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Credit unions have long played an integral role in their communities, offering accessible financial services and reinvesting funds locally to support economic growth. As not-for-profit cooperatives, credit unions prioritize people over profits, aligning their mission with the well-being of the neighborhoods they serve. However, in Tennessee, public entities such as the state and local governments are restricted from depositing funds into credit unions due to a provision in the state constitution.

This restriction stems from the Tennessee Constitution, specifically Article II, Section 29 (as it relates to cities, counties, and towns) and Section 31 (as it relates to the State) – which forbids these public entities from depositing funds in financial institutions where they have ownership. While the provision may have been well-intentioned when written, its unintended consequence is that credit unions, which are owned by their members, are excluded from accepting public deposits.

Fred Robinson, president and CEO of the Tennessee Credit Union League, underscores the demand for change: “We hear from credit unions every day that local municipalities, school districts, and other government entities reach out, wanting to deposit funds into their credit unions. While some are seeking a return on their deposits, most simply want to support a local financial institution.”

This issue recently surfaced in Manchester, where the city’s finance committee announced they plan to cut ties with their current financial institution, a large, out-of-state bank that had merged with a previously local institution. While local banks are being considered as replacements, credit unions are notably absent from the conversation due to these state constitutional restrictions. This situation highlights why reform is needed to ensure all local financial institutions — banks and credit unions alike — can support public entities.

“In most cases, I believe municipalities and other government entities simply want a local financial institution — whether a bank or a credit union — as their financial institution of choice,” Robinson further explained. “Most are not interested in dealing with a large, out-of-state institution that has no local ties to the community.”

How Credit Unions Align with Public Interests

Credit unions are uniquely positioned to support public entities since their mission is the well-being of their members and the communities they serve. This member-focused approach is particularly valuable for financially underserved areas, where access to affordable financial services may be limited.

By enabling municipalities and government entities to deposit funds into credit unions, public dollars can be used to directly benefit the community through initiatives such as small business loans, financial literacy programs, and affordable products and services.

The Case for Legislative Change

Advocating for public deposits is about creating opportunities for collaboration between municipalities and credit unions. Currently, Tennessee’s laws limit government entities to deposit funds only with financial institutions that hold FDIC insurance. Even though credit unions are federally insured through the National Credit Union Administration (NCUA), which offers the same level of protection as the FDIC, they are excluded from this designation due to technicalities in the law.

Another point of opposition raised is the tax-exempt status of credit unions. However, this tax exemption arises from their cooperative structure and should not be a point for excluding credit unions from servicing public deposits. Allowing credit unions to accept these funds would allow them to reinvest back into the communities and in turn, make the funds available in the form of credit to members to buy homes, automobiles, and secure capital for small businesses.

Modernizing Tennessee’s public deposit laws would align the state with others that have embraced this change. For example, Florida recently passed legislation to allow credit unions to accept public deposits, resulting in increased local investment and stronger community ties. This approach empowers municipalities to choose the financial institution that best serves their needs, whether it’s a bank or a credit union.

A Path Forward for Tennessee

For Ascend, our commitment to community development runs deep, with roots in Tullahoma that span more than 70 years. Today, we proudly serve over 240,000 members across Middle Tennessee. By working alongside the Tennessee Credit Union League, we are advocating for a more inclusive financial system that allows credit unions to play a greater role in supporting state and local governments. Not only does this open the doors for more accessible financial services for all, but it keeps hard-earned taxpayer dollars working locally.

Matt Jernigan is president and CEO of Ascend Federal Credit Union.