Most Minnesota cities, counties, townships and school districts keep public funds in two places: a statewide investment pool, such as the 4M Fund, the MAGIC Fund, MSDLAF+ or MNTrust, and a public funds deposit at a Minnesota bank. The investment pool vs. bank deposit question is less about which one wins and more about which job each balance is doing. Both are permitted under Minnesota Statutes Chapter 118A, and they are built differently: what you own, how it is protected, how quickly it moves, what comes off the top, and how the rate is set. Here is how the two compare, point by point, for the finance director, clerk or treasurer who has to explain the choice to a council or board.
Most Minnesota entities use both
A pool and a bank account rarely compete for the same dollar. A common pattern is to run operating cash, payroll and money waiting on a project draw through a bank, and to hold reserves that will sit for months in a pool or a ladder of securities. The mix moves with the public calendar. Property tax settlements arrive twice a year, bond proceeds land all at once, and a street project draws down over a construction season.
It does not have to be split. Public Funds Checking can carry operating cash and the Public Funds Money Market Account the reserves, both at set rates, with money moving between them as a transfer at the same bank. Keeping both here keeps a competitive return on the whole balance and keeps the money working in Minnesota.
Either way, the comparison turns on how each balance is protected, how fast it moves and what it costs. When we sit down with a city, the side by side we start from is the one we use for public funds banking for Minnesota cities, counties and townships. Here is each line of it, with the statute behind it.
Public funds collateral vs. fund structure: what protects the balance
With a bank, the entity owns a deposit at a depository its governing body has designated. Federal deposit insurance covers the first part of the balance, up to the FDIC's limits for public accounts. Minnesota law requires collateral for the rest. Under Minnesota Statutes section 118A.03, the bank pledges collateral worth at least ten percent more than the deposit it secures, assigns it to the entity in writing, and places it in safekeeping outside the bank, at a Federal Reserve bank or another financial institution the bank does not own or control, with the entity's approval. The authority to return that collateral rests with the entity, not the bank.
With a pool, the entity owns shares in a fund alongside other participants. A share is not a deposit and is not federally insured, and no collateral is pledged to the entity, because there is no deposit to secure. The protection is the fund's structure and its portfolio, which section 118A.05 restricts to the kinds of securities a Minnesota public entity could buy on its own. That is real discipline. It is also a different kind of protection than a pledge with your entity's name on it.
On our side, coverage is a standing job rather than a quarterly check. Balances jump after a tax settlement and again when bond proceeds land, so we monitor coverage as the balance moves and adjust the pledge when it does, and on accounts we know will swing we carry more than the required amount. If a board would rather have federal insurance across the whole balance, we can place it through an insured cash sweep program, so the balance is eligible for federal deposit insurance, subject to the program's limits and terms.
Cut-off times, minimum periods and early withdrawal penalties
This is the difference public officials notice most and expect least. A pool runs on published cut-off times. Instruct a redemption before the cut-off and it settles that day; miss it and it settles the next business day. Higher yielding classes commonly carry a minimum investment period and an early withdrawal penalty, which matters when a balance parked for ninety days is suddenly needed in thirty.
Pool documents also commonly reserve the right to suspend withdrawals or postpone payment in stressed or emergency conditions. Those provisions exist for sound reasons and they are rarely used. They are worth knowing before the week you need the money rather than during it.
A deposit works differently. With a public funds account at our bank, you call your banker and we move the money, with no daily cut-off deciding whether your own bank can help you today, and our Public Funds Money Market Account carries no minimum investment period, no early withdrawal penalty and no limit on the number of withdrawals. A deposit carries no fund-style right to suspend withdrawals, and section 118A.03 treats a depository's failure to promptly deliver deposits on demand as a default.
Our Public Funds Money Market Account documents carry no withdrawal notice requirement. That is worth checking at any bank, because federal Regulation D lets a bank reserve the right to require seven days' written notice before a withdrawal from a savings deposit, including a money market deposit account, and section 118A.03 does not treat that notice as a default. I would ask any bank whether its account disclosure carries it.
Comparing where your balances sit today? See how a public funds relationship works with us, from the collateral we monitor to the Rate Review your board can attach to a packet. See municipal banking
Expense ratios and fee waivers
A pool's published yield is net of the fund's expenses. The expense ratio comes out before you see a number, and in some classes wire and check costs are absorbed into a lower net rate. Read the information statement for one more line: whether the current yield reflects a voluntary fee waiver. A waiver can be withdrawn, and when it is, the yield falls with nothing happening in the market.
