                         TO BE PUBLISHED IN THE OFFICIAL REPORTS


                             OFFICE OF THE ATTORNEY GENERAL

                                       State of California


                                       DANIEL E. LUNGREN

                                         Attorney General


                            ______________________________________

                   OPINION              :
                                        :          No. 95-409
                   of                   :
                                        :          January 10, 1996
          DANIEL E. LUNGREN             :
            Attorney General            :
                                        :
          MAXINE P. CUTLER              :
         Deputy Attorney General        :
                                        :
______________________________________________________________________________

           THE HONORABLE ROSS JOHNSON, MEMBER OF THE CALIFORNIA STATE
ASSEMBLY, has requested an opinion on the following question:

                 May a local public agency invest its deferred compensation plan funds in a credit union
that has on its board of directors a member of the legislative body of the agency?

                                           CONCLUSION

                A local public agency may not invest its deferred compensation plan funds in a credit
union that has on its board of directors a member of the legislative body of the agency.

                                             ANALYSIS

                State credit unions are regulated under the California Credit Union Law (Fin. Code, ''
14000-15102) by the Commissioner of Corporations. (Fin. Code, '' 14003, 14200.) They are
generally managed by a board of directors (Fin. Code, ' 14450) and various committees (Fin. Code, ''
14550, 14453, 14456, 14600). A state credit union is a cooperative, conducting business for the
"mutual benefit and general welfare of its members with the earnings, savings, benefits, or services of
the credit union being distributed to its members as patrons." (Fin. Code, ' 14002.) Every state credit
union may accept deposits from local governments and political subdivisions thereof. (Fin. Code, '
14851.)



                                                   1.                                           95-409

               Federal credit unions are regulated under the Federal Credit Union Act (12 U.S.C. ''
1751-1795k) by the National Credit Union Administration Board. (12 U.S.C. '' 1753, 1754.) They
are managed by a board of directors, a supervisory committee and, if permitted by their bylaws, a credit
committee. (12 U.S.C. ' 1761.) A federal credit union is a "cooperative association organized . . . for
the purpose of promoting thrift among its members and creating a source of credit for provident or
productive purposes" (12 U.S.C. ' 1752) and may receive deposits from, among others, local
governments and political subdivisions thereof (12 U.S.C. ' 1757).

                 The question presented for resolution is whether a local public agency may invest its
deferred compensation plan funds in a credit union that has on its board of directors a member of the
agency's legislative body. We conclude that the agency may not invest such funds where a proscribed
conflict of interests is present.

                A local public agency may establish a deferred compensation plan for its employees
under the terms of Government Code section 53213,1 which provides:

                 "Each local agency may establish for its officers and employees a deferred
         compensation plan. Participation in such plan shall be by written agreement between
         such officers and employees and the governing body of the local agency which shall
         provide for deferral of a portion of such officers' or employees' wages. Officers and
         employees of any local agency having a deferred compensation plan may authorize
         deductions to be made from their wages for the purpose of participating in such
         deferred compensation plan."

The "purposes motivating an employee to defer compensation are to secure supplemental income to
himself or his survivors upon termination of employment through retirement, death, disability or
resignation and to defer the taxability of income." (57 Ops.Cal.Atty.Gen. 534, 536 (1974).) "By
deferring receipt of a portion of wages, the employee defers taxation on those wages until they are
actually received, usually upon retirement when the employee is in a lower tax bracket." (Herrick v.
State of California (1993) 149 Cal.App.3d 156, 159.) As we noted in our 1974 opinion:

                 ". . . It is clear that the portion of the compensation which is paid into the
         deferred compensation plan represents funds which the public entity would have to pay
         out in salaries and would have thus segregated out of the mass of its general funds.
         These are funds which the employee as well as the governmental agency, pursuant to
         agreement, desire to have invested and are funds which both the governmental agency
         and the employee wish to take certain investment risks. Whether the risks bear fruit or
         not, whether the investment is ever made, the public agency remains in relatively the
         same position. Either it would pay these funds out in the form of compensation
         directly to the employee or it would take the funds relinquished to it by the employee
         and employ them, pursuant to agreement, in a way which all those party to the
         agreement hope will bring some benefit in the future and a lessening of a tax burden at

    1
        Unless otherwise indicated, all section references hereafter are to the Government Code.


                                                             2.                                    95-409

        the present. Nevertheless, the only person who would suffer by any loss in this
        investment is the employee, and not the public treasury generally, because for the
        portion of the funds invested, only the employee had the right to that sum of money.
        Obviously the public is not so vitally concerned with these funds (as distinguished from
        public funds on deposit), once the employee, being sui juris, elects to defer that portion
        of his compensation for this investment and retirement purpose."                       (57
        Ops.Cal.Atty.Gen., supra, 540-541.)

