Background:

Public funds may only be deposited in banks and thrift institutions that have been approved as public depositaries by the Public Deposit Protection Commission (Commission). The Commission was established in 1969 and is comprised of the Governor, the Lieutenant Governor, and the State Treasurer. The State Treasurer chairs the Commission and provides administrative support. The Commission is responsible for protecting all public funds deposited in public depositaries.

"Public funds" are those moneys belonging to or held for the state, its political subdivisions, municipal corporations, agencies, courts, boards, commissions, or committees, and includes moneys held in trust.

A "public depositary" is defined as a financial institution which does not claim exemption from the payment of any sales or compensating use or ad valorem taxes under the laws of this state, which has been approved by the Commission to hold public deposits, and which has segregated for the benefit of the Commission eligible collateral having a value of not less than its maximum liability. There are separate collateral pools maintained for banks and thrifts.

The Commission's powers include:

making and enforcing regulations to complete its functions;
requiring any public depositary to furnish information dealing with public deposits and the exact status of its net worth;
taking action for the protection, collection, compromise or settlement of any claim arising in case of loss;
fixing the requirements for qualification of financial institutions as public depositaries, and fixing other terms and conditions under which public deposits may be received and held;
setting criteria establishing minimum standards for the financial condition of bank and thrift depositaries and, if the minimum standards are not met, providing for additional collateral requirements or restrictions regarding a public depositary's right to receive or hold public deposits;
fixing the official date on which any loss shall be deemed to have occurred; and
in case loss occurs in more than one public depositary, determining the allocation and time of payment of any sums due to public depositors.

To be approved as a public depositary, a financial institution must meet minimum requirements of the Commission and must pledge securities as collateral to protect public funds on deposit in all public depositaries (not just for that particular institution). For the first 12 months as a public depositary, a depositary must pledge and segregate eligible securities of at least 10 percent of all public funds on deposit in the depositary. If deposit insurance and collateral pledged by a failed institution are insufficient to reimburse all public depositors, the other public depositaries are each assessed a proportionate share of the shortfall.

The Commission may require the State Auditor or the Department of Financial Institutions (DFI) to investigate and report on the condition of any financial institution applying to become a public depositary. The Commission may also require an investigation and report on the condition of any public depositary. The DFI must also advise the Commission of any action the agency has directed a public depositary to take which will result in a reduction of greater than 10 percent of the net worth of the depositary. A public depositary must notify the Commission within five working days of any event that causes a reduction of greater than 10 percent in the net worth of the depositary.

Summary of Substitute Bill:

Powers of the Commission.

The Commission is given "broad administrative discretion" in performing its general powers. The Commission may delegate all of its authority to the State Treasurer, except rulemaking. The enforcement authority of the Commission is clarified. The Commission may assess costs or deny, suspend, or revoke authority to hold public funds, if a public depositary fails to: provide, or allow verification of, required information; or comply with relevant laws and rules or policies of the Commission. Further, the Commission may make and enforce sanctions against a public depositary for non-compliance with relevant laws, rules, or policies.

The Commission is authorized to set by resolution, based on criteria established in rule, a sum or measure as the maximum liability of public depositaries. The State Treasurer may also do so in exigent circumstances, but the sum or measure must be reviewed and ratified by the Commission within 90 days.

In addition to the existing requirement that the DFI certify reports from public depositaries, the DFI must provide information or data as may be required by the Commission. Any information or date provided to the Commission by a financial institution or a federal or state regulatory agency, must be maintained in the same confidential manner and have the same protections as examination reports received by the Commission from the DFI.

The Commission is required to maintain a single depositary pool and treat public depositaries uniformly without regard to differences in their charters.

Public Depositary Requirements .

The Commission may establish the required amount of eligible securities that a public depositary must pledge and segregate.

Public depositaries must provide the exact status of its capitalization, collateral, and liquidity, in addition to the existing requirement of providing information about its net worth. Public depositaries are required to provide the Commission with the uninsured amount of public funds on deposit in each report. They also must notify the Commission of an event which causes its net worth to be reduced in an amount greater than 10 percent, from within five working days to within 48 hours, or by the close of business of the following business day.

A public depositary's liability is not altered by a merger, takeover, or acquisition, except if liability is assumed by agreement or law by the successor entity or resulting financial institution.

Maximum Liability.

The "maximum liability" of a public depositary means, with reference to a public depositary's liability for loss per occurrence by another public depositary, on any given date a sum equal to 10 percent of:

all uninsured public deposits held by a public depositary that has not incurred a loss by the most recent Commission report date; or
the average of the balances of uninsured public deposits in the last four reports.

An additional way of defining "maximum liability" is also included to mean a sum or measure that the Commission may from time to time set by resolution according to criteria established by rule, consistent with the Commission's broad administrative discretion. If a public depositary is 100 percent collateralized by eligible collateral, the "maximum liability" of a public depositary that has not incurred a loss may not exceed the 10 percent sum mentioned above. The definition of "maximum liability" does not limit the authority of the Commission to adjust the collateral requirements of public depositaries.

Reporting.

The State Treasurer is required to report to the Legislature on actions taken by the Commission and the State Treasurer regarding public deposit protection by December 1 of each year.

Staff Summary of Public Testimony:

(In support of substitute bill) The proposed substitute bill updates the Public Deposit Protection Act (Act) for modern times. Several recent events have made it essential that the Act be amended. When Washington Mutual failed there was not enough in the thrift collateral pool to cover the public deposits. The proposed substitute bill would merge the pools to create one collateral pool for all public depositaries. Another bank recently failed and the successor bank did not cover the public deposits. All of the other public depositaries had to be assessed. The Commission needs to collect more and better information to be better able to react to these situations. The proposed substitute will foster critical and confidential cooperation between the State Treasurer and the DFI.

In the current economic situation, time has become very important. The Commission has functioned as it was supposed to in the past, but the laws need to reflect the present. These laws were not created for this time. It gives the Commission and the State Treasurer some nimbleness to confront the issues that will face the Commission. This is an important opportunity to improve the way the Commission works before things get worse. This will bring some much needed stability. The Act is insurance and financial institutions have seen that there is risk in the system. Financial institutions would like to work towards 100 percent collateralization like other states.

More discretion is vested in the State Treasurer so there is a reporting requirement so the Legislature stays informed.

(Opposed) None.