Can a Texas local government invest public funds in a money market or demand account?

Plain-English summary

A Bell County official wanted to know whether a local government, when it parks public money, may put that money in a money market deposit account or another demand account at a bank insured by the FDIC. Local governments in Texas invest idle public funds under the Public Funds Investment Act, chapter 2256 of the Government Code, which lists the kinds of investments a public body is allowed to make.

The Attorney General said yes, a local government may use a money market deposit account. The Act permits investing in "other obligations" whose principal and interest are guaranteed or insured by, or backed by the full faith and credit of, the United States, and the Attorney General found nothing in statute or case law that would keep a demand account from qualifying as one of those "other obligations."

The important qualifier is the dollar ceiling. Federal deposit insurance only covers a deposit up to a set maximum, which at the time of the opinion was $250,000. Once the money in the account goes above that insured amount, a different statute takes over: the Public Funds Collateral Act, chapter 2257. Under that act, the bank holding the public funds has to fully secure the uninsured portion by pledging collateral, and at the public entity's request that collateral is placed with a custodian who holds the securities in trust. So the bottom line was: yes, a local government can invest in money market deposit accounts, but the bank has to back the part that federal insurance does not cover.

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later Attorney General opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

What the opinion meant for those who asked

Local governments and their investment officers (as the opinion held for them): The opinion concluded that chapter 2256, the Public Funds Investment Act, permitted investing public funds in money market deposit accounts, because a demand account could be deemed one of the "other obligations" authorized under section 2256.009(a)(4).

Depository banks holding the funds (what the opinion described): The opinion explained that when a deposit exceeded the federally insured maximum, chapter 2257, the Public Funds Collateral Act, governed it, and the depository had to fully secure those funds with collateral, which at the public entity's request was deposited with a custodian who held the securities in trust.

On the word "investment" (what the opinion noted): A footnote observed that the question seemed to reflect a misunderstanding of what an "investment" is. A demand deposit is money the depositor can withdraw at any time, and the statutes governing county funds treat "deposit" and "investment" as distinct terms.

Common questions

Could a Texas local government put public money in a money market account?
The opinion concluded it could. Chapter 2256 lets a local government invest in "other obligations" insured or backed by the full faith and credit of the United States, and the Attorney General found nothing preventing a money market demand account from qualifying.

What happened if the deposit was larger than the federal insurance limit?
The opinion explained that the portion above the insured maximum fell under chapter 2257, the Public Funds Collateral Act, which required the bank to fully secure those funds with pledged collateral.

What was the insured maximum the opinion referred to?
The opinion stated that demand deposits were insured only to the maximum extent of federal law, which was then $250,000, citing a 2010 federal law (Pub. L. No. 111-203).

Is a money market "demand account" the same thing as an investment?
A footnote in the opinion pointed out that a demand deposit can be withdrawn on demand at any time, and that the statutes authorizing deposits of county funds distinguish "deposit" from "investment."

Background and statutory framework

Chapter 2256 of the Government Code, the Public Funds Investment Act, applies to various governmental bodies, including "a local government." Tex. Gov't Code Ann. § 2256.003(a)(1) (West 2008). A local government may purchase, sell, and invest its funds in investments authorized under the subchapter, in compliance with approved investment policies and the standard of care prescribed by section 2256.006. Id. § 2256.003(a). Section 2256.009 lists permissible investments, and other provisions describe additional authorized investments such as certificates of deposit, repurchase agreements, commercial paper, and mutual funds.

The question turned on section 2256.009(a)(4), which authorizes investment in "other obligations" whose principal and interest are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the state or the United States or their agencies and instrumentalities. The Attorney General found nothing in statute or case law indicating that a demand account could not be deemed such an "other obligation," and noted that the authority granted by the subchapter "is in addition to that granted by other law." Tex. Gov't Code Ann. § 2256.024(a) (West 2008). Construing the statute, and mindful that the consequences of a construction matter, see id. § 311.023(5) (West 2005), the Attorney General observed that the "other obligations" must be insured by the full faith and credit of the United States, while demand deposits are insured only to the maximum extent of federal law, then $250,000. Act of July 21, 2010, Pub. L. No. 111-203, § 335(a)(1), 124 Stat. 1376, 1540 (2010).

Because of that ceiling, the opinion pointed to chapter 2257, the Public Funds Collateral Act. Tex. Gov't Code Ann. § 2257.001 (West 2008). A "deposit of public funds" under chapter 2257 is public funds held as a demand or time deposit by an authorized depository institution. Id. § 2257.002. Demand accounts held for a local governmental body must be fully secured by collateral provided by the depository institution. Id. § 2257.021. At the request of a public entity other than a state agency, the depository must deposit with a custodian a security pledged to secure the deposit, id. § 2257.041(b) (West Supp. 2010), and the custodian holds the securities in trust. Id. § 2257.041(e). A footnote added that a "demand deposit" is defined as funds that may be withdrawn on the demand of the depositor, Tex. Loc. Gov't Code Ann. § 116.001(2) (West 2008), and that statutes governing county funds distinguish "deposit" from "investment," id. § 116.112(a) (West 2008).