                It is assumed for purposes of this opinion that the deferred compensation plan funds in
question are held by a local agency under the terms of section 53213 and qualify for the deferment of
income taxes, which requires that the funds and investment of such funds remain the property of the
local agency. (See 26 U.S.C. 457 (b)(6); 58 Ops.Cal.Atty.Gen. 129 (1975); 57 Ops.Cal.Atty.Gen.,
supra, 536.)

               The funds of a local agency may be deposited and invested under the general terms of
section 53635, which provide:

                "As far as possible, all money belonging to, or in the custody of, a local agency,
        including money paid to the treasurer or other official to pay the principal, interest, or
        penalties of bonds, shall be deposited for safekeeping in state or national banks, savings
        associations or federal association, credit unions, or federally insured industrial loan
        companies in this state selected by the treasurer or other official having the legal
        custody of the money; or, unless otherwise directed by the legislative body pursuant to
        Section 53601, may be invested in the following . . . ." (Italics added.)2

Section 53637, the focus of our opinion, additionally provides:

                 "The money shall be deposited in any bank, savings association, state or federal
        credit union, or federally insured industrial loan company with the objective of
        realizing maximum return, consistent with prudent financial management, except that
        money shall not be deposited in any state or federal credit union if a member of the
        legislative body of a local agency, or an employee of the administrative office,
        manager's office, budget office, auditor-controller's office, or treasurer's office of the
        local agency, also serves on the board of directors, or any committee appointed by the
        board of directors, or the credit union committee or supervisory committee, of the state
        or federal credit union." (Italics added.)

We must construe the requirements of section 53637 in light of the provisions of section 53609, which
expressly authorize the investment of deferred compensation plan funds. Section 53609 states:

                "Notwithstanding the provisions of this chapter or any other provisions of this
        code, funds held by a local agency pursuant to a written agreement between the agency

    2
     Section 53601 governs the investment of surplus funds by a local agency.


                                                            3.                                       95-409

         and employees of the agency to defer a portion of the compensation otherwise
         receivable by the agency's employees and pursuant to a plan for such deferral as
         adopted by the governing body of the agency, may be invested in the types of
         investments set forth in Sections 53601 and 53602 of this code, and may additionally be
         invested in corporate stocks, bonds, and securities, mutual funds, savings and loan
         accounts, credit union accounts, life insurance policies, annuities, mortgages, deeds of
         trust, or other security interests in real or personal property. Nothing herein shall be
         construed to permit any type of investment prohibited by the Constitution.

                "Deferred compensation funds are public pension or retirement funds for the
         purposes of Section 17 of Article XVI of the Constitution." (Italics added.)3

                 In applying these statutory provisions to the circumstances presented, we rely upon
several well established principles of statutory interpretation. "When interpreting a statute our primary
task is to determine the Legislature's intent." (Freedom Newspapers, Inc. v. Orange County
Employees Retirement System (1993) 6 Cal.4th 821, 826.) "In analyzing statutory language, we seek to
give meaning to every word and phrase in the statute to accomplish a result consistent with the
legislation purpose, i.e., the object to be achieved and the evil to be prevented by the legislation.
[Citations.]" (Harris v. Capital Growth Investors XIV (1991) 52 Cal.3d 1142, 1159.) "`The words of
the statute must be construed in context, keeping in mind the statutory purpose, and statutes or statutory
sections relating to the same subject must be harmonized, both internally and with each other, to the
extent possible.'" (Walnut Creek Manor v. Fair Employment & Housing Com. (1991) 54 Cal.3d 245,
268.) "Both the legislative history of the statute and the wider historical circumstances of its
enactment may be considered in ascertaining the legislative intent." (Dyna-Med, Inc. v. Fair
Employment & Housing Com. (1987) 43 Cal.3d 1379, 1387.)

                 The authority of a local agency to invest its deferred compensation plan funds in credit
union accounts was granted by the Legislature in 1971 (Stats. 1971, ch. 1629, ' 2) when section 53609
was enacted. In 1984 the Legislature amended section 53637 (Stats. 1984, ch. 659, ' 5) to allow the
deposit of all local funds in credit union accounts subject to the prohibition against the holding of a
conflict of interests.

