Create Jobs by Investing Funds With Local Financial Institutions
Matt Fong for Treasurer
"It's capital, stupid." Small to medium sized California businesses are
having problems accessing capital from financial institutions in their
communities around the state. The state has failed to do business with
smaller high quality local or community based financial institutions
where most businessmen and women get their loans.
Through the Pooled Money Investment Account (PMIA), the State of
California invests billions of dollars of idle state monies in a variety
of securities and bank deposits around the state. The Pooled Money
Investment Board (PMIB), made up of the State Treasurer, the Director of
the Department of Finance, and the State Controller, sets the overall
policy for the fund. The State Treasurer, however, manages the
day-to-day operation of the fund. At the end of May, 1994 the balance of
the PMIA was $27.4 billion. For fiscal year 1993, PMIA earned $1
In addition to these state funds, local governments also invest funds in
the PMIA through the Local Agency Investment Fund (LAIF). By pooling
their individual dollars in the LAIF, approximately $10 billion by last
account, local agencies can achieve higher rates of return.
Because of the PMIB's policies, however, local communities have
suffered. When local governments invested these funds in financial
institutions in their own communities, more capital was available to
local businesses and individuals in the community. Unfortunately, most
of the pooled funds in the LAIF are not reinvested in local communities
but instead are invested in federal government securities which help
finance Washington's deficit. The end result has been that billions of
dollars have been removed from local California economies and reinvested
in the federal government.
A portion of the combined state funds and local funds also are invested
in time deposits held in several California banks and savings and loan
associations. As of May 31, 1994, $108.5 million was invested in time
deposits. Most of these deposits, however, are held in large financial
institutions in urban areas. Further, the PMIB does not require any
portion of the deposits to be invested in the local California
communities served by the financial institution holding the deposit.
The only requirement is that the institutions receiving these deposits of
state funds must secure them with approved securities having a market
value of at least 110% of the deposits or with approved promissory notes
secured by mortgages or deeds of trust having a market value of at least
150% of the deposits. These restrictions make it difficult for smaller
institutions in local communities to participate in the program. In
addition, all institutions regardless of the quality or size are subject
to these restrictions.
Invest PMIA Funds in Local Financial Institutions
To return badly needed capital to small businesses in local communities
around the state, I will reduce the PMIA's investment in the federal
deficit and return those funds to local financial institutions. Without
incurring added risk, funds can be invested in local community banks and
thrift institutions at a yield that will maximize the PMIA return.
A look at the portfolio of California banks with under $1 billion in
assets reveals that 65.7 cents of every $1 deposited is returned to the
community in loans. Therefore, if we reinvest only one-tenth of the $10
billion of local government funds in high quality community financial
institutions, $657 million in additional capital will be made available
to businesses and individuals in the community. Applying the recognized
multiplier of 2 for spending in the U.S. economy, the intial $657 million
will result in over $1.3 billion in total additional spending.
Finally, this reinvestment in local financial institutions will result in
additional California jobs. For every $1 billion of increased Gross
State Product (GSP), 14,400 new California jobs are created. Therefore,
total additional spending of $1.3 billion will create almost 20,000 new
Reduce the Security Requirement for High Quality Institutions
To increase the availability of the program to smaller community
financial institutions, I propose to decrease the security requirement
for time deposits to 85% for the highest quality institutions,
irrespective of size.
To preserve the safety of state funds, this 85% requirement would apply
to financial institutions that qualify for the "lowest rate of
assessment" under the Federal Deposit Insurance Corporation's Matrix
Assessment Rating System. Using the FDIC System means that not only
large banks and savings & loans but also high quality smaller
institutions will be able to participate.
Encourage More Loans to Creditworthy Community Businesses
I will strongly encourage financial institutions that accept deposits of
state taxpayers' dollars to provide business loans to creditworthy
businessmen and women in the communities served by these institutions.
Under my proposal, I will work closely with small high quality financial
institutions to expand their participation in this program and to include
in their loan portfolios more loans to businesses which serve their
Current federal banking rules provide incentives for financial
institutions to invest deposits in federal securities. Investment in
federal government securities assists Washington's effort to finance the
federal deficit but it doesn't help revitalize California's business
climate. I would rather encourage financial institutions to put state
funds to work helping to finance California businesses and jobs.
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