1.1                          A bill for an act 
  1.2             relating to local government; providing an alternative 
  1.3             collateral pool for deposit and investment of local 
  1.4             public funds; amending Minnesota Statutes 1998, 
  1.5             sections 118A.01, by adding subdivisions; and 118A.03, 
  1.6             subdivision 2; proposing coding for new law in 
  1.7             Minnesota Statutes, chapter 118A. 
  1.8   BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.9      Section 1.  Minnesota Statutes 1998, section 118A.01, is 
  1.10  amended by adding a subdivision to read: 
  1.11     Subd. 5.  [COMMISSIONER.] "Commissioner" means commissioner 
  1.12  of commerce. 
  1.13     Sec. 2.  Minnesota Statutes 1998, section 118A.01, is 
  1.14  amended by adding a subdivision to read: 
  1.15     Subd. 6.  [QUALIFYING FINANCIAL INSTITUTION.] "Qualifying 
  1.16  financial institution" means a financial institution other than 
  1.17  a credit union. 
  1.18     Sec. 3.  Minnesota Statutes 1998, section 118A.03, 
  1.19  subdivision 2, is amended to read: 
  1.20     Subd. 2.  [IN LIEU OF SURETY BOND.] The following are the 
  1.21  allowable forms of collateral in lieu of a corporate surety bond:
  1.22     (1) United States government treasury bills, treasury 
  1.23  notes, treasury bonds; 
  1.24     (2) issues of United States government agencies and 
  1.25  instrumentalities as quoted by a recognized industry quotation 
  1.26  service available to the government entity; 
  2.1      (3) general obligation securities of any state or local 
  2.2   government with taxing powers which is rated "A" or better by a 
  2.3   national bond rating service, or revenue obligation securities 
  2.4   of any state or local government with taxing powers which is 
  2.5   rated "AA" or better by a national bond rating service; 
  2.6      (4) irrevocable standby letters of credit issued by Federal 
  2.7   Home Loan Banks to a municipality accompanied by written 
  2.8   evidence that the bank's public debt is rated "AA" or better by 
  2.9   Moody's Investors Service, Inc., or Standard & Poor's 
  2.10  Corporation; ~~and~~ 
  2.11     (5) time deposits that are fully insured by the Federal 
  2.12  Deposit Insurance Corporation; and 
  2.13     (6) other marketable securities and debt instruments 
  2.14  determined by the commissioner to be satisfactory for purposes 
  2.15  of providing liquid assets in the event of a public depository 
  2.16  default or insolvency. 
  2.17     Sec. 4.  [118A.035] [ALTERNATIVE COLLATERAL POOL FOR 
  2.18  QUALIFYING FINANCIAL INSTITUTIONS.] 
  2.19     Subdivision 1.  [ALTERNATIVE.] A qualifying financial 
  2.20  institution may furnish collateral to secure public funds 
  2.21  pursuant to the requirements of this section as an alternative 
  2.22  to section 118A.03.  The commissioner must adopt regulations 
  2.23  requiring that qualifying financial institutions deposit 
  2.24  collateral securities to secure public funds in each qualifying 
  2.25  financial institution.  The amount of collateral securities to 
  2.26  be pledged for the security of public deposits must be 
  2.27  established by rules consistent with this section. 
  2.28     Subd. 2.  [APPLICATION TO ALTERNATIVE COLLATERAL POOL.] A 
  2.29  qualifying financial institution desiring to participate in the 
  2.30  alternative collateral pool authorized by this section shall 
  2.31  notify the commissioner in writing in the form prescribed by the 
  2.32  commissioner.  The qualifying financial institution may begin 
  2.33  participating in the alternative collateral pool authorized by 
  2.34  this section on the 31st day after the date the commissioner 
  2.35  receives notice, unless the commissioner specifies a later 
  2.36  date.  The 30-day period for review may be extended by the 
  3.1   commissioner on a determination that the written notice raises 
  3.2   issues that require additional information or additional time 
  3.3   for analysis.  If the period of review is extended, the 
  3.4   qualifying financial institution may participate in the 
  3.5   alternative collateral pool only upon prior written approval by 
  3.6   the commissioner. 
