Denny Bolton asked local banks last year what it would cost to collect his school district’s $19 million in annual property taxes. The best offer didn’t come from a big regional bank. It came from a small, locally owned one. And it was free.
“We pay nothing” for the service, said Mr. Bolton, the business administrator of the 5,000-student Owen J. Roberts School District in Pottstown, Pa. “It used to cost us $50,000 a year.”
Seeking smarter ways to manage their money, many school districts are striking more creative and aggressive deals with banks. Despite the outcome in Pottstown, it’s no longer enough, administrators say, to automatically rely on the neighborhood banker.
And to keep schools as customers, banks are courting districts with new services, including a short-term line of credit that a Utah bank presented last week during a rural schools conference in Tucson, Ariz.
“The Main Street relationship is over,” said Michael F. Sullivan, who heads the school finance committee of the Association of School Business Officials in Reston, Va. Superintendents and business officers “need to deal with banking from a technical perspective rather than personal,” he said.
Today, school districts use banks and other financial institutions for payroll services, investment advice, loans, and management of checking accounts for various school activities.
Banking “is more complicated. There are more options and expanded laws,” said Lewis Wilks, the director of financial services for the Texas Association of School Boards. “The guys who don’t work it are losing” opportunities.
‘We Have a Problem’
The American banking industry has undergone a sea change in the past two decades as federal deregulation has let banks move more freely within and between states, and pay more competitive rates on deposits.
Mergers and bank failures cut the number of U.S. banking institutions, from 18,600 in 1975 to 12,200 in 1995, according to Federal Reserve System data.
The changes have generated frustrations--and opportunities--for school districts.
In Pottstown, for example, Mr. Bolton and his colleagues were able to turn to Security National Bank, which was started nine years ago by a group of local businesspeople who were dismayed by the proliferation of big banks. Security National Bank had its eye on good public relations. The Owen J. Roberts district had its eye on a deal.
Ray Melcher, Security National’s president, said there are benefits to collecting the district’s taxes, even though the schools pay nothing for the service. “To the extent that we do a good job for schools, we will get their teachers and parents interested in us,” Mr. Melcher said. “The [district] does a wonderful job of referring other people to us.”
Mr. Bolton, meanwhile, is watching the bottom line. “It’s easy to move banking services,” he said. “We want the best services at the best cost.”
Elsewhere, deregulation meant that the 5,100-student Hutchison, Kan., district left its longtime local bank last fall after the institution was bought and sold twice in two months. All was well until April, when the district’s $1.5 million payroll mistakenly went out on leftover checks from its old bank. “I called [the bank’s new owners] and said, ‘We have a problem,’” said Elaine Bentz, the district’s budget director.
The story ended happily because NationsBank of North Carolina, the new owner, let the district wire it funds and covered the checks in the meantime.
Today, many school officials wax nostalgic about the old days. They say that banking with a locally owned institution meant that business could be transacted with a phone call.
Large interstate banks need more paperwork and time to process transactions, they say, while branch managers don’t have the authority to make quick decisions.
“Before, loans could be obtained with a phone call and a signed promissory note in two hours,” said Kenneth Lynne, the business manager for the 3,600-student West Orange Cove district in southeast Texas. “More-centralized banks need more collateral.”
Paying the Bill
Banks today also charge fees for such once-free services as check writing and wire transfers.
“You get the feeling that they’re trying to nickel-and-dime you to death,” said Joseph Kostura, the chief financial officer for the Berks County Intermediate Unit in Pennsylvania, a service agency for local schools. The agency has set up a committee to shop around for a new bank. “You’d think that if you’re giving them money, they shouldn’t charge you.”
Banking-industry officials agree that times have changed. But they say that everyone, including schools, should expect to pay for what they get--especially if it means the greater convenience and expertise that can come from a large bank.
“There’s a price in terms of productivity for those accounts,” said Dean McKnight, a senior vice president for Mid-State Bank in Altoona, Pa., and a spokesman for the Washington-based American Bankers Association. “We expect schools to have to pay for their services.”
The old way of doing business also may not have been best for schools, said Bruce Hunter, a lobbyist for the American Association of School Administrators in Rosslyn, Va. “In the past, it was politically correct to put your money in the local bank,” he said. “But local politics can often outweigh the wisdom of getting a few investment points on your revenue.”
Deregulation has also given schools new freedom to invest their funds, and a more competitive environment in which to shop. Today, about half of the states let school districts pool their resources in funds that earn interest but remain accessible for check writing.
In 1982, Pennsylvania became the first state to allow such a “liquid asset fund.” Today, 480 of the state’s 501 districts maintain a total annual balance of $2 billion in the single, statewide pool.
The pool’s state-appointed board of directors selected Cadre Securities Inc., a division of Ambac Financial Services in New York City, to manage the fund. The private firm handles similar accounts in 14 other states.
Most state pools also have state aid wired directly to them, which allows the money to begin earning interest as soon as possible.
All but 100 of Minnesota’s 350 districts contribute to that state’s $1 billion liquid-asset fund. The districts not in the fund are large enough to do better alone, or have struck deals locally.
“There’s pressure on the other schools to stay with local banks,” said Dale Jensen, the executive director of the Minnesota Association of School Administrators. “But these banks are also trying to be more competitive.”
Districts have always shopped around for the best rates when issuing bonds. Mr. Jensen said that competitive bidding for regular banking services is “relatively new, but becoming more commonplace.”
And there’s still room for new services. Zions First National Bank in Salt Lake City, for example, hopes to fill a void in the market for accessible, short-term loans for small districts.
In February, Zions unveiled a line of credit that allows districts to borrow $10,000 to $10 million with little or no collateral, little paperwork, and an interest rate that is 75 percent of the prime rate. Schools are seen as such good risks that Zions is willing to offer such terms, said Robert B. Howell, the vice president and manager of public financial for the Utah bank.
School groups in 10 states have signed up, or are reviewing the plan, Mr. Howell said.