In order to determine what securities may be pledged for the funds of a municipality, you will want to review the investment policy of the municipality in question. In Illinois, the general criteria for the types of securities that may be pledged for the funds of a municipality can be found in the Public Funds Investment Act (“PFIA”), the Public Funds Deposit Act, the Deposit of State Moneys Act and the State Officers and Employees Money Disposition Act. All of these laws contain the same requirements regarding permissible collateral requirements.
Under these Acts, any treasurer or other custodian of public funds may accept as collateral “any securities or other eligible collateral authorized by Section 11 and Section 11.1 of the Deposit of State Moneys Act or Section 6 of the Public Funds Investment Act.” 30 ILCS 225/1. Those sections state the eligible collateral to be the following:
any of the following classes of securities, provided there has been no default in the payment of principal or interest thereon:
(1) Bonds, notes, or other securities constituting direct and general obligations of the United States, the bonds, notes, or other securities constituting the direct and general obligation of any agency or instrumentality of the United States, the interest and principal of which is unconditionally guaranteed by the United States, and bonds, notes, or other securities or evidence of indebtedness constituting the obligation of a U.S. agency or instrumentality.
(2) Direct and general obligation bonds of the State of Illinois or of any other state of the United States.
(3) Revenue bonds of this State or any authority, board, commission, or similar agency thereof.
(4) Direct and general obligation bonds of any city, town, county, school district, or other taxing body of any state, the debt service of which is payable from general ad valorem taxes.
(5) Revenue bonds of any city, town, county, or school district of the State of Illinois.
(6) Obligations issued, assumed, or guaranteed by the International Finance Corporation, the principal of which is not amortized during the life of the obligation, but no such obligation shall be accepted at more than 90% of its market value.
(7) Illinois Affordable Housing Program Trust Fund Bonds or Notes as defined in and issued pursuant to the Illinois Housing Development Act [20 ILCS 3805/1 et seq.].
(8) In an amount equal to at least market value of that amount of funds deposited exceeding the insurance limitation provided by the Federal Deposit Insurance Corporation or the National Credit Union Administration or other approved share insurer: (i) securities, (ii) mortgages, (iii) letters of credit issued by a Federal Home Loan Bank, or (iv) loans covered by a State Guarantee under the Illinois Farm Development Act [repealed], if that guarantee has been assumed by the Illinois Finance Authority under Section 845-75 of the Illinois Finance Authority Act [20 ILCS 3501/845-75], and loans covered by a State Guarantee under Article 830 of the Illinois Finance Authority Act [20 ILCS 3501/830].
(9) Certificates of deposit or share certificates issued to the depository institution pledging them as security. The public agency may require security in the amount of 125% of the value of the public agency deposit. Such certificate of deposit or share certificate shall:
(i) be fully insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, or the National Credit Union Share Insurance Fund or issued by a depository institution which is rated within the 3 highest classifications established by at least one of the 2 standard rating services;
(ii) be issued by a financial institution having assets of $15,000,000 or more; and
(iii) be issued by either a savings and loan association having a capital to asset ratio of at least 2%, by a bank having a capital to asset ratio of at least 6% or by a credit union having a capital to asset ratio of at least 4%.
The depository institution shall effect the assignment of the certificate of deposit or share certificate to the public agency and shall agree that, in the event the issuer of the certificate fails to maintain the capital to asset ratio required by this Section, such certificate of deposit or share certificate shall be replaced by additional suitable security.
The PFIA also provides that a public agency may accept a surety bond in lieu of collateral if it is “executed by a company authorized to transact the kinds of business described in clause (g) of Section 4 of the Illinois Insurance Code, in an amount not less than the amount of the deposits required by this Section to be secured, payable to the public agency . . . .” 30 ILCS 235/6(g).
Please note that in subsection 6(f) of the PFIA, a public agency may at any time declare a particular security ineligible to qualify as collateral. 30 ILCS 235/6(f). Therefore, it is necessary to review the investment policy for the municipality in question to determine which of the above securities it has deemed eligible/ineligible as collateral.