I. INTRODUCTION
Questions often arise regarding permissible types of investments authorized by Nebraska law for various state & local government subdivisions. In addition, bankers are interested in the types of security required for government deposits in excess of federally insured amounts. This article discusses investments authorized for political subdivisions and the types of security that may be pledged to protect government deposits in excess of the amount insured by the Federal Deposit Insurance Corporation (FDIC).
A. Eligible “Capital Stock Financial Institutions”
The term “capital stock financial institutions” includes state and national banks, capital stock state building and loan associations, capital stock federal savings and loan associations, capital stock federal savings banks, capital stock industrial loan and investment companies and capital stock state savings banks (Neb.Rev.Stat. § 77-2366 and § 77-2387(3) and (4)). All Capital stock financial institutions – in addition to state and national banks which could previously hold public deposits – became eligible to hold public deposits on January 1, 1990.
B. Eligible “Qualifying Mutual Financial Institutions”
The term “qualifying mutual financial institutions” includes state or federal mutual building and loan associations, state or federal mutual savings and loan associations, state or federal mutual savings banks, and state or federal mutual organized banks (Neb.Rev.Stat. § 77-2365.01). Qualifying mutual financial institutions, subject to the conditions discussed in further detail below under the heading “II. Public Funds Deposit Security Act,” became eligible to hold public funds of political subdivisions on September 1, 2001, and public funds of the state on August 31, 2003.
C. Restricted to Nebraska Chartered Institutions
Nebraska law recognizes that public funds deposits made by the state or political subdivisions are required to be placed with a bank that is chartered or that has a branch in this state or in a savings and loan that is chartered in this state. Neb.Rev.Stat. §§ 77-1262, 77-2365.01, 77-2366 and 77-2387 clarify that only banks or saving and loans with a charter in Nebraska or branches of a bank or savings and loan that was previously chartered in Nebraska are eligible institutions to hold public funds.
II. PUBLIC FUNDS DEPOSIT SECURITY ACT
The “Public Funds Deposit Security Act” (“Act”), codified at Neb.Rev.Stat. §§ 77-2386 to 77-2397, establishes both alternative and uniforms procedure applicable to any state or local political subdivision (any county, city, village, township, district, authority, or other public corporation or entity, whether organized and existing under direct provisions of the Constitution of Nebraska or laws of the State of Nebraska or by virtue of a charter, corporate articles, or other legal instruments executed under the authority of the constitution or laws, including any entity created pursuant to the Interlocal Corporation Act or the Joint Public Agency Act) for which a capital stock financial institution or qualifying mutual financial institution bank must provide security. Under the Act, financial institutions holding public deposits are required to provide security for such deposits that are in excess of the amounts covered by federal deposit insurance. The security requirements for public deposits may be satisfied by: (1) providing a surety bond; (2) furnishing securities; or (3) providing a deposit guaranty bond. The Act neither changed the traditional form of providing security for public deposits in the form of a surety bond nor made substantive changes in the manner in which a financial institution may give security for public deposits through the furnishing of securities, which may be satisfied by either: (1) depositing securities held by the financial institution; or (2) pledging or granting a security interest in securities held by the financial institution. Note that under prior law, the list of permissible securities and the amount of securities required to secure public deposits varied, depending upon the type of governmental unit. The Act promotes uniformity both in the type and amount of securities that a financial institution must provide for the protection of public deposits. In 2001, the Act was amended to permit eligible financial institutions to maintain a single deposit guaranty bond or single pool of collateral (securities) for all state and local political subdivision deposits. A description of the single pool of collateral alternative in found under the heading “III. Single Pool of Collateral Alternative.”
