Local government: investments and financial reports.

Senator Choi’s measure reframes how California local governments manage investments and financial reporting by tying a major shift in investment rules to a 2031 sunset while preserving and refining core safeguards. It centers on local agencies’ ability to invest sinking funds and treasury moneys, and it also tightens the process for officers who fail to file annual financial reports, tying forfeitures to a longer calendar window than the current notice-based deadline.

On the investment side, the bill upgrades the permissible maturity for prime-quality commercial paper to 397 days and preserves a menu of authorized instruments for local agencies, while delaying broader reforms to 2031. Specifically, the draft contemplates repealing certain provisions governing concentration limits and asset-based caps for commercial paper on January 1, 2031, and postponing the operative date for the later reform until that same date. It would also repeal the current exception permitting investments in securities that could accrue zero interest at maturity after January 1, 2031. In the interim, the existing framework remains in place, with the draft laying out the terms and conditions that would apply when the 2031 transition occurs, including limits on issuer concentration and the treatment of collateralized or repurchase arrangements.

Regarding governance of investment instruments, the bill introduces two versions of Section 53601.6 that would become effective in 2031, while maintaining an earlier version only until that date. The prospective framework would continue to prohibit investments in inverse floaters, range notes, and mortgage-derived, interest-only strips; it would also regulate repurchase and securities lending activities, including collateral requirements, term limits, and criteria for acceptable counterparties and banking relationships. Notably, the provisions specify that government-backed securities may be held under certain conditions during periods of negative interest rates, but the operative regime beginning in 2031 would align with the updated rules and valuation standards described in the bill’s 2031 text.

The bill also tightens the financial-reporting penalty regime. It would require local officers who fail to file their annual report within 10 months after the close of the local agency’s fiscal year, or within the Controller’s prescribed period, to forfeit a set amount to the state, with the specific penalty tiering tied to the agency’s prior-year revenue. The Attorney General would prosecute those forfeitures on the Controller’s request, and waivers could be granted for good cause. The changes apply alongside the broader regulatory overhaul of local government investment authorities that are scheduled to take full effect in 2031. In total, the measure seeks to establish a staged transition for investment rules while reinforcing accountability for timely financial reporting, situating both changes within a longer-term reconfiguration of California’s local government finance framework.