VII.	Reserve Hold Fundings

All projects, with the exception of states and tribal entities, must establish a “Reserve Fund” at a Qualified Financial Institution into which they deposit the federal grant and non-federal share in equal amounts. Projects may invest Reserve Fund holdings in a manner that provides an appropriate balance between return, liquidity, and risk. A grantee’s investment strategy could include a variety of responsible and appropriate investments, including certificates of deposit, treasury notes, etc.

The Reserve Fund:

• Assures compliance with the 1:1 non-federal share requirement. This is accomplished through a strict “funds transfer protocol” which begins when the project deposits any portion (up to 100%) of its committed non-federal share into the Reserve Fund. The project may then request draw down of an equal amount of federal grant funds from OCS. Upon verifying the non-federal deposit into the Reserve Fund, PMS electronically transfers an equal amount of the federal grant into the Fund.
• Protects the project account holders. Projects are required to ensure that the Reserve Fund always contains sufficient matching funds to provide the maximum potential match for all accounts open at any given time. This requirement guards against the dangerous possibility of an agency allowing a participant to open an IDA – and promising to match the account holder's savings – without having those matching funds set aside or even committed.
• Provides the grantees with a valuable leveraging and negotiating tool. Grantees can use the Reserve Fund feature to attract financial institution participation. Financial institutions benefit from their ability to invest the Reserve Fund holdings. Project Reserve Funds tend to create high and relatively stable balances over a multi-year period, since the funds must contain at all times the total potential match for all open accounts, plus sufficient project administration and operating funds. From a business perspective, most financial institutions view the cost of holding many “low-balance, high-maintenance” IDAs as balances by the holding and investing of the “high-balance, low-maintenance” Reserve Fund. Accordingly, OCS found that some projects used “leverage” of the opportunity to hold the Reserve Fund to negotiate financial institution partnerships on favorable terms.

Projects must make minimum quarterly matching deposits from the Reserve Fund, either into the IDAs directly or into a parallel account maintained by the grantee. Projects choose the rate at which they match participant deposits, with the statutory caveat that the match rate must be at least $1 (50 cents federal plus 50 cents non-federal) for every $1 in participant deposits, and cannot exceed $8 ($4 federal plus $4 non-federal) for every $1 in participant deposits. In addition to matching the participant savings at the agreed-upon rate, the grantee must provide the participant with any interest that has accrued on those matching funds. In this way, Congress ensured that the project account holders could benefit from the investment of the matching funds reserved for them.

Projects reported a total of 59 financial institutions holding Reserve Funds[20]. The diversity of this group is worth noting. They included numerous regional and local banks; several of the largest national banks; and a handful of local or statewide Federal Credit Unions. The Program fosters participation by a broad array of financial institutions, regardless of structure or size. Grantees may develop partnerships with any insured financial institution that can meet the basic program requirements – allowing the smallest credit unions to compete with the largest banks, and allowing projects to be selective and wield more negotiating power when choosing their partners.

By the end of the first project year, the 1999 grantees had drawn down approximately 30 percent (approximately $2.8 million) of the total $9.4 million in Federal grant funds awarded. An additional $2.8 million in match funds had been deposited, bringing the total sum of money in the Reserve Funds to $5.6 million. Another $1.2 million was reported as having been deposited into the Reserve Funds. Some of these additional funds represent unmatched non-federal funds; some represent operating funds provided by foundations and other funding entities (see Appendix D.1 and D.2 for details on agency reserve fund holdings).

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Notes

20. The 37 “Central” Reserve Funds (one per grantee) were held by 37 financial institutions. The remaining 22 financial institutions were holding “Secondary” Reserve Funds that had been established by 37 of the grantees. [Return to Text]