A. Standard List of Permissible Securities
Any financial institution furnishing securities for the protection of public deposits may, with the approval of the applicable governing board of the state or political subdivision entity for which securities are being furnished, provide protection for public deposits from among the following standard list of permissible securities (Neb.Rev.Stat. § 77-2387(14)):
(a) Bonds or obligations fully and unconditionally guaranteed both as to principal and interest by the United States Government;
(b) United States Government notes, certificates of indebtedness, or treasury bills of any issue;
(c) United States Government bonds;
(d) United States Government guaranteed bonds or notes;
(e) Bonds or notes of United States Government agencies;
(f) Bonds of any state or political subdivision which are fully defeased as to principal and interest by any combination of bonds or notes authorized in subdivision (c), (d), or (e) of this subdivision;
(g) Bonds or obligations, including mortgage-backed securities and collateralized mortgage obligations, issued by or backed by collateral one hundred percent guaranteed by the Federal Home Loan Mortgage Corporation, the Federal Farm Credit System, a Federal Home Loan Bank, or the Federal National Mortgage Association;
(h) Repurchase agreements the subject securities of which are any of the securities described in subdivisions (a) through (g) of this subdivision;
(i) Securities issued under the authority of the Federal Farm Loan Act;
(j) Loan participations which carry the guarantee of the Commodity Credit Corporation, an instrumentality of the United States Department of Agriculture;
(k) Guaranty agreements of the Small Business Administration of the United States Government;
(l) Bonds or obligations of any county, city, village, metropolitan utilities district, public power and irrigation district, sewer district, fire protection district, rural water district, or school district in this state which have been issued as required by law;
(m) Bonds of the State of Nebraska or of any other state which are purchased by the Board of Educational Lands and Funds of this state for investment in the permanent school fund or which are purchased by the state investment officer of this state for investment in the permanent school fund;
(n) Bonds or obligations of another state, or a political subdivision of another state, which are rated within the two highest classifications by at least one of the standard rating services;
(o) Warrants of the State of Nebraska;
(p) Warrants of any county, city, village, local hospital district, or school district in this state;
(q) Irrevocable, nontransferable, unconditional standby letters of credit issued by a Federal Home Loan Bank; and
(r) Certificates of deposit fully insured or guaranteed by the Federal Deposit Insurance Corporation that are issued to a bank, capital stock financial institution, or qualifying mutual financial institution furnishing securities pursuant to the Public Funds Deposit Security Act.
B. Market Value of Securities
The market value of securities provided for the protection of public deposits must be in an amount not less than 102% of the amount on deposit which is in excess of the amount insured by the Federal Deposit Insurance Corporation (FDIC). In accordance with prior law, a financial institution that has furnished securities for the protection of public funds may at any time and without prior approval substitute other securities of equal value in lieu of securities previously furnished as long as the securities substituted are included in the list of securities outlined above. In addition, a financial institution that has furnished securities for the protection of public deposits may withdraw all or any part of the securities upon repayment to the custodial official of the amount of the securities withdrawn.
C. Substitution and Withdrawal of Securities
A depository bank has the right, at any time, to substitute securities of equal value for securities previously deposited, provided that the securities so substituted are authorized under the Public Funds Deposit Security Act. The market value of securities which must be provided for the protection of public deposits must be in an amount not less than 102% of the amount on deposit which is in excess of the amount insured by the FDIC. In addition, a bank that has furnished securities for the protection of public deposits may withdraw all or any part of the securities upon repayment to the custodial official of the amount of the securities withdrawn.
D. Delivery of a Pledge or Grant of a Security Interest Alternative
The above-stated standard list of permissible securities applies to the delivery of a pledge, or a grant of a security interest therein, to the custodial official of the governing authority that has designated that bank as a depository of public money or public fund.
Section 77-2391(2) describes the method by which a bank creates and perfects a security interest in eligible bank assets to secure public funds deposits. Pertinent language of the law states:
The delivery by the bank, capital stock financial institution, or qualifying mutual financial institution designated as a depository to the custodial official of a written receipt or acknowledgment from a federal reserve bank or branch of a federal reserve bank, a federal home loan bank, or another bank, capital stock financial institution, or qualifying mutual financial institution including a bank, capital stock financial institution or qualifying mutual financial institution chartered by a foreign state agency as defined in subdivision (14) of section 8-101.03, or trust company other than the bank, capital stock financial institution, or qualifying mutual financial institution granting the security interest, that includes the title of such custodial official, describes the securities identified on the books or records of the depository, and provides that the securities or the proceeds of the securities will be delivered only upon the surrender of the written receipt or the acknowledgment duly executed by the custodial official designated on the written receipt or the acknowledgment and by the authorized representative of the depository shall, together with the custodial official’s actual and continued possession of the written receipt or acknowledgment, constitute a valid and perfected security interest in favor of the custodial official in and to the identified securities. Articles 8 and 9, Uniform Commercial Code, shall not apply to any security interest arising under this section.
