Opinion 2006 - 4

MUNICIPAL FUNDS -- Deposits and Investments (term of an irrevocable letter of credit issued as security by a qualifying federal home loan bank)

GENERAL MUNICIPAL LAW §§10(3), 11(2): The provisions of General Municipal Law §10(1)(h) that limit to ninety days the term of an “eligible letter of credit” issued as security for local government deposits and investments do not apply to an irrevocable letter of credit issued by a qualifying federal home loan bank.

This is in response to your inquiry regarding the use of a letter of credit issued by a federal home loan bank (hereinafter “FHLB”) as security for county deposits. Specifically, you ask whether the provisions of General Municipal Law §10(1)(h) that generally limit to ninety days the term of an “eligible letter of credit” issued as security for local government deposits and investments applies to an irrevocable letter of credit issued by an FHLB.

General Municipal Law §§10 and 11 govern the deposit and temporary investment of monies by local governments, including counties. Under General Municipal Law §§10 and 11, all deposits and investments in excess of the amount insured under provisions of the Federal Deposit Insurance Act¹ must be secured in accordance with General Municipal Law §10(3) (General Municipal Law §§ 10[3], 11[2]).

General Municipal Law §10(3) provides several alternatives for securing such excess amounts, including the acceptance of an “eligible letter of credit”, payable to the local government, as security “for the payment of one hundred forty percent, of the aggregate amount of public deposits” from the local government, and agreed upon interest (General Municipal Law § 10[3][c][i]). “Eligible letter of credit” is defined for this purpose in General Municipal Law §10(1)(h) to mean:

[A]n irrevocable letter of credit issued in favor of the local government for a term not to exceed ninety days by a bank (other than the bank with which the money is being deposited or invested) whose commercial paper and other unsecured short-term debt obligations (or, in the case of a bank which is the principal subsidiary of a holding company, whose holding company's commercial paper and other unsecured short-term debt obligations) are rated in one of the three highest rating categories (based on the credit of such bank or holding company) by at least one nationally recognized statistical rating organization or by a bank (other than the bank with which the money is being deposited or invested) that is [in compliance] with applicable federal minimum risk-based capital requirements (emphasis added).

For purposes of General Municipal Law §10, a “bank” is defined to mean a national banking association (see 12 USC §21 et seq.) or a corporation, other than a trust company, organized under or subject to the provisions of article 3 of the New York State Banking Law (General Municipal Law §10[1][d]; Banking Law §2[1]). FHLBs, which are supervised by the Federal Housing Finance Board, are separate regional corporations, owned by those savings and loan associations, cooperative banks, homestead associations, insurance companies, savings bank, and other insured depository institutions within the region that are eligible and have become members of the FHLB (12 USC §§1422a, 1424, 1426, 1432).² As such, they do not fall within the definition of “bank” for purposes of acceptance of an “eligible letter of credit” under section 10 of the General Municipal Law.

General Municipal Law § 10(3)(c) was amended in 2002, however, to specifically reference the acceptance by local governments of an “irrevocable letter of credit” issued by an FHLB to secure excess deposits (L 2002, ch 615, effective October 2, 2002). The amendment also renumbered existing paragraph (c) of subdivision 3 of section 10, as new subparagraph (c)(i).

General Municipal Law § 10(3)(c)(ii) now provides as follows:

In lieu of or in addition to the deposit of eligible securities, the officers making a deposit may, in the case of an irrevocable letter of credit issued in favor of the local government by a federal home loan bank whose commercial paper and other unsecured short-term debt obligations are rated in the highest rating category by at least one nationally recognized statistical rating organization, accept such letter of credit payable to such local government as security for the payment of one hundred percent of the aggregate amount of public deposits from such officers and the agreed upon interest, if any (emphasis added).

Thus, the 2002 amendment did not expand the definition of “eligible letter of credit” in General Municipal Law §10(1)(h) to include FHLBs. Rather, it added a separate new provision for security of municipal deposits “in the case of an irrevocable letter of credit issued … by” FHLBs.

