Government Operations and Community Development

Limitations on Municipal Deposit Options

The Mandate: Under current state law, originally enacted in 1909, the only banking institutions that are permitted to accept deposits from local governments are commercial banks and trust companies. In fact, New York is one of only a handful of states that does not allow other banking institutions, such as credit unions, to accept municipal deposits. Consequently, the cash management needs of local governments in New York State, which are estimated to be $6 to $8 billion, all must be handled by commercial banks, effectively giving them a monopoly over the deposit of public funds.

The Cost: Limiting the number of depository options precludes municipalities from taking advantage of the best available interest rates, thereby decreasing their ability to earn greater returns on their investments without increasing their investment risk. According to data collected for the NYS Credit Union League, credit union deposits could save municipal property taxpayers $18 million to $24 million annually. The more local governments can increase money on interest earnings, the more they can decrease their reliance on property taxpayers. Not only can credit unions, at times, offer a better rate of return, they are 100% locally-owned, not-for-profit institutions, which means the money they take in remains within the local community. In addition, municipalities in rural and economically diverse areas will likely be better served by credit unions and other financial institutions, since commercial banks are not always in a location that is convenient to the municipality that is depositing funds. This issue has been exacerbated by the bank mergers that have taken place recently, not only adding to the inconvenience but also leaving municipalities with fewer and fewer local depository options.

The Solution: Enact legislation that would allow savings banks, savings and loan associations and credit unions to accept deposits from municipalities.  During these difficult economic times, municipal officials need to have as much flexibility as possible to assist them in their efforts to balance their tight budgets while keeping property taxes down. Expanding depository options for municipalities will not only help them in this effort, but will help local economies as well.