In most cases, standard custody receipts issued by Federal Reserve Banks or commercial banks will meet the requirements of the law. There are three essential items:
1. The title of the custodial official.
Example: “Any County Treasurer”;
2. A description of the securities; and
3. A statement that the securities or the proceeds of securities will be delivered by the custodian only upon the surrender of the custody receipt duly executed by the custodial official designated and by the authorized representative of the depository bank. The following are two examples:
Example 1: “The securities listed on the reverse side hereof will be delivered only upon surrender of this receipt with the release and instruction provisions duly executed by the pledgee designated on the reverse side by the authorized representative of the depository institution.”
Example 2: “The securities listed on the reverse side will be delivered in accordance with above instructions upon the surrender of this receipt with the above release duly executed by the custodial official designated on the reverse side hereof and the bank to whom the receipt is issued.”
The above two examples are only for illustration purposes. Language of custody receipts may vary. At a minimum, the statement must provide that the surrendered custody receipt be signed by both the custodial official and the depository bank.
In the event of a pledge that could amount to a bailment with the securities being actually held by a third party, you need assurances that said third party is not in any way under the control of the depository bank.
Once these three requirements are met, the security interest is automatic so long as the custodial official has actual possession of the receipt.
E. Deposit of Securities Alternative
As an alternative, a bank may deposit with the county clerk the above-stated list of permissible securities. This alternative has been criticized over the question of whether, in the event of a bank’s insolvency, the security interest is adequate to assure recovery by the governing authority over and above that which would normally be afforded to general creditors of the bank. The deposit of the security would create a bailment which normally requires a specific agreement as to the terms of the bailment (i.e., that the bailee has the right to hold the securities so long as deposits are present and in the case of default or receivership by the bank, the governing authority could take the securities and reclaim them to the extent of any loss on the deposit intended to be secured).
Clearly, to be effective, the deposit of securities only under the provisions of §§ 77-2386 to 77-2397 (Public Funds Deposit Security Act) must at a minimum require:
1. The physical possession of the securities;
2. An agreement that the bailee (the governing authority) accepts property for the purposes stated and that the securities may be redeemed and sold to satisfy any loss created; and
3. Approval by both the Board of the Governing Authority and Bank Board.
We have not addressed the issue of constructive delivery through or to a third party bailee because of the new pledge or security interest grant powers.
F. Trust Receipt Alternative
Another alternative, the “Trust Receipt”, permits a bank, with the approval of the official governing body of a political subdivision or political unit, to deposit securities in a
Federal Reserve Bank or other bank or trust company and deliver the trust receipt to the appropriate official in lieu of the securities. This statute extends to all political subdivisions or political units (See, §§ 77-2390).
G. Deposit Guarantee Bond Alternative
A bank may also utilize a deposit guaranty bond to secure public deposits. A deposit guaranty bond is defined as a bond underwritten by an insurance company authorized to do business in this state which provides coverage for deposits of a governing authority which are in excess of the amounts insured by the FDIC. When utilizing a deposit guaranty bond for security of public deposits, the deposit guaranty bond must run to the custodial official and be conditioned upon the financial institution, at the end of each and every month, rendering to the custodial official a statement in duplicate, showing the daily balances and the amounts of public money or public funds of the governing authority held by the financial institution during the month and how such funds have been credited. The amount of the deposit guaranty bond which must be provided for the security of public deposits must be in an amount not less than the amount on deposit which is in excess of the amount insured by the FDIC.
H. Special Rules for Qualifying Mutual Financial Institutions
A qualifying mutual financial institution is eligible to hold deposits of the state and local political subdivisions provided that its charter and by-laws restricts the rights of a political subdivision or the state as an account holder by (1) limiting the state’s or political subdivision’s interest in the qualifying mutual institution to the withdrawal value of the state’s or the political subdivision’s account; (2) removing the state’s or the political subdivision’s voting rights in the qualifying mutual financial institution; and (3) removing any entitlement of the state or political subdivision to share in the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the affairs of the qualifying mutual financial institution. In amending its charter and by-laws to implement the restrictions set forth above, qualifying mutual financial institutions should work closely with their applicable state or federal regulators to obtain approval of the modifications required to be eligible to hold public deposits.
