Original Author: Bingham, Pamela
Date of Material: 11/17/1997
Finance--Investments and cash management
Laws and regulations--State
Reviewed Date: 07/01/2021
MTAS was asked why a city is not permitted to deposit city funds in credit unions.
Re: Depositories for City Funds
This in response to your question of last week as to why your city is not permitted to deposit city funds in credit unions. There are a number of state statutes addressing this issue, and they should be read in conjunction with one another and harmonized, whenever possible. I am attaching copies of some of these statutes for your reference and convenience.
The general provision governing the investment of municipal funds is found in T.C.A. Section 6-56-106. This statute lists authorized depositories and investments of city funds. Included in the list are state and federally chartered banks, savings and loan associations, certain bonds, notes and other type of debt securities, as well as designated money market funds. Note that credit unions are not designated in this list.
In addition, T.C.A. section 6-56-110, denominated "Deposits, security," states as follows:
Notwithstanding any other public or private act to the contrary, any municipal funds deposited with a financial institution shall be secured by collateral in the same manner and under the same conditions as state deposits under title 9, chapter 4, part 5.
Title 9, Chapter 4, part 5 is known as the "Collateral Pool for Public Deposits." T.C.A. Section 9-4-602 lists permissible investments for the state. Once again credit unions are not on this list. Further, within this same chapter, part 8 addresses the local government investment pool - an entity that enables local governments to participate together in providing maximum investment of idle funds - again, in these code sections credit unions are not listed as qualified public depositories.
Title 45, Chapter, 4 of the Tennessee Code Annotated pertains to credit unions in Tennessee. A review of these statutes serves to illustrate the ways in which a credit union differs from a federally or state-chartered bank or saving and loan association. Some of the distinguishing characteristics are that 1) membership is often limited to certain groups; 2) there is often a greater diversity of investments, some of which may not be acceptable investments for public funds, [for example in other credit unions]; and 3) the members/customers of the credit union establish some degree of control over the management of the credit union.
Finally, T.C.A. Section 6-22-120, relative to depositories of city funds under the general law city manager-commission form of government (applicable to your city), specifically states that "the board [of commissioners] shall require such security for city deposits as it deems necessary; provided, that such security shall not be less than that required for state deposits pursuant to title 9, chapter 4, part 1." (Emphasis added). Thus, in summary, the requirements relative to the deposit and investment of municipal funds is very similar to those relative to state funds. And, under the current statutes, a credit union is not a permissible depository for either.
Very truly yours,
Pamela M.M. Bingham