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Security for Public Deposits Act Security for Public Deposits Act Overview and Recent DevelopmentsOverview and Recent Developments

Department of the Treasury

April 21, 2010

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Presentation OutlinePresentation Outline

• Virginia Security for Public Deposits Act

• Definitions

• Program Overview

• Responsibilities of Public Officials

• Program Statistics

• Recent Developments

• Contacts

• Fraud Prevention Disbursement Accounts

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Virginia Security for Public Deposits Act

• The Virginia Security for Public Deposits Act (SPDA), Chapter 44 Title 2.2 was enacted by the 1973 General Assembly.

• The Virginia Security for Public Deposits Act Regulations were enacted by the Treasury Board of the Commonwealth of Virginia on November 18, 1993.

• SPDA creates a single body of law to secure public deposits of Virginia governmental entities.

• SPDA centralizes the procedures to secure public deposits at the state level to promote efficiencies in administration.

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DefinitionsDefinitions

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Section 2.2-4401 of the Code of Virginia

‘public deposit’ means moneys of the Commonwealth or of any county, city, town or other political subdivision thereof, including moneys of any commission, institution, committee, board or officer of the foregoing and any state, circuit, county or municipal court, which moneys are deposited in any qualified public depository in any of the following types of accounts: nonnegotiable or registered time deposits, demand deposits, savings deposits, and any other transaction accounts, and security for such deposit is required by other provisions of law, or is required due to an election of the public depositor.

Public Deposit DefinedPublic Deposit Defined

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Participants DefinedParticipants Defined• Qualified Public Depositories

"Qualified public depository" means any national banking association, federal savings and loan association or federal savings bank located in Virginia, any bank, trust company or savings institution organized under Virginia law, or any state bank or savings institution organized under the laws of another state located in Virginia, that receives or holds public deposits that are secured pursuant to this chapter.

"Located in Virginia" means having a main office or branch office in the Commonwealth where deposits are accepted, checks are paid, and money is lent.

• Treasurer and Public DepositorsThe terms “treasurer” and “public depositor” shall mean the State Treasurer, a county, city or town treasurer or director of finance or similar officer and the custodian of any other public deposits secured pursuant to this chapter.

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Public DepositorsPublic Depositors

Accounts established by Commonwealth of Virginia governmental entities

State Courts

Cities Towns

Counties Other Political subdivisions

Accounts established by component units of the above

Agencies Departments

Authorities Funds

Boards Institutions

Commissions Officers

Committees Schools (does not include activity fees)

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Participants DefinedParticipants Defined

• Treasury BoardThe Treasury Board of the Commonwealth created by

Section 2.2-2415 of the Code of Virginia consists of the State Treasurer, the State Comptroller, the State Tax

Commissioner, and four citizen members appointed by the Governor.

• Escrow AgentAn escrow agent is selected by a qualified public

depository for the purpose of holding collateral pledged to the Treasury Board under SPDA and must meet the selection criteria outlined in Section 140 of the SPDA regulations.

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Treasury Board Duties, Powers and Treasury Board Duties, Powers and ResponsibilitiesResponsibilities

Make and enforce regulations to perform its functions under the SPDA Make and enforce regulations to perform its functions under the SPDA Fix terms and conditions by which public deposits may be heldFix terms and conditions by which public deposits may be held Determine securities that are eligible to be held as collateralDetermine securities that are eligible to be held as collateral Ensure that all Ensure that all Code of VirginiaCode of Virginia and SPDA Regulations requirements and SPDA Regulations requirements

are met by each qualified depositoryare met by each qualified depository Establish escrow agent criteriaEstablish escrow agent criteria In case of default or insolvency, take action as deemed advisable in In case of default or insolvency, take action as deemed advisable in

accordance with program requirements to recover public fundsaccordance with program requirements to recover public funds Report to public depositors any non-compliance with the Report to public depositors any non-compliance with the CodeCode or or

Regulations by qualified depositoriesRegulations by qualified depositories Require additional collateral in excess of required collateral as it may Require additional collateral in excess of required collateral as it may

determine prudentdetermine prudent

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Program OverviewProgram Overview

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How Does SPDA Work?How Does SPDA Work?• Creates a single body of law to secure Virginia public deposits.

• Requires qualified public depositories to secure public deposits by pledging securities as collateral to be held in escrow for the Virginia Treasury Board.

• Provides Treasury Board a perfected security interest in pledged collateral.

• Empowers Treasury Board to make and enforce regulations to administer SPDA.