                At the time of the enactment of section 53609 in 1971, numerous restrictions were
placed upon the deposit and investment of local public funds. (See Stats. 1967, ch. 1026, ' 1; Stats.
1949, ch. 81, ' 1.) The Legislature imposed different requirements for the deposit and investment of
local funds needed for immediate use, those for future use, and those for employee deferred
compensation plan use. (See 57 Ops.Cal.Atty.Gen., supra, at 539-542.) By using the phrase
"[n]otwithstanding the provisions of this chapter or any other provision of this code" (see People v.
Superior Court (Hubbard) (1994) 230 Cal.App.3d 287, 296; In re Marriage of Dover (1971) 15
Cal.App.3d 675, 678; 78 Ops.Cal.Atty.Gen. 58, 61 (1995)) and granting specific investment authority
for local agencies in section 53609, the Legislature broadened the investment opportunities available

    3
     Section 17 of article XVI of the Constitution prohibits the state from loaning the state's credit and delineates the
responsibilities of the retirement board of a public pension or retirement system.


                                                           4.                                                   95-409

for deferred compensation plan funds. Essentially the Legislature authorized the deposit of such funds
in riskier investments that potentially could produce greater returns for employees. We do not believe
that investing in a credit union where a conflict of interests exists constitutes the type of "riskier"
opportunities the Legislature contemplated. We have found no statutory language indicating the
Legislature intended to condone the holding of a conflict of interests when local agency funds are
invested.

                  The limitation language of section 53637 ("money shall not be deposited in any state or
federal credit union if a member of the legislative body . . . serves on the board of directors . . . of the
. . . credit union") does not prevent local agencies from investing deferred compensation plan funds in
state or federal credit unions. Such investment is permissible in any credit union where the prohibited
dual relationship is absent. We thus believe that the terms of sections 53609 and 53637 may be
harmonized and given full effect. The purposes of the two statutes are both served by allowing the
investment of deferred compensation plan funds in credit union accounts as long as the proscribed
holding of a conflict of interests is not present.

               Moreover, we have examined in detail the legislative history of the 1984 amendment of
section 53637, which added the conflict of interests prohibition. The purpose of the prohibition was
explained in a letter dated May 21, 1984, from the sponsor of the legislation, the California Credit
Union League, to the author of the legislation, Assemblyman Alister McAlister:

               "Enclosed are amendments proposed by the California Bankers Association.
        These amendments would remove any opposition to . . . AB 628 . . . .

                 "The concern raised by the California Bankers Association was that if a local
        agency fiscal officer were a member of the board of directors or of another committee
        of the credit union, he or she might . . . direct funds to the credit union with less
        reflection on the merits of the investment [than] would otherwise be the case. To
        address their concern, we agreed to the attached amendments to avoid any possible
        problems in this area.

                "The amendments would avoid a conflict of interest by prohibiting investment
        in a credit union by a local agency when the fiscal officer sits on the board of directors
        or other specified committees of the credit union."

                 It must be conceded that the best interests of a local agency when investing its funds
may not be identical to the best interests of a particular credit union. Thus a person making investment
decisions for a local agency while serving on a credit union's board of directors or committee would
necessarily be faced with divided loyalties. (See People ex rel. Chapman v. Rapsey (1940) 16 Cal.2d
636, 641-642; 76 Ops.Cal.Atty.Gen. 81, 82-83 (1993).) Obviously the Legislature intended to protect
a local agency's funds from improvident investment decisions in such circumstances.

                Did the Legislature intend the same protection for a local agency's investment of
deferred compensation plan funds? What may be in the best interests of the employees of a local
agency when deferred compensation funds are being invested by the agency may not be in the best
interests of a particular credit union. Avoiding a conflict of interests would appear as important for
investing a public agency's deferred



                                                    5.                                               95-409

compensation plan funds as its other funds. We apply the requirements of section 53637 to the
investment of deferred compensation plan funds so that "the object to be achieved and the evil to be
prevented by the legislation" may be effectuated.4

                We conclude that a local government agency may not deposit its deferred compensation
plan funds in a credit union if a member of the legislative body of the agency serves on the credit
union's board of directors.

                                                         *****




    4
      Because of a slight difference in the definition of a "local agency" for purposes of section 53609 (see ' 53600) and
section 53637 (see ' 53630, subd. (a)), a particular local agency may not be subject to the conflict of interests proviso when
investing its deferred compensation plan funds. However, in such situation, the agency would need to examine the conflict of
interests prohibition of section 1090 to determine whether it would be applicable. An analysis of the latter statute is beyond
the scope of this opinion.


                                                             6.                                                      95-409