I. Permissible State and Political Subdivision Investments
The chart set forth below outlines the types of investments which are authorized for specific state and local political subdivisions or governmental entities. All deposits of state and local political subdivisions or governmental entities placed to capital stock financial institutions or qualifying mutual financial institutions in excess of the amounts insured by the FDIC must be secured in accordance with the provisions of the Public Funds Deposit Security Act - §§ 77-2386 to 77-2397 (* See, “Standard List of Permissible Securities” described in paragraph II. A. of this article).
PUBLIC FUNDS
Statute
Government Entity
Funds
Type Of Deposit Instruments &
Investments Authorized
§ 2-3227
Natural Resources Districts
Surplus funds, including money in any sinking fund established for payment of principal or interest of any contract, bond or other indebtedness not required for immediate needs of district
1. Certificates of Deposit of banks which are members of FDIC (deposits in excess of insured amounts must be secured in same manner as deposit of public funds)
2. Certificates of Deposit of capital stock financial institutions as provided by § 77-2366
3. Deposits in loan associations in the state of Nebraska to the extent that deposits are insured by Federal Savings & Loan Insurance Corporation
4. Natural Resources District bonds
5. United States Treasury Notes or Bonds
6. Bonds or debentures issued either singly or collectively by any of the 12 federal land banks, 12 intermediate credit banks or 13 banks for cooperatives under the supervision of the Farm Credit Administration.
§ 2-4214
Nebraska Conservation Corporation
Any funds not needed for immediate disbursement, including any funds held in reserve
1. Direct and general obligations of or obligations fully and unconditionally guaranteed by the United States of America
2. Obligations issued by agencies of the United States of America
3. Obligations of this state or of any political subdivision, except obligations of sanitary and improvement districts organized under Chapter 31, Article 7
4. Certificates of Deposit of banks whose deposits are insured by the Federal Deposit Insurance Corporation or collateralized by deposit of securities with the Secretary-Treasurer of the corporation as, and to the extent not covered by insurance, with securities which are eligible for securing the deposits of the state or counties, school districts, cities or villages of the state.
5. Certificates of Deposit of capital stock financial institutions as provided by § 77-2366
6. Repurchase agreements which are fully secured by any of such securities or obligations which may be unsecured and unrated including investment agreements of any corporation, national bank, capital stock financial institution, bank holding company, insurance company or trust company which has outstanding debt obligations which are rated by a nationally recognized rating agency in one of the three highest rating categories established by such rating agency.
§ 3-506
City Airport Authority
All Funds
Deposits must be made in a separate capital stock financial institution account or accounts.
§ 3-616
County Airport Authority
§ 3-709
Joint Airport Authority
§ 10-713
School Districts
Sinking funds for the redemption of bonds and payment of interest on such bonds which are not currently required to retire bonds and pay interest
1. U.S. Treasury Bills, bonds or notes
2. In interest bearing time Certificates of Deposit in depositories approved and authorized to receive county money, but in no greater amount in any such depository than the same is authorized to receive deposits of county funds.
§ 13-1305
Public Building Commission
§ 14-512
Cities of the Metropolitan Class
Sinking funds for the payment of general bonds of the city and interest thereon
Temporary registered general warrants of the city or of the school district located within the city subject to immediate availability.
§ 14-532
Special assessment sinking fund for street improvements
Temporary investment in securities of the United States, state of Nebraska, Douglas County, metropolitan city, school district of such city or public owned and operated municipal utilities thereof subject to immediate availability.
§ 14-556 &
§ 14-563
All Operating Funds
1. Deposit in such capital stock financial institutions within the city as shall agree to pay the highest rate of interest for the use of such funds so deposited.
2. Securities of the United States, the state of Nebraska, a city of the metropolitan class, a county in which such city is located, or a school district of such city, in securities of municipally owned public utilities in the same manner as funds of the state of Nebraska are invested and in Certificates of Deposit and time deposits in capital stock financial institutions.
§ 14-2144
Cities of the Metropolitan Class (Water Districts)
1. Water district warrants and bonds and warrants and bonds of municipalities constituting the same, including warrants and bonds of the improvement districts thereof
2. Investments and securities that are legally authorized for school funds of the state.
§ 14-1237
Cities of the Metropolitan Class (Bridge Commission)
1. Certificates of Deposit in capital stock financial institutions
2. Bonds or other evidence of indebtedness which are general obligations of the United States, the state of Nebraska or other states subject to immediate availability.
§ 14-1719
Cities of the Metropolitan Class (Parking Authority)
Investments deposited in such capital stock financial institutions or trust companies as may be selected by the authority from time to time.