• Creates a pooled collateral method to secure public deposits among qualified public depositories:

• mutuality of responsibility among depositories• cross guarantee among depositories• 50% minimum collateral requirement

• In the event of a default, assesses each qualified public depository its proportionate share of the loss of any uncollateralized and uninsured public deposits held by the defaulting depository based on the ratio that each depository’s average public deposits bear to the average total of all public deposits for the preceding twelve months.

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Public Deposit Security AgreementPublic Deposit Security Agreement Execution required Execution required

before public before public depository can depository can accept or retain any accept or retain any public deposit.public deposit.

Tri-party agreement.Tri-party agreement. Perfected security Perfected security

interest to the interest to the collateral by the collateral by the Treasury Board. Treasury Board.

TREASURY BOARDQUALIFIED PUBLIC

DEPOSITORY

ESCROW AGENT

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ReportingReporting

TREASURY BOARD

• Summary of Depository Status Report•Monthly and Quarterly Statistics

• Monthly Qualified Depository Listing

ESCROW AGENT

•Monthly securities report•Confirmations of deposits,

substitutions and collateral withdrawals

Qualified PublicDepository

• Monthly Depository Report

• List of Public Depositors

• Quarterly Depositor Notice

Public Depositor

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SECURITY FOR PUBLIC DEPOSITSSECURITY FOR PUBLIC DEPOSITSSUMMARY OF DEPOSITORY STATUSSUMMARY OF DEPOSITORY STATUS

FOR THE MONTH ENDED NOVEMBER 2009FOR THE MONTH ENDED NOVEMBER 2009

UNDERCOLLATERALIZED STATUS:DEPOSITORIES:

None

NEW QUALIFIED DEPOSITORIES:

WashingtonFirst BankWashington, DC

MERGED QUALIFIED DEPOSITORIES:None

DEPOSITORIES WITH NAME CHANGES:

None

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Summary of Qualified Depositories Summary of Qualified Depositories As of November 2009As of November 2009

Bank Name SPDA contact location

Access National Bank Reston, VA

Alliance Bank Chantilly,VA

American National Bank and Trust Company Danville,VA

Bank of America Dallas, TX

Bank of Botetourt Buchanan, VA

Bank of Charlotte County Phenix, VA

Bank of Clarke County Berryville, VA

Bank of Essex Tappahannock, VA

Bank of Fincastle Fincastle, VA

Bank of Floyd Floyd, VA

Bank of Georgetown Washington, DC

website link: http://www.trs.virginia.gov/documents/ops/Report.pdfwebsite link: http://www.trs.virginia.gov/documents/ops/Report.pdf

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Audit CertificationAudit Certification

In accordance with section 110 of the Virginia SPDA In accordance with section 110 of the Virginia SPDA RegulationsRegulationsWith the submission of the “Public Depository With the submission of the “Public Depository Monthly Report” to the State Treasurer for the month Monthly Report” to the State Treasurer for the month ending June 30, qualified public depositories shall ending June 30, qualified public depositories shall attach an annual certification from an independent attach an annual certification from an independent certified public accountant or their internal audit certified public accountant or their internal audit department, attesting to the accuracy of the public department, attesting to the accuracy of the public deposit balances reported to the State Treasurer deposit balances reported to the State Treasurer during their previous fiscal year.during their previous fiscal year.

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Audit CertificationAudit Certification

Recommended Audit ProceduresRecommended Audit Procedures Testing of the compilation and accuracy of public deposit Testing of the compilation and accuracy of public deposit

account balances reportedaccount balances reported Calculation of average daily deposit balances reportedCalculation of average daily deposit balances reported Omission of public deposit accountsOmission of public deposit accounts Accuracy in the calculation of FDIC for public deposit Accuracy in the calculation of FDIC for public deposit

accountsaccounts

Responsibilities of Public OfficialsResponsibilities of Public Officials

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Section 58.1-3158. Duties of treasurersSection 58.1-3158. Duties of treasurers-No treasurer shall permit any public deposit to be deposited with -No treasurer shall permit any public deposit to be deposited with any depository unless it is a “qualified public depository” as defined any depository unless it is a “qualified public depository” as defined in Section 2.2-4401. All such deposits shall be secured pursuant to in Section 2.2-4401. All such deposits shall be secured pursuant to the Virginia Security for Public Deposits Act (Section 2.2-4400 et the Virginia Security for Public Deposits Act (Section 2.2-4400 et seq.)seq.)

