Can a Texas city choose a credit union as the depository for its public funds?

Texas AG Opinion JM-604: City Depository Credit Union

Plain-English summary

A district attorney asked whether a general-law city could designate a credit union as the depository for its municipal funds. The tension came from two statutes: article 2461-4.01, which gives credit unions the power to act as a depository and accept the funds of cities and other public entities, and articles 2559 and following, which govern how a city picks its depository.

JM-604 concluded a city may not. The depository statutes let a city receive applications and select a depository from among a "banking corporation, association or individual banker." Following a line of prior opinions holding that savings and loan associations were not covered by that phrase, and one extending the same reasoning to credit unions, the opinion held a credit union is not a "banking corporation, association or individual banker" for purposes of article 2559. The credit union statute authorizes credit unions to receive deposits from political subdivisions, but it does not authorize political subdivisions to place their deposits in credit unions. The opinion also noted that credit unions, while performing two core banking functions (taking deposits and lending), are not "banks" as defined in the Texas Banking Code or as commonly understood. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0604.pdf

Currency note

This opinion was issued in 1986 and construes the old city-depository statutes (articles 2559 and following) and the credit union act (article 2461-4.01), which have since been amended and recodified into the Local Government Code and Finance Code. Public-funds depository rules have changed since. Treat this page as historical context, not current legal advice, and verify current law before relying on it.

Common questions

Can a general-law city put its public funds in a credit union?

No. The opinion's summary is direct: "Article 2559, V.T.C.S., does not authorize a city to designate a credit union as a depository for city funds." Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0604.pdf

But doesn't the law let credit unions accept public deposits?

It lets them receive such deposits, not the other way around. The opinion explained that article 2461-4.01 "authorizes credit unions to receive deposits from political subdivisions; it does not authorize political subdivisions to make such deposits in credit unions." Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0604.pdf

Why isn't a credit union a "bank" for this purpose?

Because it is a different kind of institution. The opinion quoted earlier authority that credit unions "are not 'banks' as that term is defined in the Texas Banking Code of 1943 . . . or as that term is commonly used or understood," and that their operations differ substantially from those of a commercial bank. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0604.pdf

Background and statutory framework

Article 2559 authorized the governing body of every city, town, and village to receive applications for the custody of city funds "from any banking corporation, association or individual banker" wishing to be a depository, and article 2560 directed the body to select the applicant offering the most favorable terms. Article 2461-4.01(a)(8) gave credit unions the power to act as agent or depository for governmental entities and accept their funds.

The opinion resolved the overlap by reading the depository phrase narrowly. It relied on Attorney General Opinion MW-534 (1982), which held that neither a credit union nor a savings and loan could serve as a hospital district depository, and on a chain of earlier opinions (including MW-272, H-1013, H-723, and M-22) treating savings and loan associations, and then credit unions, as outside the "banking corporation, association or individual banker" language of the county and city depository statutes. It distinguished JM-42 (1983), where PTA funds could go into a credit union because no statute governed their disposition. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0604.pdf

Citations and references

Statutes:

• Article 2559, V.T.C.S. (city depository applications)
• Article 2560, V.T.C.S. (selection of depository)
• Article 2461-4.01, V.T.C.S. (powers of credit unions)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-0604
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0604.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor OCR errors may remain; the linked PDF is authoritative.

THE ATTORNEY GENERAL OF TEXAS

December 30, 1986

Honorable F. A. Cerda
District Attorney
P. O. Box 340
Hebbronville, Texas 78361

Opinion No. JM-604

Re: Whether a political subdivision may designate a credit union as a depository of public funds

Dear Mr. Cerda:

You ask whether a general law city may designate a credit union as a depository for municipal funds. We conclude that it may not.

Your question arises because of a conflict between article 2461-4.01(a)(8), V.T.C.S., setting forth the powers of a credit union and articles 2559 et seq., V.T.C.S., governing a city's selection of a depository. Article 2559, V.T.C.S., provides the following in pertinent part:

The governing body of every city, town and village in the State of Texas, incorporated under either the General or Special Laws, including those operating under special charter or amendments of charter adopted pursuant to the 'Home Rule' provisions of the Constitution, is authorized to receive applications for the custody of city funds from any banking corporation, association or individual banker that may desire to be selected as a depository of the city, town or village. (Emphasis added).