§ 15-235.03
Cities of the primary class (Hospitals)
All income revenues and profits of the hospital and money derived from levies, grants, loans or contributions from the United States, the state of Nebraska or any agency or instrumentality of either of them
Deposited in a separate capital stock financial institution account or accounts.
§ 15-235.04
Cities of the primary class
Hospital sinking funds
Invest all idle funds, including but not limited to current tax receipts for such a period of time that such funds are not immediately needed, in evidences of indebtedness of the United States government and agencies thereof.
§ 15-845-849
All money collected, received or held by city treasurer (operating funds)
1. Certificates of Deposit and time deposits in capital stock financial institutions
2. Deposits for safe keeping in capital stock financial institutions doing business in the city which are of approved and responsible standing. Any such bank or capital stock financial institution located within the city may apply for the privilege of keeping such money or any part thereof upon the following conditions: (1) All such deposits shall be subject to payment when demanded by the city treasurer; and (2) Such deposits shall be subject to all regulations imposed by law or adopted by the city for the receiving and holding thereof.
§ 16-691.01
Cities of the first class (Board of Public Works)
All Surplus Funds
1. Interest bearing securities of the state of Nebraska or any political subdivision thereof
2. Certificates of Deposit of capital stock financial institutions
3. Interest bearing securities of the United States.
§ 16-712-716
Cities of the first class
1. Deposited for safe keeping in capital stock financial institutions of approved and responsible standing (such deposits are subject to all regulations imposed by law or adopted by the City Council for the receiving and holding thereof)
2. Purchase of Certificates of Deposit and time deposits in banks and capital stock financial institutions selected as depositories of city funds.
§ 17-518
Cities of the second class and villages (street improvement district)
Sinking Fund
Invested in interest bearing time Certificates of Deposit in depositories approved and authorized to receive county money, but in no greater amount in any depository than the same is authorized to receive deposits of county funds.
§ 17-540
Cities of the second class and villages (water-works and public utilities)
Surplus Funds
Invested in interest bearing bonds or obligations of the United States.
§ 17-607
Cities of the second class and villages
Deposit in one or more state or national capital stock financial institutions of approved and responsible standing as designated by the City Council or Board of Trustees.
§ 17-608
Surplus funds in excess of the amount required from maintenance or set aside for betterments and improvements
1. Outstanding bonds or registered warrants of the village or city
2. Bonds and debentures issued either singly or collectively by any of the 12 federal land banks, 12 intermediate credit banks or 13 banks for cooperatives under the supervision of the Farm Credit Administration
3. Interest bearing bonds or obligations of the United States
4. Pursuant to § 17-720, Certificates of Deposit and time deposits in any capital stock financial institution in the state of Nebraska to the extent that such certificates of deposit or time deposits are insured by the Federal Deposit Insurance Corporation or Federal Savings & Loan Insurance Corporation.
§ 18-2473
All cities and villages
Surplus funds of refunding bonds pursuant to municipal property financing venture
1. Direct obligations of or obligations the principal of and interest on which are guaranteed by the United States government
2. Obligations of any agency or instrumentality of the United States government
3. Certificates of Deposit issued by a capital stock financial institution or trust company.
§ 23-246.01
Townships
In depositories approved for the deposit of county funds.
§ 24-511
Clerk of the County Court
All fees and money received by the court
Deposits pursuant to §§ 77-2326.01 to 77-2326.09
§ 46-146
Irrigation Districts
All Proceeds from Sale of Warrants
Deposited in some local capital stock financial institution.
§ 72-1246
State Investment Officer
All state funds
Investments of the nature which individuals of prudence, discretion and intelligence acquire or retain dealing with the property of another.
§ 72-1263
Funds Available for Investment
Time deposit open account of $150,000 offered to all banks and building & loan associations in this state.
§ 77-2301
State Treasurer
Amount of money belonging to various current funds in the state treasury
Deposit in the capital stock financial institutions doing business in this state and of approved standing and responsibility (any capital stock financial institution may apply for the privilege of keeping these funds on deposit).
