Can a Texas hospital authority spread its deposits across affiliated banks so all funds are FDIC-insured and skip the collateral rules?

Texas AG Opinion JM-928: Can a Hospital Authority Skip the Collateral Rules on Its Deposits?

Plain-English summary

When a Texas public body puts its money in a bank, the law does not just trust the bank to be good for it. Public deposits above the amount the federal government insures have to be backed by collateral, meaning the bank pledges securities the public entity can seize if the bank fails. That protection is a core part of the depository rules cities follow. This opinion is about whether a hospital authority can sidestep that protection with a clever banking arrangement.

The Edinburg Hospital Authority was created by the City of Edinburg under the state Hospital Authority Act. It chose a depository bank different from the one the city used. Its depository contract let the bank take the authority's money and park it, in pieces smaller than the federal insurance ceiling, in a set of affiliated banks all owned by the same holding company. Because each piece stayed under the insurance limit, every dollar was federally insured, and so, the theory went, the bank never had to post collateral for any of it. The Hidalgo County district attorney asked the Attorney General two things: do the city depository rules even apply to a hospital authority, and if they do, does this holding-company arrangement lawfully avoid the collateral requirement?

On the first question, the answer was yes, the rules apply. Section 15 of the Hospital Authority Act says the authority can either use the same depository the city uses, on the same terms, or pick its own depository by following the same procedures the law lays out for choosing city depositories. Once the Edinburg authority decided to go its own way and pick a different bank, it stepped into the municipal-depository framework in Chapter 105 of the Local Government Code, collateral rules and all. One provision in that chapter, section 105.037, is the key to the second question: a depository does not have to post security to the extent the deposits are already covered by federal deposit insurance. That is the hook the arrangement was trying to exploit.

On the second question, though, the answer was no. The Attorney General had already dealt with essentially the same maneuver a year earlier, in Opinion JM-832, which involved river authorities. There, the question was whether an authority could arrange with a bank holding company to spread deposits above the insurance ceiling among member banks so everything was insured, without making each of those banks qualify as an official depository. The answer was no, and the reasoning carried straight over to hospital authorities. The point of requiring a bank to qualify as a depository is that the qualification process, applications, selection by the governing body, and the security obligation, is how the public entity's money gets protected and how the local-preference rules are honored. Letting the chosen depository quietly hand the money off to unqualified sister banks would route around that whole process. So the hospital authority cannot contract with its depository to shuttle its funds to affiliated banks that never qualified as official depositories under the security rules of Chapter 105.

Currency note

This opinion was issued in 1988. Later statutes, court decisions, and AG 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 mentioned here.

The public-funds depository framework has been amended and recodified since 1988. The municipal depository rules once in Chapter 105 of the Local Government Code, along with the state's separate public-funds investment and collateral statutes, now govern how Texas public entities select depositories and secure their deposits, and the specific section numbers and federal insurance references cited here may read differently today. The core principle, that public deposits beyond the federally insured amount must be collateralized and that a bank must actually qualify as a depository, remains the backbone of Texas public-funds law, but anyone handling these questions now should work from the current statutes rather than the 1988 provisions discussed here.

Who this opinion affected (as of 1988)

Hospital authorities and hospital districts: The opinion confirmed that a hospital authority choosing its own depository steps into the same municipal-depository rules a city follows, including the collateral requirements.

Public treasurers and depository banks: The opinion foreclosed a popular workaround, spreading deposits among affiliated banks under one holding company to stay under the FDIC ceiling, when the receiving banks had not qualified as official depositories.

Local governments generally: The opinion reinforced that the depository-qualification process, not just the end state of everything being insured, is what the law requires, extending the reasoning of the earlier river-authority opinion (JM-832) to hospital authorities.

Common questions

Do city depository rules apply to a hospital authority?
Yes, when the authority picks a depository different from the city's. Section 15 of the Hospital Authority Act sends the authority to the same procedures used for selecting city depositories, which are in Chapter 105 of the Local Government Code.

When does a bank not have to post collateral for public deposits?
Under section 105.037, a depository does not have to provide security to the extent the deposits are covered by federal deposit insurance. Amounts above the insured ceiling still need collateral.

Can a depository spread the money among affiliated banks to keep it all insured and skip collateral?
No. The Attorney General concluded a hospital authority cannot contract with its depository to move part of its funds into sister banks owned by the same holding company that never qualified as official depositories, even if the goal is to keep every piece federally insured.

Why does that matter if all the money ends up insured anyway?
Because the law requires banks holding public money to actually qualify as depositories through the selection and security process. Routing money to unqualified banks bypasses that process and the local-preference and security protections behind it.

