Protecting Municipal Deposits in Wisconsin
July 2008
Many bankers regularly field questions about how public deposits are insured in
Wisconsin by both their local municipalities and their auditors. Public monies
deposited by governmental units in public depositories receive protection in a
variety of ways. This article will review all the options available for banks and
their public depositors to protect public deposits.
Insurance Availability
First, there is insurance provided by the FDIC. The FDIC will insure what are
called “public unit accounts,” defined as funds owned by cities, counties, states or
other government entities of the United States that are deposited by an official
custodian. Insurance coverage of a public unit account differs from that of a
corporate or individual account in that the coverage extends to the official
custodian of the funds, rather than the public unit itself. Each official custodian of
time and savings accounts (including interest-bearing NOW accounts) of a public
unit is insured up to $100,000. Additionally, demand deposits maintained in an
insured institution in the same state as the public unit are separately insured up to
$100,000. Consequently, the same official custodian may receive up to $200,000
in FDIC insurance coverage — $100,000 in time and savings deposits and
$100,000 in demand deposits.
Public unit funds maintained in any out-of-state institution, whether time, savings
or demand deposits are limited to a maximum of $100,000 per official custodian.
One person may serve as official custodian of more than one public unit. Also, a
public unit may be served by two or more official custodians, all of whom would
merit separate insurance coverage for the funds in their control. The official
custodian must have plenary authority, including control, over the funds owned by
the public unit. Similarly, if the exercise of authority or control over the funds of a
public unit requires action by or the consent of two or more “custodians,” they will
be treated as one official custodian for the purpose of deposit insurance. If a
public unit has political subdivisions, the funds of each subdivision will be
separately insured if each subdivision was created under express authorization of
law, has some functions of government delegated to it by law, and can exercise
exclusive control over funds for its exclusive use. Finally, the bank’s deposit
account records must indicate that the account contains funds of a public unit.
Beyond FDIC coverage, the State of Wisconsin also provides limited protection
for public depositors. A 1985 Act prospectively abolished the state deposit
guarantee fund by providing that only the current balance in the fund may be used
for the payment of losses of public deposits. While there is no longer a separate
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fund, an appropriation not to exceed $400,000 above the amount of deposit
insurance provided by the FDIC, may be made to any public depositor for losses
of the public depositor in any individual public depository in accordance with state
law. Such appropriations are available until the fund is exhausted.
“Public depositor” for purposes of state law is defined in Chapter 34 of Wisconsin
statutes to mean the state or any county, city, village, town, drainage district,
power district, school district, cooperative educational service agency, sewer
district or any commission, committee, board or officer of this state, a corporation
organized under § 39.33, Wis. Stats., (a corporation created by the higher
educational aids board), or the housing and economic development authority if
the authority elects to be bound by Chapter 34. “Public depository” for purposes of
state law means a national or state bank, federal or state credit union, federal or
state savings and loan association, savings and trust company, federal or state
savings bank or the local government pooled-investment fund. Coverage under
state law is limited to $400,000 per public depositor and per public depository.
There is nothing in our state law similar to the FDIC's “official custodian” rule
whereby a municipality that maintains several different accounts at a bank by
different official custodians for several different purposes may be fully covered by
deposit insurance. Also, deposit account coverage at the state level will not exist
once the present balance in the state deposit guarantee fund is completely
exhausted.
As of June 30, 2008, the balance of the Public Deposit Guarantee Fund in
Wisconsin is in just under $39 million. A history of bank failures in Wisconsin is
almost non-existent. Other than the closure of the First National Bank of
Blanchardville due to fraud in May, 2003, the most recent failure prior to that was
Strong’s Bank of Dodgeville, which failed in 1985. From there, you have to go
back to around 1973 when a bank in Algoma failed. The likelihood of massive
bank failures in Wisconsin, given this history and the strength of banking
regulation in this state, is minimal at best. Balance information for this fund may
be obtained from the State Treasurer.
Pledging Collateral
The 1985 law that prospectively abolished the state deposit guarantee fund also
made it possible for a public depository, as a means of protecting public deposits
above the level of insurance available, to secure public deposits with assets of the
public depository. Under §34.07, Wis. Stats., a surety bond or other security may
be required of or given by any public depository for any public deposits that
exceed the amount of deposit insurance provided by federal and state
government. The Wisconsin Bankers Association (WBA) has forms available for
this purpose.
A bank wanting to pledge assets to collateralize public deposits must first execute
the Public Deposits Security Agreement (WBA 104 (7/00)). This form grants the
public depositor a security interest in the collateral identified on the Collateral
Register (WBA 104A (7/00)), attached to the Security Agreement. The collateral
must be identified on the Collateral Register. Always attach a completed
Collateral Register to the Security Agreement. The collateral secures the
repayment of public deposits to the extent “the amount of such deposits exceeds
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deposit insurance provided by the Federal Deposit Insurance Corporation plus
$400,000….”
The Security Agreement was drafted to accommodate collateral consisting of
securities (e.g., U.S. treasury bills, notes or bonds). It was not drafted to
accommodate a security interest in a pool of collateral. The Security Agreement
also addresses the issues of substitutions and withdrawals of collateral.
Revised Article 8 (and the conforming changes to Article 9), which was effective
on July 1, 1998, significantly changed the rules for taking and perfecting security
interests in investment property, including stocks, bonds, shares in mutual funds
and other securities. These changes to Article 8 necessitated changes to these
municipal forms allowing a bank to pledge assets to secure public deposits and to
the way in which such security interests are perfected.
Under Revised Article 8, secured creditors perfect their security interests in
investment property by taking “control” of the investment property. A secured
creditor takes control of investment property by either taking possession of it or, if
the investment property is in the possession of a third party (the “Intermediary”),
having the ability to order the Intermediary to follow the secured creditor’s
exclusive instructions. The Intermediary’s agreement to follow the secured
creditor’s exclusive instructions is contained in the Public Deposits Control
Agreement form (WBA 105 (7/00)). The form states that the secured creditor,
who in this case is the public depositor not the bank, can exercise exclusive
control over the Collateral if there is an event of default by the bank in its
agreements with the public depositor. This Control Agreement should be
executed by all the parties at the same time the securities are pledged by the
bank to the public depositor.
Finally, WBA provides a form for the bank to use for the purpose of substituting
collateral as and to the extent permitted by the Security Agreement and Control
Agreement. This form is the Notice of Substitution of Collateral (WBA 106 (8/00)).
All forms referenced above may be ordered by calling FIPCO customer service at
800/722-3498 or on the web at www.fipco.com.
Excess Deposit Insurance Coverage
An additional means of providing insurance on public deposits is to offer public
depositors the BancInsure Excess Deposit Insurance Bond. Many bankers
purchase this coverage on behalf of their public depositors to cover account
balances that are not already protected by federal and state insurance and that
are not already collateralized. This coverage is insured in the municipality’s
name, thereby including it in Category 1 for accounting purposes.
Note: The above information is not intended to provide legal or accounting
advice; rather, it is intended to provide general information about banking issues.
Specific questions, legal advice or other professional assistance should be
directed to your professional financial or legal advisor.
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