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10 Key Steps For Managing School District Investments: | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | Glossary |

9. Negotiate depository contracts that maximize returns.

The Texas Education Code, section 45.203, requires that a school district depository must be a bank located in Texas. The bank selected as a school depository and the school district must enter into a depository contract in a form approved by the State Board of Education. School districts must bid depository contracts every two years. A school district and the district’s depository bank may agree to extend a depository contract for one additional two-year term. An extension of this type is not subject to the two-year bid requirement.

For a school district, the idea is to maximize safety and yield by minimizing balances in low-interest accounts, eliminating low-interest or no-interest accounts and minimizing fees or service charges. The school district’s goal is to ensure all assets are earning at a reasonable market rate.

Banks invest money deposited in the institution and earn interest, and pay out interest to the depositors for the use of their money. The bank’s goal is to make a profit, and that profit is the difference between the interest earned and the interest paid. Because school districts are often the largest investor in town, they should have the negotiating power to achieve favorable terms. The investor’s job is to know from the financial or other sources what is a reasonable rate for its targeted maturity range.

Many districts pay for banking services by leaving money in the bank. These are called compensating balances. The bank pays little or no interest and the school district pays little or no fees. Be warned: there is no such thing as free banking.Depository contracts that require compensating balances use an earnings credit rate (ECR) to generate the money to pay banking fees. Other depository contracts are paid on a fee basis in which the direct fees are paid monthly for services received. To compare these different approaches, the district must calculate the amount of interest that is paid through the ECR versus what might be earned in another investment. The ECR rate is almost always less than comparable rates in pools or money market funds so the district could earn the higher rate, pay the fees and keep the increased earnings.

Depository contracts should also address how excess funds will be handled. The idea is to let the banking structure work for you. The amount of interest the bank pays on account balances is critical. What kinds of accounts can be used to keep balances low so that every possible dollar can be invested in higher yield instruments? An account structure that uses sweep accounts can keep assets earning at market rates daily and minimizes the amount of collateral required by the bank. For example, districts can earn interest even on dollars held overnight by investing remaining balances at the end of a day in an overnight sweep account. Sweep accounts may allow several investment options including repurchase agreements, an agreement whereby the seller agrees to repurchase the securities at an agreed upon price and time.

The FDIC insures bank accounts up to $100,000 by each tax identification number, not by account. This protects the district should the bank become insolvent. But school districts typically have a great deal more cash in the bank, so how will they protect the taxpayer's assets in excess of $100,000?

In a depository contract, the district should make certain that all time and demand balances are fully collateralized, meaning that the bank has pledged certain authorized securities as collateral for the amount of principal and current interest earned on deposit. As discussed earlier, these balances should be collateralized to 102 percent, and the collateral should be held in a separate institution outside the bank’s holding company. Administrators must monitor this function to ensure that the district’s assets are fully protected in the event of default. The Texas Education Code, section 45.208, requires that depository banks provide a bond and/or pledge approved securities in an aggregate amount sufficient to adequately protect the funds of the school district deposited with the bank. If a bank provides a bond, the board of trustees of the school district must approve the bond and the surety on the bond. A copy of the depository contract and bond must be filed with the TEA.

It is important to negotiate interest-bearing checking accounts, banking account structure, sweep accounts and other services to achieve the most favorable terms for all bank services and fees.

Additional Resources:

Below is a list of additional resources you may find helpful. Information in the documents and URLs listed below are not endorsed by this agency, but only provided as resource material. For more information on these resources, consult the bibliography.

Texas Education Code:
http://www.capitol.state.tx.us/statutes/edtoc.html

Types of Investments
(Treasury Operations, Comptroller of Public Accounts)
The various types of allowed and disallowed investments, the advantages and disadvantages of different types of allowed investments and their risks.

Choosing and Using Benchmarks
(Patterson and Associates)
Use of benchmarks in investing.

Flexible Repurchase Agreements
(First Southwest Asset Management)
Flexible repurchase agreements.

IMPORTANT NOTICE: The information in this document is presented solely as technical assistance and as a resource available to school districts. The information does not serve as a substitute for legal advice nor replace the independent judgement of a district's governing body concerning its investments. A district should consult its attorney or other appropriate counsel such as its investment adviser to resolve questions about its investment transactions.