Governor Newsom Approves Senate Bill 998 Expanding Local Government Agencies’ Investment Options
On September 28, 2020, Governor Gavin Newsom signed into law Senate Bill 998 (Moorlach) – Local Government Investments (“SB 998”), which expands local public agencies’ investment options and makes other changes to their ability to invest surplus funds. Seeking to distribute investment authority, safeguard municipal investments, and clarify access to joint powers authority (JPA) investment pools, SB 998 made several changes to existing law.
The Joint Exercise of Powers Act generally authorizes two or more public agencies to agree to jointly exercise a common power. It specifically authorizes two or more public agencies that have the authority to invest funds in their treasuries to agree to jointly exercise that common power and describes how funds subject to that agreement may be invested. SB 998 authorizes a JPA formed as described above to establish the terms and conditions pursuant to which agencies may participate and invest in pool shares and specifically clarifies that a federally recognized Indian tribe is eligible to participate in such a JPA or otherwise invest in pool shares consistent with the terms and conditions established by the JPA.
Additionally, SB 998 increases the commercial paper limit for cities and special districts that have more than $100 million in investment assets from 25% to 40% of their total surplus funds. Pursuant to SB 998, Government Code Section 53601 has been amended to specify that “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% of their moneys in eligible commercial paper.”
SB 998 also provides that “[a] local agency, other than a county or a city and county, may invest no more than 10% of its total investment assets in commercial paper and the medium-term notes of any single issuer.” Medium-term notes are securities with a maximum remaining maturity of five years or less. Prior to the enactment of SB 998, cities and special districts had a 10% single issuer commercial paper concentration limit, based on the issuer’s total commercial paper allocation, yet corporate medium-term notes, which can carry higher risk due to longer maturities, had no single issuer concentration limit. SB 998 addressed this issue by establishing a combined 10% single issuer commercial paper and medium-term note concentration limit, based upon the agency’s total investment assets. This change in the law will remain in effect only until January 1, 2026; and will be repealed.
SB 998 also authorizes a local agency 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. SB 998 also authorizes a local agency to hold these instruments until their maturity dates. This allows local agencies an investment vehicle for use in extreme economic times to avoid potential loss of principal. This change in the law also contains a sunset date of January 1, 2026.
In light of the changes enacted pursuant to SB 998, local agencies may wish to review their current investment policies and may wish to consult with their legal counsel, investment director or advisors, and/or financial advisors concerning various additional investment options that will become available.