§ 77-2312
County
Monies collected and held by county treasurer
Deposit in capital stock financial institutions of approved and responsible standing (any capital
stock financial institution located in the county may apply for the privilege of holding county deposits subject to payment upon demand by the county treasurer and subject also to such regulations as are imposed by law and the rules adopted by the county treasurer for holding and receiving such deposits). When more than one capital stock financial institution is selected by the county board as depositories, no institution shall be given preference, but monies shall be deposited with each financial institution as the paid-up capital of such financial institution as of December 31 of the preceding year is a part of the amount of all the paid-up capital of all financial institutions so selected as of December 31 of the preceding year. The treasurer may select one or more financial institutions to be used for active accounts in which deposits may be kept in excess of these requirements as may be necessary for the transaction of ordinary day-to-day requirements.
§ 77-2315 &
§ 77-2320
County Funds
1. United States government bonds
2. Bonds & debentures issued either singly or collectively by any of the 12 federal land banks, 12 intermediate credit banks, or the 13 banks for cooperatives under the supervision of the Farm Credit Administration
3. United States treasury notes, bills or certificates of indebtedness maturing within 2 years from the date of purchase
4. Certificates of Deposit.
§ 77-2326.04
Clerk of the District Court
All Public Funds in Hands of Court Officials
Deposited in such capital stock financial institutions as shall have been designated as official depositories for such funds.
§ 77-2340
Operating Fund
May also be deposited in time deposits in banks or capital stock financial institutions
§ 77-2341
County, city, village or other governmental subdivision other than a school district
Surplus funds in excess of current needs or sinking funds for payment of bonds in excess of amounts necessary to pay principal and interest
1. Certificates of Deposit
2. Time Deposits
3. Securities in which the state investment officer is authorized to invest pursuant to authorized investment guidelines of the Nebraska Investment Council
§ 77-2342
Metropolitan Water or Utilities Districts
All funds received or held by
treasurer
Deposited in such capital stock financial institutions situated within the boundaries of such district as are approved by the governing body of the district as official depositories for the funds belonging to the district.
§§ 77-2350 – 77-2350.01; See also,
§§ 77-2351 – 77-2352
Funds received or held by the treasurer of a school district
Deposited in such capital stock financial institutions, situated within the boundaries of such district, as shall have been designated by the governing body of the school district as official depositories for such funds. No one capital stock financial institution shall be given preference over another but school district deposits shall be prorated in the manner required by the county treasurer as provided in § 77-2314.
§ 77-2353.01
Public Power and Irrigation District
All funds
Deposited in such capital stock financial institutions as shall have been designated as official depositories for the funds belonging to the district.
§ 77-2369 through
§ 77-2385
Local Hospital Districts
Funds received or held by the secretary-treasurer of a local hospital district
Deposited in capital stock financial institutions of approved and responsible standing which are located within the boundaries of such district (any capital stock financial institution located in the district may apply for the privilege of holding local hospital district deposits subject to payment upon demand by the district secretary-treasurer and subject also to such regulations as are imposed by law and the rules adopted by the secretary-treasurer for holding and receiving such deposits). When more than one capital stock financial institution is selected by the local hospital district Board of Directors as depositories, no institution shall be given preference, but money shall be deposited with each capital stock financial institution as the paid-up capital of such capital stock financial institution as of December 31 of the proceeding year is a part of the amount of all the paid-up capital of all capital stock financial institutions so selected as of December 31 of the proceeding year. The Secretary-Treasurer may select one or more capital stock financial institutions to be used for active accounts in which deposits may be kept in excess of these requirements as may be necessary for the transaction of ordinary day-to-day requirements.
§ 79-1043
Invested in securities the nature of which individuals of prudence, discretion and intelligence acquire or retain in dealing with the property of another.
III. SINGLE POOL OF COLLATERAL ALTERNATIVE
A. Standard List of Assets
Neb.Rev.Stat. § 77-2398 allows an eligible financial institution to secure all deposits of one or more governmental units in excess of the FDIC insured amounts by depositing, pledging or granting a security interest in a single pool comprised of the standard list of permissible securities, as defined in § 77-2387(14). Eligible financial institutions include banks, capital stock financial institutions and qualifying mutual financial institutions.
B. Designation and Eligibility of Qualified Trustee
An eligible financial institution in which public funds have been deposited satisfies its requirement to secure the public funds in excess of the amounts insured by the FDIC by providing a deposit guaranty bond or by depositing, pledging or granting a security interest in a single pool of securities. The eligible financial institution must designate a “qualified trustee” and place with the trustee, for holding, the guarantee bond or securities so deposited, pledged or in which a security interest has been granted.