  3.7      Subd. 3.  [TERMS FOR DENYING APPLICATION.] The commissioner 
  3.8   may deny approval to participate in the alternative collateral 
  3.9   pool authorized by this section if the commissioner finds that 
  3.10  participation would be contrary to the public interest. 
  3.11     Subd. 4.  [TERMINATION BY QUALIFYING INSTITUTION IN 
  3.12  POOL.] A qualifying financial institution participating in the 
  3.13  alternative collateral pool may cease participation by notifying 
  3.14  the commissioner in writing in the form prescribed by the 
  3.15  commissioner.  The qualifying financial institution may cease to 
  3.16  participate in the alternative collateral pool 90 days after the 
  3.17  date the commissioner receives the notice, unless the 
  3.18  commissioner specifies an earlier or later date.  A qualifying 
  3.19  financial institution may not terminate its participation in the 
  3.20  alternative collateral pool until the qualifying financial 
  3.21  institution has demonstrated to the commissioner that all 
  3.22  uninsured public funds held by the institution are fully 
  3.23  collateralized under section 118A.03. 
  3.24     Subd. 5.  [RESTRICTED ACCOUNT.] To secure public funds, a 
  3.25  qualifying financial institution must place required collateral 
  3.26  securities in a restricted account at a federal reserve bank, a 
  3.27  federal home loan bank, a trust department of a commercial bank, 
  3.28  or with another financial institution that is not owned or 
  3.29  controlled by the same institution or holding company.  The 
  3.30  qualifying financial institution shall deliver to the 
  3.31  commissioner a power of attorney authorizing the commissioner to 
  3.32  transfer or liquidate these securities in the event of a 
  3.33  default, financial failure, or insolvency of a qualifying 
  3.34  financial institution.  The qualifying financial institution 
  3.35  shall take all steps necessary to insure that the commissioner 
  3.36  has a valid, perfected, enforceable, first priority security 
  4.1   interest in any pledged collateral.  Notice to the commissioner 
  4.2   under subdivision 1 constitutes consent by the qualifying 
  4.3   financial institution to additional assessments and liquidation 
  4.4   of pledged collateral by the commissioner in accordance with 
  4.5   this chapter. 
  4.6      Subd. 6.  [COLLATERAL.] (a) The commissioner shall 
  4.7   periodically determine a minimum ratio for collateral pledging 
  4.8   for qualifying financial institutions that accept public 
  4.9   deposits.  The minimum ratio must be established at a level 
  4.10  estimated to cause the aggregate amount of collateral required 
  4.11  by all qualifying financial institutions to be equal to the 
  4.12  average uninsured public funds held during the previous year by 
  4.13  the qualifying financial institution located within the state 
  4.14  holding the most public deposits.  The minimum collateral ratio 
  4.15  for all qualifying financial institutions must not be less than 
  4.16  ten percent nor greater than 50 percent of each qualifying 
  4.17  financial institution's uninsured public funds. 
  4.18     (b) The average amount of uninsured public funds held by 
  4.19  any qualifying financial institution shall be determined by 
  4.20  adding the amounts of uninsured public funds, if any, as they 
  4.21  existed on the date in each calendar quarter used in preparing 
  4.22  the report of condition and income for submission to the federal 
  4.23  government, adding the subtotals for the four calendar quarters, 
  4.24  and dividing the total by four. 
  4.25     Subd. 7.  [ADDITIONAL COLLATERAL.] The commissioner shall 
  4.26  adopt rules to require collateral equal to 110 percent of a 
  4.27  qualifying financial institution's uninsured public funds for 
  4.28  qualifying financial institutions whose: 
  4.29     (1) deposits exceed the statewide average ratio of public 
  4.30  deposits to total deposits; and 
  4.31     (2) financial condition is weakening determined on the 
  4.32  basis of factors specified by the commissioner. 
