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<br />LEGISLATIVE POSITION PAPER <br /> <br />Public Funds Collateral <br /> <br />Background. <br /> <br />Currently banks in Texas are constrained by Federal tax law which <br />eliminated the80~ tax exemption on tax exempt securities held previously <br />as public funds collateral. This loss plus the financially unstable <br />position of banks brought about by the economic slump in the oil and real <br />estate markets has made public funds co1lateralization of great <br />importance. Failure to adequately and safely collateralize deposits <br />could significan~y increase the risk on public funds in case of a bank <br />failure. <br /> <br />In addition, the financial markets have created several new securities <br />from treasury security components which do not necessarily represent safe <br />collateral for public bodies. These hybrid securities may be acceptable <br />securities or packaged and backed by a securities dealer. These vehicles <br />do not necessarily represent full protection for governmental entities. <br />Ultimate fiscal responsiblility may rest with the dealer and not the <br />government. Despite normal marketability of the securities, these <br />hybrids put the original government securities out of reach of the entity <br />in case of failure. <br /> <br />Finally, the Texas collateral laws currently contain significant <br />ambiguities and inconsistencies. The statutes refer to security types no <br />longer in exi stence and do not address the newer securi ti es whi ch have <br />been developed by the financial markets. <br /> <br />Reconmendation <br /> <br />It is recollll1ended that a Public Funds Collateral Act be developed as a <br />supplement to the Public Funds Investment Act of 1987 which clearly <br />delineates the acceptabl e coll atera1 for public deposits on time and <br />demand deposits as well as repurchase agreements and securities lending. <br />This listing would act to guide public entities on safe collateral. <br /> <br />The collateral listing would primarily condense the statutes already <br />existing in depository and collateral law and clarify issues on the new <br />hybrid - or second tier - securities such as CMO's, REMICS, etc. <br /> <br />Call atera1 rel ease/substituti on procedures shaul d al so be defi ned, and <br />streamlined, in this Act. <br /> <br />Impact <br /> <br />This change would clarify collateral requirements for all public entities <br />and assure maximum safety limits for collateral. <br /> <br />0031f/0040f <br /> <br />9 <br />