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Are Your Public Deposits Insured?

How much money is in your district’s bank accounts? Is all of it covered by deposit insurance if the bank were to fail?

These questions had less importance to school districts when the banking industry enjoyed greater stability, and school districts could give precedence to other financial and banking objectives. Indeed, focusing on interest rates, bond ratings, and other issues may have been right for the times. With the current state of the banking industry, however, school districts should review their public deposits to make certain that funds are secured properly. You can’t afford to discover the answers to these questions the hard way.

A school district’s total public deposit protection currently is limited to a total of $650,000; that is, $250,000 from the FDIC and $400,000 from the State (after the FDIC limits are exceeded, and provided the State appropriation has not already been exhausted). Under Section 34.07 of the Wisconsin Statutes, a school district has the power to require security for its deposits beyond the FDIC and State levels with the bank’s assets. Such security is often a surety bond or collateral consisting of U.S. treasury bills, notes, or bonds. Most banks should be well aware of this process as the Wisconsin Banker’s Association has prepared form documents for its member banks to use.

The process is fairly straightforward. First, the bank signs a security agreement with the school district. Second, the bank transfers the securities (not the school district’s money) through the Federal Reserve to a third-party bank (typically the Federal Reserve Bank itself) to act as custodian of the securities under a custodial agreement which shows the school district as the owner of those securities. Lastly, the custodial bank then sends the school district monthly statements reporting the market value of those securities pledged by the bank.
Every school district should, especially in this economy, consider requiring its banks to provide such collateralized security if the deposits plus interest exceed, or are likely to exceed, the $650,000 limit.

On a related topic, Chapter 34 of the Wisconsin Statutes requires governing bodies to designate, by formal resolution, the one or more banks into which the treasurer must deposit all funds. This includes all types of deposits such as CDs, demand deposits, and savings deposits. If your school district has not made such a formal designation recently, previously designated banks may differ from those that are used today. It is in your school district’s best interest to review and formally designate the banks currently used in order to comply with the statute.

If your school district would like assistance in reviewing your bank’s deposit security documentation or drafting a bank designation resolution, please do not hesitate to contact your Davis & Kuelthau, s.c. attorney.