Section 58.1-3177.B Duties of the clerk; deposit of funds; Section 58.1-3177.B Duties of the clerk; deposit of funds; investment of funds; failure to pay out.investment of funds; failure to pay out.-All moneys received by the clerk shall be deposited intact as soon -All moneys received by the clerk shall be deposited intact as soon as practical and secured in accordance with the Virginia Security for as practical and secured in accordance with the Virginia Security for Public Deposits Act (Section 2.2-4400 et seq.)Public Deposits Act (Section 2.2-4400 et seq.)

Responsibilities of Public OfficialsResponsibilities of Public Officials

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Responsibilities of Public OfficialsResponsibilities of Public Officials Section 2.2-4408. Authority to deposit public funds.Section 2.2-4408. Authority to deposit public funds.

A. All treasurers and public depositors are hereby authorized to deposit A. All treasurers and public depositors are hereby authorized to deposit funds under their control in qualified public depositories securing public funds under their control in qualified public depositories securing public deposits pursuant to this chapter.deposits pursuant to this chapter.B. Local officials handling public funds in the Commonwealth may not B. Local officials handling public funds in the Commonwealth may not require from a depository institution any pledge of collateral for their require from a depository institution any pledge of collateral for their deposits in such institution which is in excess of the requirements of this deposits in such institution which is in excess of the requirements of this chapter.chapter.

Section 2.2-4410. Liability of treasurers or public depositors.Section 2.2-4410. Liability of treasurers or public depositors.When deposits are made in accordance with this chapter no treasurer When deposits are made in accordance with this chapter no treasurer or public depositor shall be liable for any loss thereof resulting from or public depositor shall be liable for any loss thereof resulting from the failure or default of any depository in the absence of negligence, the failure or default of any depository in the absence of negligence, malfeasance, misfeasance, or nonfeasance on his part or on the part malfeasance, misfeasance, or nonfeasance on his part or on the part of his assistants or employees.of his assistants or employees.

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Responsibilities of Public OfficialsResponsibilities of Public Officials

To ensure public deposits are deposited in a “qualified public depository” To ensure public deposits are deposited in a “qualified public depository” as defined in Section 2.2-4401 of the as defined in Section 2.2-4401 of the Code of VirginiaCode of Virginia..

Ensure that locality’s funds remain with a qualified depository during Ensure that locality’s funds remain with a qualified depository during mergers, acquisitions and name changes.mergers, acquisitions and name changes.

To ensure locality’s depositories know that locality’s demand deposit To ensure locality’s depositories know that locality’s demand deposit accounts and non-negotiable certificates of deposit are considered public accounts and non-negotiable certificates of deposit are considered public deposits under the SPDA and are collateralized accordingly.deposits under the SPDA and are collateralized accordingly.

To ensure locality’s depositories comply with the SPDA by reviewing the To ensure locality’s depositories comply with the SPDA by reviewing the Summary of Depository Status Report (available at Summary of Depository Status Report (available at www.trs.virginia.govwww.trs.virginia.gov in the Operations Division).in the Operations Division).

To review quarterly public depositor report (bank statements) and notify To review quarterly public depositor report (bank statements) and notify the State Treasurer’s office of any discrepancies between the statement and the State Treasurer’s office of any discrepancies between the statement and the depositor’s records.the depositor’s records.

To notify locality’s depository of large deposits pending so the depository To notify locality’s depository of large deposits pending so the depository can have sufficient collateral pledged to cover the deposit.can have sufficient collateral pledged to cover the deposit.

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Program StatisticsProgram Statistics

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Total Public Deposits $4,980,997,063 •$3,406,834,368 (net of FDIC coverage)

Total Market Value Collateral $4,208,218,256

Total Required Collateral $2,594,631,522

Percentage of Public Deposits held by the six largest Public Depositories 64%

Total Qualified Public Depositories 121

Total banks required to pledge at 100% - 24 Total savings banks required to pledge at 110% - 1

Statistics as of September 30, 2009

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Public Deposits by Bank TypePublic Deposits by Bank TypeSeptember 30, 2009September 30, 2009

Bank Type

September 30, 2009 Total Public

Deposits % of Total

September 30, 2009 Treasurer of VA

Accounts % of Total

Virginia National Banks 197,531,263.95 5.80% 24,405,510.21 18.20%

Virginia State Chartered Bank 932,916,021.54 27.38% 28,064,281.62 20.92%

Total Virginia Banks 1,130,447,285.49 33.18% 52,469,791.83 39.12%

Out of State National Banks 862,780,272.91 25.32% 58,291,169.08 43.46%

Out of State- State Chartered Banks 1,411,990,902.10 41.45% 23,363,738.12 17.42%

Total Out of State Banks 2,274,771,175.01 66.77% 81,654,907.20 60.88%

Savings and Loans 1,615,907.58 0.05% 0 0.00%

Grand Total 3,406,834,368.08 100.00% 134,124,699.03 100.00%

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Recent DevelopmentsRecent Developments