Entities eligible to act as a “qualified trustee” for the receipt of a deposit guaranty bond or for the holding of a pool of securities include any Federal Reserve Bank, branch of a Federal Reserve Bank, a federal home loan bank, or another responsible bank which is authorized to exercise trust powers, capital stock financial institution which is authorized to exercise trust powers, or qualifying mutual financial institution which is authorized to exercise trust powers, including a bank which is authorized to exercise trust powers, capital stock financial institution which is authorized to exercise trust powers, or qualifying mutual financial institution which is authorized to exercise trust powers chartered by a foreign state agency as defined in subdivision (14) of Section 8-101.03, or trust company, other than the pledgor or the bank, capital stock financial institution, or qualifying mutual financial institution providing the deposit guaranty bond or granting the security interest in a single pool of securities.
C. Substitution, Release or Exchange of a Single Pool of Securities
An eligible financial institution may at any time substitute, exchange, or release securities deposited with the qualified trustee, provided such substitution, exchange, or release does not reduce the aggregate market value of the pool of securities to an amount that is less than 102% of the total amount of the public funds in excess of FDIC insured limits and may reduce the amount of the deposit guaranty bond, provided that the reduction does not reduce the value of the bond to an amount less than the total amount of public funds in excess of FDIC insured limits.
D. Amount of Deposit Guaranty Bond or Single Pool Securities Required
1. Deposit Guaranty Bond
An eligible financial institution in which public funds have been deposited satisfies its requirement to secure the public funds in excess of the amounts insured by the FDIC by providing a deposit guaranty bond that runs to the qualified trustee under the condition that the eligible financial institution will render to the qualified trustee the statement described in Paragraph E (1) below. The total value of the deposit guaranty bond must at all times be at least equal to the amount of public funds on deposit in excess of FDIC insured limits.
2. Securities
The market value of securities must at all times be in an amount equal to at least 102% of the amount of public funds on deposit in excess of FDIC insured amounts for any eligible financial institution that maintains a single pool of collateral for the protection of public deposits.
E. Reporting Duties of Eligible Financial Institution
Neb.Rev.Stat. Section 77-23,100 creates a series of “notice” or “reporting” requirements for an eligible financial institution that secures public fund deposits in excess of FDIC insured amounts by providing a deposit guaranty bond or a single pool of collateral. These requirements are as follows:
1. On or before the 10th day of each month, the eligible financial institution must render to the Administrator a statement showing as of the last business day of the previous month (a) the amount of public money or public funds deposited in such eligible financial institution that is not insured by the FDIC (i) by each governmental unit separately and (ii) by all governmental units in the aggregate and (b) the total value of the deposit guaranty bond and the aggregate market value of the pool of securities deposited, pledged, or in which a security interest has been granted. (See, Neb.Rev.Stat. § 77-23,100(3)).
2. The eligible financial institution must give written notice of the designation of the qualified trustee to any governmental unit depositing public money or public funds for which securities are deposited, pledged, or in which a security interest has been granted, and if an affiliate of the eligible financial institution is to serve as the qualified trustee, the notice must disclose the affiliate relationship and the notice must be given prior to designation of the qualified trustee. “Affiliate” means any entity that controls, is controlled by, or is under common control with another entity and “control” means to own directly or indirectly or to control in any manner twenty-five percent of the voting shares of any bank, capital stock financial institution, or holding company or to control in any manner the election of the majority of directors of any bank, capital stock financial institution, or holding company. (See, Neb.Rev.Stat. § 77-23,100(1)).
3. An eligible financial institution must also report upon the request of a governmental unit: (a) the amount of public money or public funds deposited in such eligible financial institution as of the date of the request that is not insured by the FDIC (i) by the governmental unit making the request and (ii) by all other governmental units which is secured by a single deposit guaranty bond or a single pool of securities; and (b) the total value of the deposit guaranty bond or the aggregate market value of the pool of securities which secure the public funds held by the eligible financial institution. Such report must be made on or before the date specified by the governmental unit. (See, Neb.Rev.Stat. § 77-23,105).