A bank deposit carries no fund-level expense ratio. That does not mean a bank account carries no fees. Account and service fees are set out in the account disclosure, and a fair comparison puts them on the table next to the fund's expenses. Ask for both in writing.
How the rate is set, and how fast money moves between accounts
A pool publishes one yield, and every participant in a class earns it. Our public funds accounts work much the same way. Most of the public entities we bank hold Public Funds Checking and the Public Funds Money Market Account, and both carry set rates, so a city, county or township earns a competitive return on operating cash and on the balance waiting to be spent without negotiating for it.
The difference is how fast the money moves. Operating cash in Public Funds Checking and the balance in the money market account sit at the same bank, so moving between them is a transfer, not a redemption against a fund's cut-off. A clerk can move it in online banking, or our treasury management team, including Brooklyn Bangasser, can set up the transfers and sweeps that fit how the entity's cash comes in and goes out. ACH, wires and Positive Pay run on the same accounts.
Put both on the same basis before comparing. A fund's seven-day yield is a simple annualization of a seven-day window, multiplied by 365 over 7, with no compounding. A bank's annual percentage yield already includes compounding. Convert both to an effective annual yield, use figures from the same date, and account for any fees the published number leaves out.
Sometimes that exercise favors the pool and sometimes it favors the bank. If I were the one comparing, I would put both on paper for the same day. When we prepare a Rate Review and the entity is already doing better where it is, we tell them that, in writing.
What a Minnesota investment pool can own: the 118A.04 rating limits
Section 118A.04 lets Minnesota public funds go into general obligations of a state or local government rated A or better and revenue obligations rated AA or better. Section 118A.05 holds a Minnesota joint powers investment trust to that list, and a statewide pool operates under those limits. So what a pool can own is bounded by what carries a qualifying rating.
Plenty of Minnesota bonds carry no rating. A city financing a water system or a street reconstruction often sells one to five million dollars of bonds directly to a bank, and on a private placement there is little reason to pay for a rating. The same is true of a township's note for a fire truck or a lift station. That paper is outside what a pool is permitted to own. A community bank is not bound the same way. We buy unrated Minnesota issues by private placement, from equipment notes to multimillion dollar water and road bonds, and do the credit work ourselves, and communities like Glencoe and Winsted have come back to us for issue after issue.
That is not a criticism of the pools. It is arithmetic about what the statute lets them hold.
Where public deposits go: back into Minnesota communities
A public deposit at our bank does not sit still. It funds loans to Minnesota farms, businesses and families, and it buys the bonds and notes of Minnesota communities. We buy those issues directly from the issuer, often by private placement, and hold them on our own balance sheet rather than reselling them, so the money stays in Minnesota. The projects are ordinary infrastructure in ordinary towns: water systems, lift stations, street reconstruction, fire trucks, school buildings and a rural hospital.
That is the part of the comparison a yield does not show. A pool's portfolio is built from national markets. The audited annual reports for MAGIC and MSDLAF+ as of June 30, 2025 list about 4.8 billion dollars of investments between their main portfolios and no municipal bonds at all: certificates of deposit and repurchase agreements with large U.S. and foreign banks and dealers, and commercial paper from national corporations and funding programs. Not one issuer is a Minnesota community bank or a Minnesota town. The 4M Fund's information statement allows deposits at any FDIC-insured bank, with no requirement that the bank be in Minnesota, and when S&P Global reported on the fund in September 2024, municipal debt was two percent of it. None of it reaches the unrated bonds and notes that pay for a town's water system, streets or fire truck. A dollar on deposit with a Minnesota community bank can reach those projects, and the next one in a town like yours. See the Minnesota communities whose bonds and notes we hold, and how a community bank puts local deposits back to work.
Questions to ask any bank and any pool
Whichever way your entity leans, these are the questions I would want answered in writing before a council vote:
- How is our balance protected above federal deposit insurance, and who watches coverage when the balance moves?
- What are the cut-off times, and what happens to a transfer instructed after one?
- Does the class or account we would use carry a minimum investment period or an early withdrawal penalty?
- Can withdrawals be suspended, postponed or made subject to notice, and which document says so?
- What comes out of the yield or rate before we see it, and is any of it a temporary fee waiver?
- How does money move between operating cash and the balance earning a return: a phone call, online banking or an automatic sweep?
Those are fair questions to ask any bank, including us, and any fund.
Questions Minnesota public entities ask about pools and deposits
What investment pools do Minnesota public entities use?