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Need for ChangeNeed for Change(Fall 2008)(Fall 2008)

Continued weakness in banking sectorContinued weakness in banking sector Concentration of Virginia public deposits-Six Concentration of Virginia public deposits-Six

banks hold 64% of public depositsbanks hold 64% of public deposits Only 50% collateral requirements for most Only 50% collateral requirements for most

banksbanks Desire on the part of banks to opt out of Desire on the part of banks to opt out of

collateral pool, reducing their risk of loss collateral pool, reducing their risk of loss under the SPDA programunder the SPDA program

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Change in Collateral RequirementsChange in Collateral Requirements

Increased collateral that banks holding public Increased collateral that banks holding public deposits must pledge (effective February 2009)deposits must pledge (effective February 2009) public deposits (net of FDIC) under $50 million public deposits (net of FDIC) under $50 million

collateralized at 50%collateralized at 50% public deposits between $50 million and $250 public deposits between $50 million and $250

million collateralized at 75%million collateralized at 75% public deposits over $250 million collateralized at public deposits over $250 million collateralized at

100%100%

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2009 Legislative Action2009 Legislative Action

Enactment of HB1761 by 2009 General AssemblyEnactment of HB1761 by 2009 General Assembly

Allows banks that fully collateralize their public deposits to Allows banks that fully collateralize their public deposits to “opt out” of the collateral pool and be responsible for only “opt out” of the collateral pool and be responsible for only securing their public deposits; no partial liability for the loss securing their public deposits; no partial liability for the loss of Virginia public deposits held by another bank that defaultsof Virginia public deposits held by another bank that defaults

Implementation effective January 1, 2010, Treasury Board Implementation effective January 1, 2010, Treasury Board established guidelines to allow banks to opt out of the pooled established guidelines to allow banks to opt out of the pooled arrangementarrangement

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Collateralization of Public Deposits Effective Collateralization of Public Deposits Effective January 2010January 2010

Two choices:Two choices: Pooled MethodPooled Method Dedicated MethodDedicated Method

Annual Election PeriodAnnual Election Period November 1 thru December 1 for next calendar yearNovember 1 thru December 1 for next calendar year

Savings banks can only use dedicated methodSavings banks can only use dedicated method

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Pooled MethodPooled Method

Liable for proportionate share of losses of uninsured and Liable for proportionate share of losses of uninsured and uncollateralized public deposits held by SPDA bank in uncollateralized public deposits held by SPDA bank in defaultdefault

Collateralization requirements same as those adopted by Collateralization requirements same as those adopted by Treasury Board in February 2009Treasury Board in February 2009

100% collateralization of public deposits if ranked “below 100% collateralization of public deposits if ranked “below average” by IDC bank rating serviceaverage” by IDC bank rating service

Monthly reporting of public deposit balancesMonthly reporting of public deposit balances Monthly reporting and pricing of collateralMonthly reporting and pricing of collateral No change in types of eligible securities that can be No change in types of eligible securities that can be

pledged as collateralpledged as collateral

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Pooled Method Collateral CalculationPooled Method Collateral Calculation

Public Deposits (net of FDIC)Public Deposits (net of FDIC) $500,000,000$500,000,000

Collateral RequirementCollateral Requirement

Tier 1Tier 1

(50% of $50 million)(50% of $50 million)$ 25,000,000$ 25,000,000

Tier 2Tier 2

(75% of $ 200 million)(75% of $ 200 million)$150,000,000$150,000,000

Tier 3Tier 3

(100% of excess balances)(100% of excess balances)$250,000,000$250,000,000

Total Total $425,000,000$425,000,000

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Dedicated MethodDedicated Method

No contingent liability for losses of public deposits when No contingent liability for losses of public deposits when another qualified public depository fails.another qualified public depository fails.