  4.33     Subd. 8.  [VALUATION.] The commissioner shall adopt rules 
  4.34  to provide for the valuation of collateral if market value is 
  4.35  not readily determinable. 
  4.36     Subd. 9.  [REPORTING.] The commissioner shall adopt rules 
  5.1   governing reporting requirements and other administrative 
  5.2   procedures necessary to effectively implement this section.  The 
  5.3   commissioner shall make available a list of all qualifying 
  5.4   financial institutions participating in the alternative 
  5.5   collateral pool authorized by this section.  
  5.6      Subd. 10.  [DEFAULT.] In the event of a default or 
  5.7   insolvency of a qualifying financial institution, the 
  5.8   commissioner shall implement the following procedures: 
  5.9      (1) ascertain the amount of public funds on deposit at the 
  5.10  defaulting qualifying financial institution and the amount of 
  5.11  deposit insurance applicable to such deposits; 
  5.12     (2) the potential loss of public depositors must be 
  5.13  calculated by compiling claims from such depositors.  The claims 
  5.14  must be validated.  The loss to public depositors must be 
  5.15  satisfied as far as possible, first through any applicable 
  5.16  deposit insurance, then through the sale of securities pledged 
  5.17  by the defaulting qualifying financial institution, and then 
  5.18  through the sale of the defaulting qualifying financial 
  5.19  institution's assets; 
  5.20     (3) if the loss to public depositors is not covered by 
  5.21  insurance and the proceeds of the defaulting qualifying 
  5.22  financial institution's assets and pledged collateral, the 
  5.23  commissioner shall provide coverage of the remaining loss by 
  5.24  assessment against other qualifying financial institutions' 
  5.25  pledged collateral.  The assessment must be determined by 
  5.26  multiplying the total amount of the remaining loss to all public 
  5.27  depositors by a percentage that represents the average of 
  5.28  Minnesota public funds deposits held by each qualifying 
  5.29  financial institution during the previous 12 months, divided by 
  5.30  the average total public deposits held by all qualifying 
  5.31  financial institutions during the same 12-month period.  Each 
  5.32  qualifying financial institution shall pay its assessment to the 
  5.33  commissioner within three business days after it receives notice 
  5.34  of assessment.  If a qualifying financial institution fails to 
  5.35  pay its assessment when due, the commissioner shall satisfy the 
  5.36  assessment by selling securities pledged by that qualifying 
  6.1   financial institution; and 
  6.2      (4) following collection of the assessments, the 
  6.3   commissioner shall distribute funds to the public depositors of 
  6.4   the defaulting qualifying financial institution according to 
  6.5   their validated claims.  If the assets available are less than 
  6.6   the total deposits, the commissioner shall make an additional 
  6.7   assessment against qualifying financial institutions using the 
  6.8   calculation methodology specified in clause (3).  Each 
  6.9   qualifying financial institution shall pay any additional 
  6.10  assessment to the commissioner within three business days after 
  6.11  it receives notice of the assessment.  Entities receiving 
  6.12  payment under this subdivision shall assign to the commissioner 
  6.13  any interest they may have in funds that subsequently become 
  6.14  available to depositors of the defaulting qualifying financial 
  6.15  institution. 
  6.16     Subd. 11.  [ADDITIONAL DEPOSIT.] If the commissioner sells 
  6.17  a qualifying financial institution's collateral securities, the 
  6.18  institution must deposit additional collateral to meet required 
  6.19  collateral levels. 
  6.20     Subd. 12.  [FEE.] The commissioner may assess a fee to 
  6.21  qualifying financial institutions participating in the 
  6.22  collateral pool established under this section.  The fee must be 
  6.23  assessed on a reasonable basis and total fees must not exceed 
  6.24  the cost to the commissioner of fulfilling the duties of the 
  6.25  commissioner under this section.