Massive federal funding to locals could put burden on banks

By: - June 15, 2021 5:00 am
(Photo: Getty Images)

(Photo: Getty Images)

Local governments are slated to receive $2.28 billion in federal funds through the American Recovery Plan, but banks could be running into a problem handling the amount of money slated to go straight to counties and cities.

Finance and Administration Commissioner Butch Eley, Lt. Gov. Randy McNally, House Speaker Cameron Sexton, Comptroller Jason Mumpower and other top state officials met Thursday to discuss the situation. The group took the matter under advisement.

Butch Eley, Commissioner, Tennessee Finance and Administration (Official photo)
Butch Eley, Commissioner, Tennessee Finance and Administration (Official photo)

Late last week, Eley was trying to gather more information and declined to answer questions about the problem. A spokeswoman for the Department of Finance and Administration said the matter requires more study.

Amy Heaslet, executive vice president and general counsel for the Tennessee Bankers Association, confirmed Monday the association has been working on the American Recovery Plan for two months, talking to counties and encouraging bankers to reach out to local governments to get a better idea of how much they stand to receive and how they will use it.

Banks have been flooded with work since the COVID-19 pandemic started, first handling Paycheck Protection Program loans, then seeing an influx of money through stimulus funds from the federal government. 

A cash shortage was an initial problem, but banks have plenty of cash on hand right now, largely because of those deposits. People are sitting on the money they got from the government instead of spending it, and still more federal money is set to come in.

The American Recovery Plan funds could exacerbate the problem because the money has to be backed or secured by another instrument from the banks, and that could be problematic, especially for smaller banks.

The U.S. Treasury is sending $516 million to Tennessee’s metro cities, $1.326 billion to counties and $438 million to non-metro cities. Those smaller cities won’t be able to receive more than 75% of their budget.

Even so, counties and cities will be receiving large amounts of money directly from the federal government and will be needing to place the funds in a bank, potentially putting a good deal of pressure on those banks to secure backing for the money.

“It’s just a matter of trying to make sure there’s appropriate collateral on hand at the bank to start with,” Heaslet said.

The amount injected into local governments is so large that Comptroller Mumpower has been traveling the state counseling leaders on how to handle the money, because the state won’t have control over spending. Part of his advice: “Don’t let it burn a hole in your pocket.”

His latest task, though, is to help come up with the best way to safeguard it.

The oddity is that banks, because of their cash flow, have more money than they can handle. The Legislature extended the time frame for collateralizing public deposits this session in an effort to help banks deal with the extra flow of federal money, but they may need another boost.

When is money a problem for banks? When small, community banks don’t have enough collateral to secure a massive cash infusion.  

To be sure, local governments are not in danger of losing the federal funds, according to the Comptroller’s Office. But because of the expected impact on banks, Mumpower suggested local money be held in the state’s Local Government Investment Pool and allow cities and counties to draw it down as needed, according to spokesman John Dunn.

Heaslet expects some banks to take advantage of the comptroller’s plans, but she says plenty of others are “willing and capable” of taking the money when it hits the system.

“I’m confident, though, there won’t be a situation where the government stands entitled to get some money and they won’t have a bank to turn to. There’s always options of where they could go,” Heaslet said.

Craig Fitzhugh, a former House Democratic Caucus leader from Ripley and president of the Bank of Ripley, said the infusion directly into banks, mainly smaller ones, could cause problems because public deposits have to be secured.

“That puts banks, especially community banks, in sort of a bind,” Fitzhugh said.

The next question is whether banks that can handle large amounts of money even want to take on those sorts of deposits because they might not be able to make any money on the interest if they hold them for only short periods of time. Unless a bank already has a relationship with a local government entity, it might forego the business, he added.

Tennessee has a Bank Collateral Pool, authorized by the General Assembly in 1990, which enables banks and local governments across the state to take part in a pool providing greater efficiency and less risk when offering collateral for public funds. But some banks might not qualify to participate in that fund, Fitzhugh said.


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Sam Stockard
Sam Stockard

Sam Stockard is a veteran Tennessee reporter and editor, having written for the Daily News Journal in Murfreesboro, where he served as lead editor when the paper won an award for being the state's best Sunday newspaper two years in a row. He has led the Capitol Hill bureau for The Daily Memphian. His awards include Best Single Editorial from the Tennessee Press Association.