.” The statute also sets rating and percentage caps for medium‑term notes, mutual/money‑market funds and mortgage‑related securities, and it identifies certain multilateral development bank obligations and public‑bank instruments as eligible under stated conditions.
The Five Things You Need to Know
The statute bars any investment whose forward settlement date exceeds 45 days from the time of investment.
Unless the legislative body preauthorizes otherwise at least three months earlier, no security may be purchased with more than five years remaining to maturity.
Bankers’ acceptances are limited to 180 days’ maturity and may not exceed 40 percent of the agency’s investible moneys, with a 30 percent cap on bankers’ acceptances from any single commercial bank.
Eligible commercial paper may have a maximum maturity of 397 days; non‑county local agencies may invest no more than 25 percent of their investible moneys in such commercial paper and no more than 10 percent of total assets in the commercial paper and medium‑term notes of a single issuer.
Reverse repurchase and securities lending exposure is capped at 20 percent of the pool’s base value, requires the agency to have owned the underlying security at least 30 days before the sale, and generally may not exceed a 92‑day term without a written codicil guaranteeing earnings for the full period.
Section-by-Section Breakdown
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Which agencies this section governs and basic custody rule
The opening paragraph narrows the section’s reach to agencies that do not pool funds with other agencies that have separate governing bodies—pools with separate boards are handled under a different section. It also requires that any security purchased be delivered to the agency (book‑entry, physical delivery, or third‑party custodian), and permits transfers into a counterparty bank’s customer book‑entry account as an acceptable form of delivery. Practically, this forces agencies to review custodial agreements and place written title instructions in contracts to avoid constructive possession claims or delivery disputes.
How remaining term is measured and limits on forward settlements
The statute measures an investment’s remaining maturity from settlement date to final maturity and sets a 45‑day ceiling on forward settlement dates; absent express prior authorization, purchases with more than five years remaining are prohibited. For operations, that means trade desks must coordinate settlement timing and governing‑body approvals; trades executed with long forward dates or that settle late could violate the statute even if the trade date was compliant.
Baseline safe instruments — local, state, federal obligations
These provisions confirm local bonds, U.S. Treasury instruments, California state warrants and bonds, other states’ treasuries, and federal agency/GSE obligations as permitted holdings. Agencies can rely on these as the statutory core of a conservative portfolio, but must still follow custody and maturity rules when holding them. Because some of those instruments may be used as collateral for repurchase transactions, agencies should ensure that title and custody language permits rehypothecation only where allowed by the statute.
Short-term bank and commercial paper instruments and negotiable CDs
Bankers’ acceptances carry a 180‑day maturity cap and concentration limits expressed both as a share of investible moneys and per‑bank limits. Commercial paper is restricted to prime issuers meeting size and rating criteria and to a 397‑day maximum maturity, with non‑county agencies facing a 25 percent cap of investible moneys in commercial paper and issuer‑level limits. Negotiable certificates of deposit are allowed up to a statutory percentage of investible funds, but the statute forbids agencies from investing in CDs issued by a credit union when certain agency officials serve on that credit union’s governing committees, tying conflict‑of‑interest rules directly into investment eligibility.
Repurchase agreements, reverse repos, and securities lending — strict operational guardrails
Repurchase agreements must be over securities authorized under the statute, collateralized at a minimum 102 percent and marked to market no less than quarterly (with a daily margin safety net). Reverse repurchase and securities‑lending agreements require the agency to have owned the security for at least 30 days, limit aggregate reverse‑repo exposure to 20 percent of the portfolio’s base value, and restrict term lengths generally to 92 days unless a codicil guarantees an earning spread for the entire period. They may be entered into only after governing‑body approval and with primary dealers or banks that have or had a significant banking relationship with the agency—criteria explicitly listed in the statute—creating a higher governance and counterparty‑selection bar than for ordinary trades.
Medium‑term notes and pooled/mutual funds — ratings and caps
Medium‑term notes must be rated at least A (or equivalent) and are subject to a statutory cap on the portion of investible funds that can be placed in these instruments; mutual‑fund and money‑market fund shares qualify only when the fund or its adviser meets minimum rating or adviser‑experience/asset thresholds. Purchases of such pooled vehicles are capped at a fixed percentage of investible funds, with an additional per‑fund limit, forcing agencies to track fund exposures and diligence criteria for advisers and ratings.
Trustee funds, secured obligations, mortgage‑backed and special obligations
Money held by trustees or fiscal agents may be invested according to the governing bond documents or, absent controlling language, in accordance with the statute. Secured obligations backed by first‑priority security interests are permitted with specific custody and perfection requirements. Mortgage‑related securities are allowed only when highly rated (AA or equivalent) and subject to a percentage cap of surplus funds, and select multilateral development bank obligations and public‑bank instruments are enumerated as eligible under stated conditions. These clauses affect how bond counsel and trustees draft indentures and how local agencies run separate bond or trust accounts.
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Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- City and district treasurers: Gain a wider, explicitly enumerated menu of instruments and clearer custody rules, enabling more formalized use of repurchase operations and diversified short‑term cash placements.
- Joint powers authorities and pool managers: Can market diversified pooled vehicles that comply with explicit statutory eligibility standards for funds and advisers, making it easier to pitch pooled solutions to participating agencies.
- Primary dealers, money market funds and larger banks: Stand to receive more business as counterparties for repurchase agreements, commercial paper placements, and money‑market fund investments because the statute specifies and limits acceptable counterparties and fund characteristics.
Who Bears the Cost
- Small local agencies and smaller treasurers: Face increased compliance burdens—documenting custody arrangements, tracking ratings, managing concentration limits, and obtaining timely governing‑body approvals for >5‑year investments.
- Credit unions (and their negotiable CD offerings): Risk exclusion in certain circumstances because the statute bars investments in CDs from a credit union when agency officials serve on the credit union’s governing or supervisory committees.
- Agencies’ finance/legal teams and advisers: Must negotiate custodial and counterparty agreements, implement margining and marking‑to‑market processes, and draft or revise investment policies and governing‑body resolutions to satisfy preauthorization and documentation requirements.
Key Issues
The Core Tension
The statute balances two legitimate aims—expanding the investable toolkit for yield and effective cash management, and protecting public funds through conservative caps, rating floors, and custody requirements—but those aims pull in opposite directions: every relaxation that improves return potential requires more complex operational controls and governance, while strict caps and conservative custody rules limit market access and potential yield.
The statute ties expanded investment choices to technical operational constraints that can be costly to implement. Custody arrangements that rely on a counterparty bank’s customer book‑entry account create practical convenience but raise legal questions about constructive possession and rehypothecation risk; agencies should ensure custodial contracts and third‑party safekeeping are structured to preserve legal title.
The heavy reliance on NRSRO ratings and bright‑line rating floors simplifies compliance but embeds reliance on private rating agencies—an approach that can be procyclical and lag market stress. Concentration caps measured “at the date of purchase” let portfolios drift as securities mature or are sold, creating situations where aggregate exposures can materially increase without new purchases, unless agencies build internal rebalancing rules.
The reverse repurchase and securities‑lending provisions are operationally detailed but introduce ambiguity in two places: the definition of a “significant banking relationship” is functional but may be interpreted differently across agencies, and the requirement that an agency have owned a security for 30 days before selling it in a reverse repo limits synthetic liquidity management strategies. Finally, the conflict‑of‑interest prohibition on investing in a credit union’s negotiable CDs when agency officials sit on the credit union’s boards is sensible as an anti‑self‑deal rule but risks excluding local, low‑cost counterparties and could push agencies toward larger banks, with potential cost implications.
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