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Public Sector Banking Relationships

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Benjamin M. Effinger
March 1, 2024

The County of Los Angeles is the world’s largest municipal government organization—with an annual operating budget north of $43 billion. The County of Los Angeles Treasurer and Tax Collector is also responsible for holding and maintaining treasury pool investments north of $50 billion. Those numbers may be hard to fathom, however ensuring that the county maintains fiscal stability and invests public funds in accordance with public sector finance principles of safety, liquidity and yield—in that specific order—is paramount. Possessing and maintaining the right banking relationships—potentially with multiple different banking institutions—is key to successfully managing cashflow, segregation of funds, safeguarding funds and ensuring the capabilities to meet all mandated reporting requirements.

It is critical for municipal government agencies to build and maintain strong, robust relationships with their banking partners. For municipalities of larger size and scope, it may be important to maintain relationships with several banking partners, ensuring that the organization has access to several banking accounts and solutions to meet diverse financial needs of the city, county or joint powers authority. There may be instances where a primary depository bank may not offer a banking solution to meet the needs of the municipality, therefore having banking contracts and relationships with multiple different banking institutions expands the business portfolio and access to account types and services across multiple institutions, and as a byproduct, separates municipal funds across several banking institutions, which ensures the safety of the public funds—as is a charged responsibility of the government agency.

The County of Los Angeles maintains banking relationships with some of the largest banks in the United States, ensuring access to funds on a daily basis to meet the cashflow and investment needs of the county. In selecting banking partners, it is important to ensure that local government codes are carefully reviewed and discussed in detail, ensuring that the banking partner can meet the needs of the municipal agency. One of these such areas of discussion specifically is collateralization. As defined by the Government Financial Officers Association (GFOA), collateralization is described as public unit deposits which may be secured by collateral or assets of a bank or financial institution. In the event of the failure of the bank, the FDIC will honor the collateralization agreement if the agreement is valid and enforceable under applicable law. In California, under state government code, public deposits must be collateralized at 110 percent of the value of the public deposit, which ensures that safety and liquidity of the funds for the municipal agency.

Each municipal official—city or county manager, chief financial officer and/or treasury manager—should be intimately familiar with the local regulations and laws associated to collateralization of public funds. They must also ensure the banking partners, under contract, can meet the collateralization requirements of the deposit of public funds. In the event of large-scale public deposits—for example, date specific installment payments of local property tax where large cashflow is being received by the government agency—it may benefit the municipal government agency to split the deposits amongst multiple banking partners to ensure adherence to the collateralization requirements without overburdening one specific banking institution.

Fostering and maintaining these banking relationships is critical to public sector financial success. For example, the County of Los Angeles needed to call on its primary depository bank partner when it received its allocation of federal COVID-19 funds, which was a substantial amount of public funds on short notice from the federal government, to be able to deposit and collateralize the funds in accordance with state and local government codes. Short notice collateralization of more than $1 billion dollars can place stress on a financial institution, therefore having an established and healthy depository relationship, as well as open communications, was key for the county to safely deposit the funds and then allocate them for distribution to the appropriate county departments, ensuring that federal and state reporting requirements and accounting were maintained for all funds.

Maintaining open communications and well-defined banking contracts is essential to enable healthy banking relationships for municipalities to be financially sound and safeguard public funds as charged. It is imperative that city and county managers, chief financial officers and treasury managers have in-depth knowledge of local government regulations, laws and policy associated to public sector deposits in order to maximize safety of the public funds. In addition, these officials must maintain these banking relationships to ensure the ability to call on these partner banking institutions to pivot, move and safely deposit public funds so that local governments can operate effectively and efficiently without interruption. Healthy and robust public sector banking relationships are essential for municipalities to thrive and serve their constituency and community, while safeguarding public funds entrusted to their care and stewardship.

Author: BENJAMIN M. EFFINGER, MPA, is the operations chief of the Cash Management Division of the County of Los Angeles Treasurer and Tax Collector. He also serves on the communications team of the ICMA Veterans Advisory Committee and is pursuing his doctorate in public administration from the University of La Verne.

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