Background and statutory framework

The Edinburg Hospital Authority was created by the City of Edinburg under the Hospital Authority Act, article 4437e, V.T.C.S., and had selected a depository different from the city's under section 15 of that Act. Its depository contract provided that the authority's monies could be used to purchase certificates of deposit in various banks affiliated with the depository bank in increments under $100,000, so that at all times the authority's funds would carry F.D.I.C. insurance; the designated depository purchased certificates of deposit with the authority's money, in the authority's name, from its affiliates. There were two or more banks doing business in Edinburg.

Section 15 of the Hospital Authority Act answers the threshold question: "The Authority may select a depository or depositories according to the procedures provided by law for the selection of city depositories or it may award its depository contract to the same depository or depositories selected by the City or Cities and on the same terms." In other words, a hospital authority created by a city under article 4437e need not select the same depository as the city, but if it chooses a different depository it must make that selection under the procedures in Chapter 105 of the Local Government Code.

Several Chapter 105 provisions address security. Section 105.014 directs the governing body, after considering applications, to select as municipal depositories one or more banks offering the most favorable terms for handling municipal funds, permits rejection of applications and readvertising, and applies the conflict-of-interests provisions of Chapter 179, Acts of the 60th Legislature, Regular Session, 1967 (article 2529c, V.T.C.S.) to the selection. Section 105.015 provides that when a selected bank provides security in accordance with subchapter C and is approved by the governing body, the governing body qualifies the bank as a depository by order recorded in its minutes, and that if a selected bank does not provide security by the deadline prescribed by section 105.031, the selection is void and the governing body must publish notice, receive applications, and select another depository. Section 105.037 provides that a depository is not required to provide security for the deposit of municipal funds to the extent the deposits are insured under 12 U.S.C.A. sections 1811-1832.

The second question, whether a designated local depository may buy certificates of deposit from non-local, non-depository banks and thus avoid the local-preference and security requirements, was controlled by Attorney General Opinion JM-832 (1987). That opinion addressed the analogous issue for river authorities: whether, under article 4413(34c), V.T.C.S. (which relates to the investment of public funds in the custody of state agencies and political subdivisions), an authority could arrange with members of bank holding company families to take deposits above $100,000 and distribute them among other members of the holding company families so that all deposits were FDIC-insured, without requiring each depository to qualify. Because Water Code section 51.356 requires a river authority to select a depository in the same manner as a county depository, JM-832 concluded that a river authority may not arrange with a bank holding company to distribute deposits among member banks that have not qualified according to law as official depositories. The Attorney General concluded that the requirement that a hospital authority select a depository according to the procedures for selecting a city depository, set forth in section 15 of article 4437e, mandates the same result: the hospital authority may not contract with a depository to transfer part of its funds to sister banks owned by the same holding company that have not qualified according to subchapter C of Chapter 105 of the Local Government Code.

Citations

Statutory authority:

• V.T.C.S. article 4437e, section 15 (Hospital Authority Act; authority may select a depository by the procedures for city depositories or use the city's depository on the same terms)
• Local Government Code chapter 105 (Depositories for Municipal Funds), subchapter C (security)
• Local Government Code section 105.014 (selection of municipal depositories; conflict-of-interests provisions)
• Local Government Code section 105.015 (qualification of a depository by order recorded in the minutes; void selection if no security)
• Local Government Code section 105.031 (deadline to provide security)
• Local Government Code section 105.037 (no security required to the extent deposits are federally insured)
• 12 U.S.C.A. sections 1811-1832 (federal deposit insurance)
• V.T.C.S. article 4413(34c) (investment of public funds; discussed via Opinion JM-832)
• Water Code section 51.356 (river authority selects a depository as a county does; discussed via Opinion JM-832)
• Chapter 179, Acts of the 60th Legislature, Regular Session, 1967 (article 2529c, V.T.C.S.; conflict of interests)

Prior Attorney General materials referenced: JM-832 (1987).

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-928
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1988/jm0928.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor OCR errors may remain; the linked PDF is authoritative. A few section numbers the scan garbled (article 4437e section 15, Chapter 105) have been restored to match the numbers used elsewhere in the opinion.

July 1, 1988

Honorable Rene Guerra
Criminal District Attorney
Hidalgo County Courthouse
Edinburg, Texas

Opinion No. JM-928

Re: Selection of a depository by a hospital authority (RQ-1350)

Dear Mr. Guerra:

You ask:

1. If a hospital authority created by a city under the provision of TEX. REV. CIV. STAT. ANN. Art. 4437e (1976 and Supp. 1988) selects a depository different from the city under the provision of Sec. 15 of said Act, do the provisions of Chapter 105, titled Depositories for Municipal Funds, of the Texas Local Government Code apply to the hospital authority's depository?