Collateral requirements based on financial strength of each Collateral requirements based on financial strength of each banking institutionbanking institution

Financial strength based on ratings assigned by IDC bank Financial strength based on ratings assigned by IDC bank rating servicerating service

Weekly and monthly reporting of public deposit balancesWeekly and monthly reporting of public deposit balances Weekly and monthly reporting and pricing of securities held Weekly and monthly reporting and pricing of securities held

as collateralas collateral Mortgage-backed securities and non-Virginia municipal Mortgage-backed securities and non-Virginia municipal

securities valued at 80% of market valuesecurities valued at 80% of market value Virginia municipal securities valued at 90% of market valueVirginia municipal securities valued at 90% of market value

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Dedicated Method Collateral RequirementsDedicated Method Collateral Requirements

Banks rated superior – 105%Banks rated superior – 105%

Banks rated excellent – 110%Banks rated excellent – 110%

Banks rated below average – 120%Banks rated below average – 120%

Banks rated lowest rating tier – 130%Banks rated lowest rating tier – 130%

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Dedicated Method Collateral CalculationDedicated Method Collateral Calculation

Public Deposits (net of FDIC)Public Deposits (net of FDIC) $500,000,000$500,000,000

Collateral RequirementCollateral Requirement

Bank rated “Average” @ 110%Bank rated “Average” @ 110% $550,000,000$550,000,000

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Composition of Pooled and Opt-out BanksComposition of Pooled and Opt-out Banks

0%10%20%30%40%50%60%70%80%90%

100%

# of banks $ deposited

Pooled Banks

opt out banks

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20102010 Legislative Action Legislative Action

Legislation was introduced to amend Security Legislation was introduced to amend Security for Public Deposits Act for recent changesfor Public Deposits Act for recent changes

Codifies the pooled and dedicated methodsCodifies the pooled and dedicated methods Redefines “public deposit”Redefines “public deposit” Simplifies payment of losses Sections 2.2-Simplifies payment of losses Sections 2.2-

4403 and 2.2-44044403 and 2.2-4404 SB456 and HB1036SB456 and HB1036

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Public Deposits Defined-Effective July 2010Public Deposits Defined-Effective July 2010

““Public deposit” means moneys held by a Public deposit” means moneys held by a public depositor who is charged with the duty public depositor who is charged with the duty to receive or administer such moneys and is to receive or administer such moneys and is acting in an official capacity, such moneys acting in an official capacity, such moneys being deposited in any of the following types being deposited in any of the following types of accounts: non-negotiable time deposits, of accounts: non-negotiable time deposits, demand deposits, savings deposits, or any demand deposits, savings deposits, or any other transaction accounts.other transaction accounts.

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ContactsContacts

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SPDA Treasury ContactsSPDA Treasury Contacts(As of January 2010)(As of January 2010)

Thelma IngleManager, Agency Accounting (804) 371-6009Thelma.Ingle@trs.virginia.gov

Kristin ReiterDirector, Operations Division (804) 225-3240Kristin.Reiter@trs.virginia.gov

E-mail: SPDAMail@trs.virginia.gov

SPDA information on Treasury’s website:www.trs.virginia.gov/Operations/operations.aspx

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Department of the TreasuryDepartment of the Treasury

Fraud Prevention Disbursement AccountsFraud Prevention Disbursement Accounts

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Payee Match Positive PayPayee Match Positive Pay

Definition

The Payee Match Positive Pay service provides the Commonwealth of Virginia (COV) with a high level of protection against unauthorized disbursements and fraudulent checks. Checks presented for payment, including those presented for encashment in the branches, are matched by check number, dollar amount and payee name against COV’s check issue file. COV is then notified of any checks that do not match this criteria and instructs the bank to pay or return the item.

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Payee Match Positive PayPayee Match Positive Pay

MAJOR FEATURES

COV issues and mails checks on behalf of each agency. 24 hours prior to the issuance, COV sends an electronic data

transmission file containing the check information to the bank. The bank updates the check issue information to the teller

system several times per day, which assists in making sure the most recent check data is available to the tellers for verification.

The bank matches the paid (posted) checks against the issued checks and notifies the COV of unmatched items via an Internet-based bank information reporting service.

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Payee Match Positive PayPayee Match Positive Pay

How It Works

COV’s check-issue information is electronically transmitted to the bank at least 24 hours prior to the issuing of checks.

Any manual check issues or cancellations are entered via the bank’s Internet-based information reporting service up until the end of each business day.

As checks are presented for payment, the bank matches the check number, amount and payee against the issue file to identify unauthorized items.

Notification of any checks that do not match COV’s issue information is provided through the bank’s Internet-based information reporting service, whereupon COV indicates its decision to accept or return each check online. Images of the checks in question are provided.

The pay/no pay decision must be made by 2 p.m. ET. If a pay or return decision is not made by the daily cut-off time, exceptions are

either paid or returned based on COV’s pre-determined default decision.

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Payee Match Positive PayPayee Match Positive Pay

Benefits

COV is protected against unauthorized check disbursements.

Reduces research time and expense as only authorized checks are paid.

Reduces potential legal expenses for COV. Helps control/reduce audit costs associated with

fraudulent checks.