By separating and renumbering existing paragraph (3)(c), which relates to acceptance of “eligible letters of credit” as security, and enacting a discrete subparagraph (ii) describing the criteria for a letter of credit issued by FHLBs, we believe the Legislature evinced an intent to establish FHLB letters of credit as a category of security distinct from “eligible letters of credit”. This intent is further manifested by two material differences between the criteria applicable to FHLB letters of credits and “eligible letters of credit”. First, “eligible letters of credit” must provide coverage at one hundred forty percent of the amount of deposits plus interest (General Municipal Law §10[3][c][i]), while FHLB letters of credit must provide coverage at one hundred percent (General Municipal Law §10[3][c][ii]). In addition, the unsecured short-term obligations of the issuing FHLB must be rated in the highest category by at least one nationally recognized rating organization (General Municipal Law §10[3][c][ii]). By comparison, the definition of “eligible letter of credit” requires that the unsecured short-term obligations of the issuing bank be rated in one of the three highest categories or that the bank be in compliance with applicable federal minimum risk-based capital requirements (General Municipal Law §10[1][h]). ³

Based on the foregoing, it is our opinion that the Legislature, by the 2002 amendment to General Municipal Law §10, intended to provide separate authorization for local governments to accept letters of credit issued by FHLBs, distinct from the pre-existing authority to accept “eligible letters of credit”. Accordingly, the definition of “eligible letter of credit”, including the ninety day term limitation, is not applicable in the case of a letter of credit issued by qualifying FHLBs.⁴

July 27, 2006

Joel Kleiman, Commissioner of Finance
County of Orange

¹ FDIC regulations generally provide that each official custodian of funds of any municipality depositing funds in insured banks located in the same state as the municipality shall be insured in an amount of up to $100,000 for demand accounts per bank and up to $100,000 for time deposit accounts per bank (12 USC §1821[a][2][A]; 12 CFR § 330.15[a]).

² FHLBs provide loans, in the form of advances, to member institutions, and other services, including accepting deposits, and collecting and settling checks, drafts, and other negotiable instruments (12 USC §§1430, 1431). Although the FHLBs are authorized to issue obligations to raise funds, those obligations are not deemed to be obligations of the United States of America, nor are they guaranteed by the United States of America (12 USC §§1431, 1435).

³ The literal language of the 2002 amendment, in effect, presumes the authority of local governments to use a letter of credit issued by a FHLB as security, even though, as noted, FHLBs do not fall within the definition of “bank” for purposes of acceptance of an “eligible letter of credit”. The legislative history of the amendment, however, makes it clear that the primary purpose of the amendment was to provide new, additional authority for local governments to secure their deposits with letters of credit from the FHLBs, and for them to do so at an amount representing one hundred percent, rather than one hundred forty percent, of the deposits and interest (see Bill Jacket, L 2002, ch 615; Letter to Counsel to the Governor on behalf of the Independent Bankers Association, September 30, 2002; 10-Day Bill Memorandum from the Office of the State Comptroller, August 16, 2002; Budget Report on S. 7160 of 2002; Introducer’s Memorandum in Support for S. 7160 of 2002).

⁴ We note that a letter dated after the enactment of chapter 615 from Senator Farley, who was the Senate sponsor of S. 7160, which became chapter 615 of the Laws of 2002, is consistent with the conclusion reached herein. Senator Farley stated, inter alia, that:

The third change we made [to General Municipal Law § (10)(3)(c)] was not to include in the new subparagraph [(ii)] the 90 day maximum term that currently applies to bank letters of credit…we decided that this arbitrary limit was not needed or beneficial in the case of letters of credit issued by a highly rated Federal Home Loan Bank. Therefore, to provide maximum flexibility, we chose not to set any limits on the maximum term of these particular letters of credit. (Letter from Hon. Hugh T. Farley, Senator, New York State Senate, to Alfred A. DelliBovi, President, Federal Home Loan Bank of New York, April 23, 2003).

The Court of Appeals, however, has noted that post-enactment letters and memoranda, even by the sponsor of a measure, are not reliable indicia of what the Legislature as a whole intended (see, e.g., Matter of Consolidated Edison v Department of Environmental Conservation, 71 NY2d 186, 524 NYS2d 409, footnote 4; Matter of Delmar Box, 309 NY 60, 67; see also Pena v Robles, 2006 NY Slip Op 51020U, Supreme Court, New York County, May 19, 2006; cf. Greer v Wing, 95 NY2d 676, 723 NYS2d 123). Therefore, we note Senator Farley’s letter for informational purposes only.