IBA Compliance Connection

Your go to source for compliance!

The Public Funds Investment Act limits our public funds deposits that are “not collateralized or insured by an agency of the federal government.” To avoid that limitation, must our public funds deposits be collateralized by assets of the federal government, or can they also be collateralized by other assets, such as a mortgage backed security (assuming it is approved by the public depositor)?

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The limitation on public funds deposits in the Public Funds Investment Act (75% of your capital stock and surplus) applies only when a public funds deposit is both uninsured by an agency of the federal government and uncollateralized. In other words, if your local municipality has approved the use of mortgage backed securities as collateral, and the deposits are collateralized by those mortgage backed securities, then those deposits will not be subject to the 75% limitation.

In the portion of the statute that you quoted, the phrase “by an agency of the federal government” modifies the word “insured,” meaning that the insurance must be obtained from an agency of the federal government (i.e., the FDIC or NCUA) — it does not modify the word “collateralized.” Moreover, collateral for public funds do not have to be obtained from an agency of the federal government — Illinois law expressly permits public agencies to approve any security as acceptable collateral (although we note that some agencies, such as the State of Illinois, have chosen to exclude all mortgage-backed securities from their investment policies).

For resources related to our guidance, please see:

  • Public Funds Investment Act, 30 ILCS 235/6 (“if such [public] funds or moneys are deposited in a bank, the amount of all such deposits not collateralized or insured by an agency of the federal government shall not exceed 75% of the capital stock and surplus of such bank . . . .”)
  • Deposit of State Moneys Act, 30 ILCS 235/6(d)(8) (“Whenever a public agency deposits any public funds in a financial institution, the public agency may enter into an agreement with the financial institution requiring any funds not insured by the Federal Deposit Insurance Corporation . . . to be collateralized by any of the following classes of securities: . . . (8) In an amount equal to at least market value of that amount of funds deposited exceed the insurance limitation . . .  (i) securities, (ii) mortgages . . . .”)