Securitization of deposits and investments

Ensuring the security of government deposits and investments is a fiduciary responsibility of the governing body and management of your government. The following are four common mechanisms that help governments fulfill their duty to safeguard public funds:

1. FDIC insured bank deposits

One of the most common methods of securitizing government funds is to keep bank deposits below the Federal Deposit Insurance Corporation (FDIC) limit. However, it is important to know that special rules apply to government depositors:

  • Time and savings deposits held at an institution within your state are insured for up to $250,000 for the combined total of deposits at that institution. This includes Certificates of Deposit (CDs), savings deposits, Negotiable Order of Withdrawal (NOW) accounts, and money market accounts.
  • Demand deposits held at an institution within your state are also insured for up to $250,000 for all demand deposits at that institution. Demand deposits are those deposits payable on demand where the institution does not require advanced notice of withdrawal.
  • Deposits held in accounts at an institution outside of your state are insured up to $250,000 for the combined total of all deposits at that institution.

2. NCUSIF insured accounts

Similar to the FDIC, the National Credit Union Share Insurance Fund (NCUSIF) provides all members of federally insured credit unions with $250,000 in coverage for their accounts. These accounts include regular shares, share drafts, money market accounts, and share certificates. Also, like the FDIC, the NCUSIF is backed by the full faith and credit of the US government.

3. SIPC insured investments

For investments held by a broker, Securities Investor Protection Corporation (SIPC) coverage may apply. If the brokerage firm is a member of SIPC, then the government’s cash and securities held by the brokerage firm may be protected up to $500,000, including up to $250,000 of protection for cash in the account, if the investment firm were to go out of business. SIPC covers most types of securities, including stocks, bonds, and mutual funds.

4. Collateral

For those governments that have deposits in financial institutions in excess of FDIC limits, many banks are willing to collateralize public deposits through the pledging of securities. Keep the following in mind when obtaining collateral from your bank:

  • The pledge agreement should be in writing
  • The pledged collateral should comply with the government’s investment policy or state statute, whichever is more restrictive
  • The pledge collateral should be held at an independent third-party institution
  • Any substitutions of collateral should meet the requirements of the collateral agreement
  • Reporting should come directly from the custodian, preferably monthly

Other methods to secure your government’s deposits and investments

In addition to these common means of securing deposits and investments, a number of banks have started entering into an Irrevocable Letter of Credit with an institution, such as the Federal Home Loan Bank of Chicago, in which they name the government as beneficiary. In this case, were the bank to fail, procedures are in place to draw down funds under the letter of credit.

Other banks have programs to spread funds amongst many institutions to ensure that they are all covered by FDIC insurance. One common program is the Certificate of Deposit Account Registry Services (CDARS) program. Another is the Insured Cash Sweep service.

In the State of Wisconsin, there is additional coverage provided by the Public Deposit Guarantee Fund. Coverage under state law is limited to $400,000 per public depositor and per public depository. This is over and above the FDIC coverage.

Safeguarding public funds is crucial

Regardless of the method that management and the governing body deem appropriate, it is important for governments to safeguard the public funds they control. Banks and other financial institutions are well positioned to provide your government with valuable tools and information to ensure that happens.

For more information on this topic, or to learn how Baker Tilly state and local government specialists can help, contact our team.