Citations

Statutes:

• Tex. Gov't Code Ann. § 2256.003(a)(1) (West 2008)
• Tex. Gov't Code Ann. § 2256.003(a)
• Tex. Gov't Code Ann. § 2256.006
• Tex. Gov't Code Ann. § 2256.009(a)(4) (West 2008)
• Tex. Gov't Code Ann. § 2256.024(a) (West 2008)
• Tex. Gov't Code Ann. § 311.023(5) (West 2005)
• Tex. Gov't Code Ann. § 2257.001 (West 2008)
• Tex. Gov't Code Ann. § 2257.002
• Tex. Gov't Code Ann. § 2257.021
• Tex. Gov't Code Ann. § 2257.041(b) (West Supp. 2010)
• Tex. Gov't Code Ann. § 2257.041(e)
• Tex. Loc. Gov't Code Ann. § 116.001(2) (West 2008)
• Tex. Loc. Gov't Code Ann. § 116.112(a) (West 2008)

Federal authority:

• Act of July 21, 2010, Pub. L. No. 111-203, § 335(a)(1), 124 Stat. 1376, 1540 (2010)
• 12 U.S.C. § 1821(a)(1)(E)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0834
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2011/ga0834.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS
GREG ABBOTT

January 12, 2011

The Honorable Richard J. Miller Opinion No. GA-0834
Bell County Attorney
Post Office Box 1127 Re: Whether a local governmental body subject to
Belton, Texas 76513 the Public Funds Investment Act, chapter 2256,
Government Code, may invest in money market
and other demand accounts (RQ-0895-GA)

Dear Mr. Miller:

You ask whether a local governmental body subject to Government Code chapter 2256, the Public Funds Investment Act, may "invest" in money market deposit accounts or other demand accounts that are insured by the Federal Deposit Insurance Corporation.[1]

Chapter 2256 applies to various kinds of governmental bodies, among which is "a local government." TEX. GOV'T CODE ANN. § 2256.003(a)(1) (West 2008). A local government is specifically permitted to "purchase, sell, and invest its funds and funds under its control in investments authorized under this subchapter in compliance with investment policies approved by the governing body and according to the standard of care prescribed by Section 2256.006." Id. § 2256.003(a). Section 2256.009 lists various kinds of permissible investments, and other provisions of chapter 2256 describe other kinds of authorized investments, such as certificates of deposit, repurchase agreements, commercial paper, and mutual funds. See, e.g., id. §§ 2256.009, .010, .011, .013, .014. You suggest that "investments" in demand accounts may be permitted by a provision of section 2256.009 that lists, as one kind of authorized investment under chapter 2256,

other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, this state or the United States or their respective agencies and instrumentalities.

Id. § 2256.009(a)(4); Request Letter at 1-4.

We have found nothing in statutory or case law that would indicate that a demand account cannot be properly deemed an "other obligation" under section 2256.009 of the Government Code. Chapter 2256 specifically provides that "[t]he authority granted by this subchapter is in addition to that granted by other law." TEX. GOV'T CODE ANN. § 2256.024(a) (West 2008). In construing a statute, however, we are mindful that we must consider "the consequences of a particular construction." Id. § 311.023(5) (West 2005). The "other obligations" authorized as an investment by section 2256.009 must be insured by, inter alia, the "full faith and credit of ... the United States." Id. § 2256.009(a)(4) (West 2008). Demand deposits, of the kind of which you inquire, are insured only to the maximum extent of federal law, which is at present $250,000. See Act of July 21, 2010, Pub. L. No. 111-203, § 335(a)(1), 124 Stat. 1376, 1540 (2010) (to be codified at 12 U.S.C. § 1821(a)(1)(E)).[2]

You should also be aware that the kind of deposit of which you inquire is governed by chapter 2257, Government Code, the Public Funds Collateral Act. See TEX. GOV'T CODE ANN. § 2257.001 (West 2008) ("This chapter may be cited as the Public Funds Collateral Act."). "Deposit of public funds" under chapter 2257 "means public funds of a public entity that: (A) the comptroller does not manage under Chapter 404; and (B) are held as a demand or time deposit by a depository institution expressly authorized by law to accept a public entity's demand or time deposit." Id. § 2257.002. Demand accounts held for a local governmental body must be fully secured under chapter 2257 by collateral provided by the depository institution. Id. § 2257.021. At the request of a public entity other than a state agency, a depository for that entity is required to "deposit with a custodian a security pledged to secure a deposit of public funds." Id. § 2257.041(b) (West Supp. 2010). "A custodian holds in trust the securities to secure the deposit of public funds of the public entity in the depository pledging the securities." Id. § 2257.041(e).

Thus, while a local governmental body may "invest" its funds in money market deposit accounts under chapter 2256, Government Code, those funds are governed, when they exceed the maximum amount insured under federal law, by chapter 2257, Government Code.

SUMMARY

While a local governmental body may "invest" its funds in money market deposit accounts under chapter 2256, Government Code, the Public Funds Investment Act, those funds are governed, when they exceed the maximum amount insured under federal law, by chapter 2257, Government Code, the Public Funds Collateral Act.

DANIEL T. HODGE
First Assistant Attorney General

DAVID J. SCHENCK
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Rick Gilpin
Assistant Attorney General, Opinion Committee

[1] Request Letter at 1 (available at http://www.texasattorneygeneral.gov).

[2] Your question appears to reflect a misunderstanding of the nature of an "investment." A "demand deposit," for purposes of the deposit of county funds, is defined as "a deposit of funds that may be withdrawn on the demand of the depositor." TEX. LOC. GOV'T CODE ANN. § 116.001(2) (West 2008). See also BLACK'S LAW DICTIONARY 504 (9th ed. 2009) (defining "demand deposit" as "a bank deposit that the depositor may withdraw at any time without prior notice to the bank"). The statutes authorizing deposits of county funds distinguish between the terms "deposit" and "investment." For example, a commissioners court "may direct the county treasurer to withdraw any county funds deposited in a county depository that are not immediately required to pay obligations of the county and invest those funds as provided by this section." TEX. LOC. GOV'T CODE ANN. § 116.112(a) (West 2008).