Turmoil in the banking industry continues this week following the collapse of Silicon Valley Bank and Signature Bank, the second and third largest bank failures in U.S. history (1). Headlines swirl about the effect the collapses will have on the municipal bond market, and whether increased scrutiny of banking regulations will cause a closer look at the creditworthiness of municipal securities issuers. But amid this frenzy, many are simply wondering, “Are bank deposits of public funds safe?” Generally, the answer is yes.
Iowa Code Chapter 12C provides that when a bank accepts a deposit of public funds, the bank must agree to pledge certain collateral in accordance with Iowa Code section 12C.22 to secure the public funds deposited. Specifically, a bank must pledge collateral if the total amount of public funds on deposit in the bank exceeds the total capital of the bank. This calculation will fluctuate depending on the total capital of the bank in relation to the amount of public funds on deposit on any particular day. The Treasurer of the State's web page FAQ states that banks “shall pledge and maintain eligible collateral with the Treasurer's approved custodian that has an aggregate market value that at all times equals or exceeds the amount by which the bank’s public deposits exceed its total capital. Banks are required to determine if circumstances on any given day require them to pledge securities that day.”(2) The pledged collateral must be held by an “approved custodian,” the criteria for which is also found on the Treasurer of State’s website. If the bank fails to pay a check, draft or warrant of a public officer, if the bank closes, or in other limited circumstances, the Treasurer of the State may liquidate the pledged collateral to pay the claims of the public entity. When the Treasurer of the State pays claims of public entities, the claims will be paid from the following sources in the following order:
• Any applicable insurance (i.e., first $250,000 on deposit is insured by the FDIC);
• Liquidation of any pledged collateral or funds received from a Letter of Credit used by a pledging bank to secure the public funds;
• Assets of the bank which are liquidated within 30 days of the closing of the bank;
• Funds in the State Sinking Fund; and
• Assessments against all remaining banks whose public funds deposits exceed FDIC insurance coverage. (3)
So, as you can see, there are multiple layers of protection for the deposit of public funds in Iowa, including the State Sinking Fund.
One other item to note is Iowa Code 12C.4 requires public funds depositories to be located within specific geographic locations, and generally always within the State of Iowa. However, Code Chapter 12B does allow any public funds that exceed the FDIC limit, to be invested in insured deposits or certificates of deposit in amounts covered by the FDIC limit, in banks that may be located outside of Iowa. The location of these deposits fluctuates and moves daily to ensure each bank holds funds only up to the FDIC limit. If your entity invests money pursuant to one of these products authorized by Iowa Code 12B.10(7), there is the possibility your deposits exceed the FDIC limit in the event of duplication error. In addition, these deposits may be placed in out of state banks experiencing financial distress. Therefore, it is wise to verify daily the amount of the deposit and which out of state bank you have deposits in when utilizing one of these products.
(1) Silicon Valley Bank failure may prompt closer look at munis. The Bond Buyer, Connor Hussey March 15, 2023.
(2) State of Iowa Treasurer’s Office, Public Fund FAQ. https://www.iowatreasurer.gov/media/cms/Public_Fund_FAQ_2023_0C0D00CD444C7.pdf.
(3) Iowa Code § 12C.23-23A. (2023).
This article is only a summary of the public fund collateralization law. If you have questions about the impact of the law or want advice generally on the investment of public funds, please contact an attorney in the Ahlers & Cooney, P.C.’s Public Finance Practice Group or by visiting the Firm's website at www.ahlerslaw.com.
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