Background:

The Public Deposit Protection Commission (Commission) ensures that public funds deposited in financial institutions are protected. The Commission is made up of the State Treasurer, Lieutenant Governor, and the Governor, and it is administered through the Office of the State Treasurer. It determines which institutions may hold state and local government deposits and monitors collateral pledged to secure uninsured deposits.

The Commission has the authority to: enforce regulations; require any public depositary to furnish information regarding the status of public deposits; take necessary actions regarding the protection, collection, compromise or settlement of claims arising from loss; set the requirements for initial and continued qualification of financial institutions as public depositaries; make and enforce rules regarding the standards governing matters within its power; require additional or different types and amounts of collateral or to restrict a public depositary's right to receive or hold public deposits if financial standards are not met; and make and enforce sanctions against a public depositary for noncompliance with statutes or rules or policies of the Commission.Generally, the deposit of public funds in a public depositary outside of the state is prohibited, but there are several statutory exceptions. These include:

funds deposited under a fiscal agency contract with the state fiscal agent;
funds deposited under a custodial bank contract with the state's custodial bank;
funds deposited under a local government multi-state joint self-insurance program; and
funds in a demand deposit account maintained by a treasurer outside Washington solely for the purpose of transmitting money for deposit in public depositories in Washington. Funds in a demand deposit account may be withdrawn at any time without advance notice to the depositary institution. The account must be authorized by the Commission or the commission chair, if delegated that authority by the Commission. There must be good cause for the account, and the account may be limited in time, terms, and conditions as the Commission or the chair deem appropriate.

In 2005 an additional exemption for out-of-state deposits was allowed. A demand deposit account may be maintained by a treasurer for the deposit of higher education endowment grants for specified study or research programs being performed outside Washington. The use of such out-of-state accounts must be authorized by the Commission or the chair, if delegated that authority by the Commission. There must be good cause for the account, and the account may be limited in time, terms, and conditions as the Commission or the chair deems appropriate.

Demand Accounts in Out-of-State Banks.

The Commission, or the chair upon delegation by the Commission, may authorize state and local governmental entities to establish demand accounts in out-of-state and alien banks in an aggregate amount up to $1 million. No single governmental entity is authorized to hold more than $50,000 in one demand account. The governmental entities establishing such accounts are solely responsible for their proper management and must bear total responsibility for any losses incurred by those accounts. As part of the exemption allowed for higher education endowment grants in 2005, this limitation does not apply to endowment grants for specified study or research programs being performed outside Washington.

Summary of Bill:

An additional exception to the prohibition of depositing public funds in out-of-state institutions is permitted. Public funds may be deposited in out-of-state institutions if the following conditions are met:

The funds are initially deposited in a Washington public depositary selected by the state or local government.
The selected state public depositary has arranged for the funds to be deposited in one or more federally insured institutions for the account of the state or local government where the full amount of the principal, and any accrued interest of each deposit, is insured by an agency of the federal government.
The selected depositary acts as a custodian for funds deposited by the state or local government.
On the same date that the state or local government funds are deposited, the selected public depositary receives deposits from customers of other financial institutions in an amount equal to or greater than the amount of funds initially deposited by the state or local government.

Public funds deposited pursuant to the exemption created in this act are not subject to the limitations regarding deposits in demand accounts in out-of-state institutions.

Staff Summary of Public Testimony:

(In support) This bill authorizes reciprocal deposits and community banks to compete with larger financial institutions and allows the funds deposited in community banks to stay in the community. It would maximize the opportunities for investment in local communities. Nearly 100 percent of the banks participating in reciprocal deposits are community banks. After the financial crisis, a lot of work was done to make sure that banks had one 100-percent collateral. Now that the crisis is over, the reciprocal deposit system under this bill will allow community banks to maximize deposits and keep the money fully protected.

(Opposed) None.