2. If so, can said depository transfer part of such authority's funds to sister banks owned by the same holding company such that all of the funds are covered by Federal Deposit Insurance, thus avoiding, under Sec. 105.037 of the Local Government Code, having to provide security for funds not so insured, as otherwise required by subchapter C of Chapter 105 of the Local Government Code?

You furnish this office with the following background information:

The Edinburg Hospital Authority was created by the city of Edinburg under the provisions of TEX. REV. CIV. STAT. ANN. Art. 4437e (1976 and Supp. 1988). Pursuant to the provisions of Sec. 15 of said statute, Edinburg Hospital Authority has selected a depository different from that of the City of Edinburg. In the Authority's Depository contract it is provided that the monies of the Authority can be used to purchase certificates of deposit in various banks affiliated with the depository bank in less than $100,000.00 increments, thus providing that at all times under the contract the Authority's funds will be provided with F.D.I.C. insurance. The designated depository has chosen to purchase certificates of deposit with the Authority's monies in the Authority's name from its affiliates under the provisions of its depository contract. There are two or more banks doing business within the city of Edinburg.

Section 15 of the Hospital Authority Act, article 4437e, V.T.C.S., provides the answer to your question:

The Authority may select a depository or depositories according to the procedures provided by law for the selection of city depositories or it may award its depository contract to the same depository or depositories selected by the City or Cities and on the same terms. (Emphasis added.)

In other words, a hospital authority created by a city pursuant to article 4437e, V.T.C.S., need not select the same depository as the city. If, however, it chooses a different depository, it must make its selection pursuant to the procedures set out in chapter 105 of the Local Government Code.

Several provisions in chapter 105 deal with the provision of security. Section 105.014 provides:

(a) After considering the applications, the governing body of the municipality shall select as municipal depositories one or more banks that offer the most favorable terms and conditions for the handling of the municipal funds.

(b) The governing body may reject any of the applications and readvertise for applications.

(c) The conflict of interests provisions of Chapter 179, Acts of the 60th Legislature, Regular Session, 1967 (Article 2529c, Vernon's Texas Civil Statutes), apply to the selection of the depositories.

Section 105.015 provides:

(a) When a bank provides security in accordance with Subchapter C and is approved by the governing body of the municipality, the governing body shall qualify, by order recorded in its minutes, the bank as a depository for the municipality's funds.

(b) If a bank selected as a municipal depository does not provide security by the deadline prescribed by Section 105.031, the selection of the bank as a depository is void, and the governing body shall publish notice, receive applications, and select another depository in the regular manner. (Emphasis added.)

Section 105.037 provides:

A depository is not required to provide security for the deposit of municipal funds to the extent the deposits are insured under 12 U.S.C.A. Sections 1811-1832.

Your second question follows from these provisions regarding security. You restate the second question succinctly, as follows:

Assuming that the preliminary hurdle of determining whether the above-described rules apply to a hospital authority created under Article 4437e is resolved with a decision that they do apply, the unresolved issue becomes whether a designated local depository may, within the statutory rules, buy certificates of deposit from non-local, non-depository banks and thus avoid the local preference and security requirements of the codified statutes governing public fund depositories.

In Attorney General Opinion JM-832 (1987), an analogous issue was presented regarding the selection and qualification of depositories for the funds of river authorities. In Attorney General Opinion JM-832 one of the questions asked was

Under article 4413(34c), can the authority enter into arrangements with members of bank holding company families which will take deposits in excess of $100,000.00 and distribute them among other members of the holding company families, so that all of the deposits are fully insured by FDIC insurance, without requiring each of the depositories to qualify in the manner provided for in county depositories?

Article 4413(34c), V.T.C.S., relates to the investment of public funds in the custody of state agencies and political subdivisions. Section 51.356 of the Water Code provides that the river authority shall select a depository in the same manner provided for the selection of a county depository. It was concluded in Attorney General Opinion JM-832 that the river authority may not arrange with a bank holding company to distribute the authority's deposits among member banks that have not qualified according to law as official depositories of the authority.

We conclude that the requirement that a hospital authority select a depository according to the procedures provided by law for the selection of a city depository set forth in section 15 of article 4437e mandates the same result. The hospital authority may not contract with a depository to transfer part of the authority's funds to sister banks owned by the same holding company that have not qualified according to subchapter C of chapter 105 of the Local Government Code.

SUMMARY

The provisions of chapter 105 of the Local Government Code relating to depositories for municipal funds apply to a hospital authority. The hospital authority may not enter into a contract that allows the depository to transfer funds to sister banks owned by the same holding company that do not qualify according to law as official depositories for a municipality.

Very truly yours,

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Tom G. Davis
Assistant Attorney General