Could a small Maryland town invest its surplus municipal funds in a money market account?

Plain-English summary

The Mayor of the Town of Glen Echo, on behalf of the town's treasurer, asked the Attorney General whether Maryland law allowed the town to invest its municipal funds in certain money market accounts. The opinion concluded that Article 95, §22 of the Maryland Code strictly limited how a political subdivision could invest or deposit public funds: in bonds or obligations backed by the federal government, in deposits at banks, savings and loan associations, or building and loan associations that either posted escrowed bonds or gave other statutorily specified collateral equal to the deposit, or in the state's local government investment pool. Reviewing the statute's history back to 1943, the opinion found that every expansion of permitted investment vehicles over the decades had been paired with a continuing requirement that public funds be adequately secured, and concluded that a money market account failing to meet these collateral or federal-backing requirements was simply not a permitted investment, regardless of its potential return. As an alternative for a small municipality like Glen Echo, the opinion pointed to the local government investment pool administered by the State Treasurer under Article 95, §22F.

Currency note

This opinion was issued in 1983. Subsequent statutory amendments, court decisions, or later 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, deadline, or remedy mentioned here.

An editor's note appended to the opinion reports that Article 95, §22 was amended the following year by Chapter 482, Laws of Maryland 1984, to add another permitted investment vehicle, certain collateralized repurchase agreements. Maryland's local government investment statute has likely been recodified and further amended since 1983 and 1984; verify the current version of Article 95 (or its successor provisions) before relying on any specific list of permitted investments described here.

Common questions

Could a Maryland town in 1983 put its surplus cash into any money market account it wanted?
No, according to this opinion. It concluded that Article 95, §22 of the Maryland Code confined political subdivisions to specific investment vehicles: certain federally backed bonds or obligations, deposits at banks or savings and loan associations that provided adequate collateral or bond escrow, or the state's local government investment pool, so a money market account outside those categories was not a permitted investment.

Why did Maryland require towns to get collateral before depositing public money in a bank?
The opinion traced the statute's history back to 1943 and found that every time the General Assembly expanded the list of permitted investment vehicles, from federal bonds only, to interest-bearing bank deposits, to savings and loan deposits, it paired the expansion with a continuing requirement that the funds be secured by escrowed bonds or other approved collateral, showing a consistent legislative concern for protecting the public treasury.

What alternative did the opinion suggest for a small town looking for a better return than a basic bank deposit?
The opinion pointed to the local government investment pool created under Article 95, §22F, administered by the State Treasurer for local governments' funds, noting it appeared to be of particular benefit to small municipalities like Glen Echo, while cautioning that giving investment advice itself was outside the Attorney General's role.

Background and statutory framework

The opinion's analysis centered on Article 95, §22 of the Maryland Code, which authorized the "chief fiscal or administrative officer or officers or governing body of each municipality, town, body politic, [or] public body corporate" to invest unexpended or surplus funds either in federal government bonds or obligations, or to deposit those funds in banks, savings and loan associations, or building and loan associations in interest-bearing accounts, or in the local government investment pool. That authorization was conditioned, however, on the depository bank or association either depositing "a like amount of bonds in escrow" or providing collateral of the types listed in a companion statute, Article 95, §21A, which included FDIC, FSLIC, and Maryland Savings-Share Insurance Corporation coverage and obligations guaranteed by the federal government.

Tracing the statute's amendment history, the opinion found that the original 1943 version, Chapter 78, Laws of Maryland 1943, permitted investment only in federally guaranteed bonds; a 1954 amendment, Chapter 74, Laws of Maryland 1954, added bank deposits conditioned on escrowed bond collateral; a 1974 amendment, Chapter 731, Laws of Maryland 1974, broadened permissible collateral to the types listed in the newly created §21A, which itself required that collateral's market value equal the full deposit at all times; and a 1975 amendment, Chapter 634, Laws of Maryland 1975, extended the same collateralized-deposit option to savings and loan associations. The opinion read this pattern, each expansion of investment options paired with a continuing security requirement, as showing that a political subdivision seeking to maximize returns nonetheless had to confine its investments to vehicles that were sufficiently collateralized or federally insured under §22's terms. It noted a parallel, self-explanatory statute governing municipal sinking funds in Article 31, §§6 and 7.

Citations

Statutes:

• Article 95, §22 (governing statute; permitted investments and deposits of public funds)
• Article 95, §21A (permitted collateral for public fund deposits)
• Article 95, §22F (local government investment pool administered by the State Treasurer)
• Article 31, §§6 and 7 (analogous provisions governing investment of municipal sinking funds)
• Chapter 78, Laws of Maryland 1943 (original enactment; federal bonds only)
• Chapter 74, Laws of Maryland 1954 (added collateralized bank deposits)
• Chapter 731, Laws of Maryland 1974 (broadened permitted collateral types; created §21A market-value requirement)
• Chapter 634, Laws of Maryland 1975 (extended collateralized-deposit option to savings and loan associations)
• Chapter 482, Laws of Maryland 1984 (editor's note; added repurchase agreements as a permitted investment)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1983/Volume68_1983.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

Local Government—Budgetary Administration—Investment of Public Funds—Limitations—Local Government May Invest Public Funds Only As Permitted by State Law.

April 13, 1983

The Honorable Fred Kuster
Mayor
Town of Glen Echo

On behalf of the Treasurer of Glen Echo, you have inquired about the legality of investing municipal funds in certain money market accounts.

As explained more fully below, Maryland law enables officers of a political subdivision to make certain investments and deposits of public funds. However, such investments may be made only in: (1) certain governmental obligations; (2) certain statutorily designated depositories, if they provide collateral sufficient to cover the amount of the deposit; and (3) the collective investment pool created under Article 95, §22F. Investments may not be made in money market accounts that fail to meet these criteria.