The statewide pools most Minnesota public entities know are the 4M Fund, sponsored and governed by the League of Minnesota Cities for cities, special districts and other public entities; the MAGIC Fund, sponsored by the Association of Minnesota Counties and the Minnesota Association of County Auditors, Treasurers, and Financial Officers; MSDLAF+, the Minnesota School District Liquid Asset Fund Plus, created by Minnesota school districts in 1984; and MNTrust, a pooled fund for Minnesota school districts. Many entities hold a pool account and a bank deposit side by side. Keeping both at a Minnesota community bank, in a checking account and a money market account, keeps a competitive return and keeps the money working in Minnesota.
Are investment pool shares FDIC insured?
No. A share in a statewide investment pool is not a bank deposit and is not insured by the FDIC. Its protection comes from the fund's structure and portfolio, which Minnesota law restricts to the kinds of securities public entities are permitted to own. A public funds deposit at a bank is insured up to FDIC limits, and Minnesota law requires the bank to pledge collateral for the balance above insurance.
How much collateral does a Minnesota bank have to pledge on public deposits?
Under Minnesota Statutes section 118A.03, collateral at market value must be at least ten percent more than the deposit it secures, measured at the close of each banking day. Where the collateral is an irrevocable standby letter of credit from a Federal Home Loan Bank, it must at least equal the deposit. The collateral is assigned to the entity in writing and placed in safekeeping outside the pledging bank, at a Federal Reserve bank or another financial institution it does not own or control, with the entity's approval.
Can a Minnesota city use an investment pool and a bank at the same time?
Yes, and most do. The governing body designates its depositories by resolution, commonly once a year at the organizational meeting, and can invest in a pool under its investment policy. Designating a bank as a depository does not obligate the entity to move any funds.
How do you compare a pool's seven-day yield with a bank rate?
Put both on the same basis. A fund's published seven-day yield is a simple annualization of a seven-day window, multiplied by 365 over 7, with no compounding. A bank's annual percentage yield already includes compounding. Convert both to an effective annual yield, use figures from the same date, and account for any fees the published number leaves out.
Can a statewide investment pool buy our city's unrated bonds?
Not within Minnesota's investment statutes. Section 118A.04 of Minnesota Statutes limits public fund investments in state and local obligations to general obligations rated A or better and revenue obligations rated AA or better, and section 118A.05 holds a Minnesota joint powers investment trust to that list. An unrated bond or note from a Minnesota city or township falls outside it, whether it is a few hundred thousand dollars for equipment or several million for a water system or road project. A community bank can buy that issue by private placement and do its own credit work.
The next step
If your depository designation is coming onto the agenda, or a balance has sat in one place longer than anyone meant it to, the easiest time to look is before the resolution is drafted. Ask us for a Public Funds Rate Review. Send an average balance and we send back a one page document written for your board: what the balance would earn in our Public Funds Money Market Account, the annual difference in dollars, the collateral schedule your entity would receive, and the designation language your clerk would need. Rates are subject to change.
Your first call is Adam Birkholz, who was City Administrator for the City of Winsted before he joined the bank. He has written the depository resolution and answered to the auditor from your side of the table. Once accounts open, Brooklyn Bangasser on our treasury management team sets up the controls a public office runs on: Positive Pay, ACH, wires and user permissions. Reach either of them directly, stop in at any of our 21 offices, or read why Minnesota communities bank with us.
Adam BirkholzVP Commercial Loan OfficerPublic funds, depository designation, collateral and municipal bondsCall (320) 485-3831Email Adam
Brooklyn BangasserSenior Treasury Management AssociateAccount setup, Positive Pay, ACH, wires and user permissionsCall (952) 358-2542Email Brooklyn
Holding public funds in more than one place? Send us the average balance. We will put our rate beside what you earn now, on the same basis, in writing. Request a Rate Review
- Keep reading
- Municipal banking in Minnesota for public deposits, collateral and bond purchases.
- Seven questions to ask your bank, a checklist to download before a depository designation.
- Treasury management guide for Positive Pay, ACH and access controls.
- How community banks work and where local deposits go.
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Growing, together.
Statutes cited are Minnesota Statutes sections 118A.03, 118A.04 and 118A.05 and the savings deposit notice provision at 12 CFR 204.2(d), read October 2026. Pool portfolio figures are from the audited annual reports of MAGIC and MSDLAF+ as of June 30, 2025, S&P Global Ratings' report on the 4M Fund as of September 26, 2024, and the 4M Information Statement as modified October 9, 2025. Pool provisions described here are common features; a fund's own information statement governs its terms. This post is general information, not legal or investment advice; an entity's investment policy, auditor and counsel guide its decisions. Deposit rates are not quoted here and are subject to change. Deposits are insured by the FDIC up to applicable limits; investment pool shares are not bank deposits and are not FDIC insured. Page last reviewed October 2026.
