The District government has been unable to meet its goal of placing one-third of its deposits in minority banks and has incensed other local bankers by saying the city's banking institutions are too small to handle some of its other investments.
That assessment was made last month in a report by the District of Columbia auditor on the effectiveness of the 1977 D.C. Depository Act, which requires the government to place all demand deposits in local banks and give preferences to local institutions in short-and long-term investments on the basis of their hiring and lending practices.
The law is intended to "benefit District citizens who traditionally have not had access to conventional credit and to stimulate the economy of the District."
Under the city's recent home rule charter, the city's money was transferred from the U.S. Treasury to private financial institutions.
But according to the report, more than 40 percent of the District government's short-term investments through repurchase agreements were given to banks in New York because "many of the transactions are outside the ability of the local financial community."
Through repurchase agreements the District invests surplus money for one to 89 days. The District earns interest while the banks gain use of the money to add to reserves or investments.
Several bankers said yesterday that their banks are able to handle the government's repurchase agreements, or "repos" as the bankers call them. The District takes its business to New York banks because it can get a better interest rate on the investment despite the intent of the act to help the city's banks, the bankers said.
The report said that nearly 60 percent of the repurchase transactions and 50 per cent of the dollar volume of the transactions involved local institutions.
It adds that District bankers "were involved in 68 percent of the 83 transactions under $5 million but were unable to accommodate the District on any of the four transactions over $40 million."
"This bank has bought repos from the government on numerous occasions," said Melvin Chrisman, senior vice president and cashier at Riggs National Bank, the city's largest. "I don't know when our banks ever refused to take a repo for reasons of size."
After checking bank records, Chrisman said Riggs has handled more than $135 million in repurchase agrteements in one day and handles about $100 million "in an average day. We could have handled another $35 million today," Chrisman said.
District Auditor Matthew S. Watson said on some days when the District has surplus funds to invest it offers the money to New York banks because of higher interest rates given there. Although the law provides that the city give a preference to local institutions, "it doesn't mean preference at any cost," Watson said.
During last year the District earned $8.8 million on an average daily balance of $134 million for an average interest rate of 7.07 percent, the reprot said. The first short-term investments were made Oct. 28, 1977, so funds were invested only during 11 months of 1978, the report said. The average interest rate the District received was higher than the average U.S. Treasury bill rate of 6.58 percent for 1978, the report said.
The act also provides that one-third of the city's funds should be set aside for the two highest ranking institutions based on hiring and lending practices. Those two institutions are the black-owned Industrial Bank of Washington and United National Bank.
But the managed to deposit only 5.4 percent of its funds in the two banks. "On a technical basis, the District did not meet the set-aside requirement," the report said.
"The city determined what types of accounts the smaller banks could efficiently handle for us," Watson said.
But Samuel Foggie, president of United National, vehemently denied in a telephone interview that his bank was too small to handle the Districths business.
"That's not true. That is not true," Foggie said. "We have a good track record of handling large accounts. We handled thousands of items a day. I disagree with (the auditor's assessment) wholeheartedly."
"Local banks can handle the District government's business and I think they should," Foggie said.
Watson recommended in the report that the city not base its set aside goal on the amount of deposits, but on the fees that the minority banks receive for performing services for the District. Watson said because the minority banks handled a large number of small transactions they earned 24 percent of fees paid out to banks.
Watson said the city was cautious during the first year of the program because many people felt that the transfer of the District's account from the U.S. Treasury to local banks "would be done in the fashion that the city usually does things -- all screwed up."