I
Governing Statute

The investment of public funds is governed by Article 95, §22 of the Maryland Code. This section provides, in pertinent part: "Notwithstanding any provision ... or . . . limitation contained in any other law or ordinance, . . . the chief fiscal or administrative officer or officers or governing body of each municipality, town, body politic, public body corporate, . . . are hereby severally directed, authorized and empowered to invest . . . all unexpended or surplus moneys in any fund or account of which they have custody or control either in bonds or other obligations for the payment of principal and interest of which the faith and credit of the United States of America are pledged, or in obligations of federal governmental agencies issued pursuant to acts of Congress; or to deposit said moneys in any bank or banks in the State of Maryland or in any savings and loan association or savings and loan associations or in any building and loan association or building and loan associations in interest-bearing time deposit and/or savings accounts, or in the local government investment pool created in this article ...."

This authorization, however, is not unqualified. Section 22 further stipulates that: "Such deposits in banks or in savings and loan associations or building and loan associations shall only be made if the bank or savings and loan associations or building and loan association has deposited a like amount of bonds in escrow, as now prescribed by law, covering bank deposits, savings and loan deposits, building and loan deposits, or if the bank, savings and loan association or building and loan association has given as security for these deposits any of the types of collateral set forth in §21A of this article. . . ."1

It is clear from the express language of §22 that public officials may invest only as designated by statute. For investment purposes, the officers are "directed, authorized and empowered" to place surplus or unexpended funds in certain institutions and in certain bonds or other obligations. Moreover, even these investments "shall only be made if": (i) the institution in question either deposits a "like amount of bonds in escrow" or gives an adequate amount of collateral as security;

1 Article 95, §21A lists several types of permitted collateral, including Federal Deposit Insurance Corporation insurance, Federal Savings and Loan Insurance Corporation insurance, Maryland Savings-Share Insurance Corporation insurance, and obligations issued or guaranteed by the United States government.

and (ii) the investment bond or other obligation is federally insured.2

II
History of Statute

A brief review of the legislative development of §22 may assist in understanding this emphasis on compliance with the statutory provisions.

Initially, the chief fiscal or administrative officers of political subdivisions were authorized to invest funds only in bonds or obligations guaranteed by the faith and credit of the federal government. Chapter 78, Laws of Maryland 1943. In subsequent years, deposits into interest-bearing time accounts in State banks were authorized, provided that the bank "deposited a like amount of bonds in escrow, as now prescribed by law, covering bank deposits". Chapter 74, Laws of Maryland 1954. Clearly, protection of the public fisc was a paramount concern.

In 1974, an amendment to §22 enabled banks to give as security for State or municipal deposits "any of the types of collateral set forth in Section 21A". Chapter 731, Laws of Maryland 1974. In §21A, the types of collateral described are all insured or guaranteed by the credit of federal, State, or local governmental authorities or by specially-created insurance pools.3

2 Analogous, self-explanatory provisions governing the investment of sinking funds appear in Article 31, §§6 and 7 of the Maryland Code. Sinking funds are sums accumulated for the payment of bond obligations or other municipal debts.
3 Section 21A was itself amended in 1974 to expressly require the market value of collateral given as security for deposited public funds to equal, at all times, the total amount of the deposit. Chapter 731, Laws of Maryland 1974. Consequently, a deposit cannot exceed the amount for which it is collateralized or insured.

Finally, in 1975, savings and loan associations were authorized to become depositories, as long as such associations similarly protected State or municipal investments, either by depositing bonds in escrow sufficient to cover the amount of deposit or by giving the types of collateral specified in §21A as security for the public money. Chapter 634, Laws of Maryland 1975.

In sum, each expansion of permissible investment vehicles under Article 95, §22 was accompanied by a continuing statutory requirement that public funds be adequately secured. We therefore conclude that a political subdivision, in seeking to realize maximum returns, must nevertheless confine itself to the investment of public funds within the guidelines of §22, that is, through depositories or obligations that, by statute, are sufficiently collateralized or insured.

III
Local Government Investment Pool

You have also requested our advice as to "acceptable, attractive alternatives", in the event that investment in money market accounts is not appropriate.

Rendering investment advice is, of course, outside the scope of our expertise. Nevertheless, we are happy to point out an alternative in the law that appears to be of particular benefit to small municipalities like Glen Echo.

Under Article 95, §22, officers of a political subdivision may invest in "the local government investment pool created in this article". This clause refers to Article 95, §22F, which establishes an investment pool, under the administration of the State Treasurer, for all funds from local governments that are placed in the custody of the State for investment and reinvestment.

Further information about the features and mechanics of this alternative investment program may be obtained from the Office of the State Treasurer.

IV
Conclusion

In summary, it is our opinion that local officials may invest public funds only as designated by statute. Under Article 95, §22 of the Maryland Code, such investments are limited to: (1) certain governmental obligations; (2) certain statutorily designated depositories, if they provide collateral sufficient to cover the amount of the deposit; and (3) of perhaps particular benefit to smaller jurisdictions, the local government collective investment pool created by Article 95, §22F.

Stephen H. Sachs, Attorney General
Avery Aisenstark, Chief Counsel
Opinions and Advice
Lynette M. Phillips, Staff Attorney
Opinions and Advice

Editor's Note: Article 95, §22 has since been amended by Chapter 482, Laws of Maryland 1984, to authorize an additional investment vehicle: "repurchase agreement[s] ... secured by any bond or other obligation of the type in which the [State] Treasurer may reinvest under [Article 95,] §22F(a)(1)".

The preceding Opinion was originally written as a letter of advice. Because of the importance of this issue to local governments, it is published here in a slightly revised format.