Protecting Funds Collected from Citizens and Donors

Protecting Funds Collected from Citizens and Donors

Governments and large nonprofits have a fiduciary duty to protect the assets they collect through taxes, fees or donations. Whether by law or by policy, there are generally strict requirements for deposits to be backed by FDIC insurance, corporate surety bond or pledged collateral.

FDIC insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category (one of which is “government account”). Additional FDIC insurance is possible for time accounts like CDs and saving vehicles like NOW accounts and MMDAs in the same state as the public entity, but only up to a total of $250,000 and subject to restrictive rules.

It’s highly inefficient for a government or nonprofit to place their funds in $250,000 increments into multiple banks, especially if the accounts hold operational funds, which necessitate frequent transactions. (Imagine a city CFO trying to manage $2.5 million in separate accounts at 10 different banks!)

What are the other options when there’s a requirement to collateralize public or nonprofit funds?

Bank Networks Expand FDIC Coverage

Thankfully there are networks of banks that have agreements to distribute funds in excess of $250,000 among the other member banks in the network so the deposits are FDIC insured. Pinnacle is a member of the Intrafi Network (also previously known as Promontory Interfinancial Network, CDARS or ICS).

Networks like Intrafi are especially useful for clients that must comply with investment policy mandates, such as city or state governments, municipal services and utilities and nonprofits.

The benefits of Intrafi Network Deposits include:

  • Peace of mind through a single banking relationship and FDIC insurance for up to $150 million in deposits
  • An interest rate set by the member bank that compares favorably to treasuries and government money market mutual funds without the risks associated with prime money market mutual funds
  • Compliance with investment policy mandates without ongoing collateral-tracking or footnotes on uninsured deposits in financial statements
  • Transparency with consolidated reporting
  • Simplicity of one statement from our bank for each Intrafi product option
  • Liquidity management via demand deposit or money market accounts or CDs
  • Satisfaction that your funds are available locally when funds are exchanged with other IntraFi member banks*
  • Cash Management services are uninterrupted with the ICS sweep option and viewable through online banking
  • Stability in the face of market volatility because funds are not subject to floating net asset values
  • Higher deposit and transaction limits and more member banks compared to other networks

Prior to the development of networks like IntraFi, Traditionally, for a financial institution to collateralize amounts above what the FDIC covers, the bank would pledge additional collateral. But that’s expensive for the bank and therefore usually reduces the interest the bank can pay on the funds.

Other options for collateralization that may be useful in certain circumstances, sometimes in combination with funds deposited with a network like IntraFi include:

Corporate Surety Bond

This option is a short-term investment in a U.S.-based commercial firm rated at least A-1 by S&P and/or at least P-1 by Moody’s. The maturity dates are typically between 90 and 270 days and therefore must be renewed regularly. The funds are unsecured, so risk assessment is a factor, and the fees may not make sense for smaller organizations that don’t have the high balances needed to make the expense worthwhile. Funds invested in commercial paper generally don’t have same-day liquidity, so it’s not a good fit for funds that are tapped for day-to-day operations.

Local Government Investment Pools

Many states have set up local government investment pools (LGIPs), sponsored and organized by the state treasurer or a governing body like a county commission. The participating public entity doesn’t have sole control over what the funds are invested in, and LGIP’s are not regulated by the Securities and Exchange Commission, so the reporting requirements are reduced. Rates are generally not reported until after the end of the month. Like corporate surety bonds, local investment pools have fees and are not federally insured. Therefore returns are not guaranteed, and participants must take care not to put public funds at too much of an investment risk.

* When deposited funds are exchanged on a dollar-for-dollar basis with other institutions that use IntraFi Network Deposits, our bank can use the full amount of a deposit placed through IntraFi Network Deposits for local lending, satisfying some depositors’ local investment goals or mandates. Alternatively, with a depositor's consent, our bank may choose to receive fee income instead of deposits from other participating institutions. Under these circumstances, deposited funds would not be available for local lending.

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