F. Reporting Duties of Qualified Trustee
A “qualified trustee” must comply with the following reporting requirements:
1. Within twenty days after receiving the statement referred to in Paragraph E (1), above, from an eligible financial institution, the Administrator must provide a report to each governmental unit listed in such statement reflecting: (a) the amount of public money or public funds deposited in such eligible financial institution by each governmental unit as of the last business day of the previous month that is not insured by the FDIC and that is secured by the granting of a deposit guaranty bond or by the deposit, pledge, or granting of a security interest in a single pool of securities; and (b) the total value of the deposit guaranty bond or the aggregate market value of the pool of securities so deposited, pledged or in which a security interest is granted as of the last business day of the previous month. The Administrator is required to clearly notify the governmental unit within such report if the value of the securities deposited does not meet the statutory requirements. (See, Neb.Rev.Stat. § 77-23,100(4)).
2. A qualified trustee must also report, upon request of a governmental unit, as of the date of such request, the total value of the deposit guaranty bond or the aggregate market value of the pool of securities provided by the depository eligible financial institution to secure public funds and must provide an itemized list of the securities in the pool. Such report must be made on or before the date specified by the governmental unit. (See, Neb.Rev.Stat. § 77-23,105).
3. The qualified trustee must provide its written receipt describing the pool of securities deposited, pledged, or in which a security interest has been granted by an eligible financial institution, to each director or administrator, a copy of which must also be delivered to the eligible financial institution. (See, Neb.Rev.Stat. § 77-23,100 (1)).
G. Interests in Deposit Guarantee Bond or Single Pool of Assets
The provisions of Neb.Rev.Stat. § 77-2399 grant each governmental unit depositing public money or public funds in an eligible financial institution with an undivided beneficial interest under the deposit guaranty bond provided or an undivided security interest in the pool of securities deposited, pledged or in which a security interest is granted by the eligible financial institution in the proportion that the total amount of the governmental unit’s public funds secured by the deposit guaranty bond or by the pool of securities bears to the total amount of public money or public funds so secured.
H. Event of Default
The provisions of Neb.Rev.Stat. § 77-23,102 establish a procedure for the Director to enforce the deposit guaranty bond or to liquidate the single pool of securities in order to repay custodial officials for public funds in excess of the FDIC insured limits in any case where an eligible financial institution has experienced an “event of default.” An event of default means the issuance of an order by a supervisory authority or a receiver which restrains an eligible financial institution from paying its deposit liabilities.
IV. CDARS PROGRAM AUTHORITY
Nebraska law recognizes eligible financial institutions may consider participating in a program commonly referred to as “CDARS.” The CDARS program allows such financial institutions to participate in the program to “swap” deposits with other participating institutions. For example, a bank with a customer desiring full FDIC insurance coverage for a $1 million deposit could retain $250,000 of such deposit and transfer $750,000 of the deposit in $250,000 increments to three separate participating banks and receive, in return, three $250,000 deposits from the other banks to replace these funds. Neb.Rev.Stat. § 77-2365.02 authorizes this type of investment by state and local political subdivisions. The law provides that where state and political subdivision public funds laws allow investment of such funds in certificates of deposit (CDs) or time deposits with banks, capital stock financial institutions or qualifying mutual financial institutions, such authority will include the investment of funds in CDs or time deposits if:
When the state or political subdivision public funds are deposited into and such CDs or time deposits are issued by other eligible institutions, the financial institution in which the investment of public funds was initially made receives an amount of deposits from customers of other financial institutions located in the United States which is equal to or greater than the amount of the investment of funds in CDs or time deposits initially made by the state or political subdivision.
V. NEBRASKA CAPITAL EXPANSION ACT – TIME DEPOSIT OPEN ACCOUNT PROGRAM
From the funds available for investment in the Operating Investment Pool, the Nebraska Investment Council is required, pursuant to the Nebraska Capital Expansion Act (Neb.Rev.Stat. Section 72-1263), to offer each qualifying bank and capital stock financial institution in the State a time deposit open account (TDOA). Each institution is allowed up to a $1 million deposit as long as they satisfy the requirements of the program. As of July 18, 2014, to the extent that the total amount of funds initially offered to all qualifying banks and capital stock financial institutions is not accepted, the balance of such funds must be reoffered to any qualifying bank or capital stock financial institution desiring additional funds, subject to a maximum deposit of $16 million. The first $250,000 of the deposit is insured by the FDIC. The statute requires the pledging of collateral for deposits greater than the FDIC insurance coverage level.
Additional information regarding the TDOA program may be obtained at https://nic.nebraska.gov/tdoa.