Article 2560, V.T.C.S., sets forth the following in pertinent part:

Upon considering the applications submitted, the governing body shall select as the depository or depositories of such funds the banking corporations, association or individual banker or bankers offering the most favorable terms and conditions for the handling of such funds. (Emphasis added).

Article 2461-4.01, V.T.C.S., sets forth the general powers of a credit union. Subsection (a) specifically provides that

[a] credit union may exercise all powers necessary or appropriate to accomplish the purposes for which it is organized and all powers granted corporations authorized to do business in this state. These powers include, but are not limited to, the power to:

. . . .

(8) act as agent or depository of the United States, any agent or instrumentality of the United States, this or any other state, or any city, town, village, county, school district, municipal corporation, political subdivision, or taxing authority of this or any other state, accept for deposit the funds of such an entity or both. . . . (Emphasis added).

V.T.C.S. art. 2461-4.01(a)(8). It is clear that a credit union is authorized to act as a depository of a city's public funds. At issue is whether a city may choose a credit union as a depository and specifically whether a credit union is a "banking corporation, association or individual banker" for purposes of article 2559 et seq., V.T.C.S. On the basis of prior authority, we conclude that it is not. Article 2461-4.01, V.T.C.S., authorizes credit unions to receive deposits from political subdivisions; it does not authorize political subdivisions to make such deposits in credit unions. See Attorney General Opinion H-723 (1975).

In Attorney General Opinion MW-534 (1982), this office concluded that neither a credit union nor a savings and loan could serve as a depository for a hospital district. Citing prior opinions of this office which hold that savings and loan associations were not embraced by the phrase "banking corporation, association or individual banker" for purposes of articles 2544 through 2558a, V.T.C.S., governing a county's selection of a depository (made applicable to hospital districts by article 4494n, section 10, V.T.C.S.), the opinion extended the same rationale to credit unions as well. See Attorney General Opinions MW-272 (1980) (reaches credit unions as well as savings and loan associations); H-1013 (1977) (soil and water conservation district not authorized to deposit funds in savings and loan associations); H-723 (1975) (same with regard to political subdivisions); M-22 (1967) (concluding that "banking corporations, associations or individual banker" does not include savings and loan associations for purposes of the depository statutes). Cf. Attorney General Opinion JM-42 (1983) (PTA funds may be deposited in credit union where statutes do not govern disposition of funds). The opinion relied in part upon the policy considerations set forth in an earlier opinion of this office, Attorney General Opinion WW-838-A (1961), which held inapplicable to credit unions an article of the banking code which prohibits "branch banking." In that earlier opinion this office declared:

[Although] credit unions exercise two of the most important functions of banking, the receiving of deposits and the lending of money, it must be recognized that credit unions or associations are not 'banks' as that term is defined in the Texas Banking Code of 1943 . . . [citation omitted] or as that term is commonly used or understood. Furthermore, the operations of a credit union in receiving deposits or lending money are substantially different from the corresponding operations of a commercial bank, and in fact, the functions and underlying concept of a credit union are basically different from those of a commercial bank.

The opinion then detailed other basic functions of banking that distinguish both banks from credit unions and banks from savings and loan associations. Cf. Attorney General Opinion WW-1498 (1962), withdrawn and replaced by Attorney General Opinion WW-1498-A (1963) (also indexed as Attorney General Opinion C-87 (1963)). Accordingly, we conclude that a city may not designate a credit union as a depository.

SUMMARY

Article 2559, V.T.C.S., does not authorize a city to designate a credit union as a depository for city funds.

JIM MATTOX
Attorney General of Texas

JACK HIGHTOWER
First Assistant Attorney General

MARY KELLER
Executive Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Jim Moellinger
Assistant Attorney General