A Philippine legal article on whether, when, and how LGUs may place public funds in “high-yield savings” products

1) Why this topic matters

Local Government Units (LGUs) constantly balance three competing duties in cash management:

Safety of public funds (capital preservation)
Liquidity (ability to pay obligations when due)
Earning a reasonable return on temporarily idle cash (fiscal stewardship)

“High-yield savings accounts” (HYSAs)—bank deposit products marketed as paying higher interest than ordinary savings—sound attractive. But for LGUs, the question is not marketing; it is legal authority: Is the placement of LGU money in such an account authorized by law and audit rules, and under what controls?

In Philippine public finance law, an LGU cannot treat its money like private cash. Public funds are held in trust for the public and are governed by constitutional audit powers, statutory rules on custody and deposit, budgetary restrictions, and COA disallowance risk.

2) What “high-yield savings” is (legally)

There is no single statutory definition of “high-yield savings account” in Philippine law. In practice, banks use the term for deposit accounts that may feature one or more of the following:

Higher interest rates conditional on maintaining a minimum balance
Tiered interest (higher rates for higher balances)
Limits on withdrawals or requirements on transaction frequency
Bundling with cash management services
Promotional/introductory rates that later reset

Legally, an HYSA is still typically a bank deposit account (often savings, sometimes a structured deposit). For an LGU, the key legal characterization is:

Is it a regular deposit (withdrawable on demand or with minimal restrictions)?
Is it effectively a time deposit or term deposit?
Is it a structured product with embedded risk (e.g., linked to derivatives or market performance)?

For LGUs, the more it departs from a plain deposit or authorized investment, the higher the legal and audit risk.

3) The constitutional anchor: COA’s power over LGU funds

The Constitution establishes the Commission on Audit (COA) as the guardian of legality and regularity in the use and custody of government funds. COA has authority to define audit rules, examine accounts, and disallow illegal or irregular expenditures or financial arrangements.

Implication for HYSAs: Even if an LGU believes a product is “just a deposit,” COA will audit whether the placement complied with:

statutory authority,
budget and fund restrictions,
internal controls, and
COA-prescribed rules and circulars.

COA disallowance can lead to personal liability for responsible officials if the arrangement is found unauthorized or attended by negligence, bad faith, or gross inattention to duties (standards depend on circumstances and prevailing jurisprudence).

4) The statutory core: Local Government Code rules on custody, deposit, and accountability

A. Fundamental principles on local fiscal administration

Under the Local Government Code of 1991 (Republic Act No. 7160), LGUs are governed by fundamental fiscal principles—commonly summarized as:

local funds must be properly accounted for,
disbursements must be supported and authorized, and
financial transactions must observe economy, efficiency, and effectiveness, while maintaining accountability.

B. Requirement to keep and deposit LGU funds properly

The LGC framework contemplates that LGU funds are:

collected by authorized local officers (typically the local treasurer),
accounted for under the local accounting system, and
deposited in authorized depository banks and/or kept under authorized custody rules.

LGU funds are not supposed to be left “floating” or placed wherever rates are highest. Where and how funds are deposited is a controlled legal decision, typically involving:

the local treasurer (custody and cash management),
the local chief executive (overall executive authority), and
the sanggunian (policy/authorization, including designating depository arrangements in practice).

C. “Depository bank” concept

Public funds are generally required to be placed in authorized government depository banks (commonly including government banks and/or banks authorized under applicable rules). The practical question for an HYSA is:

Is the account offered by a bank that is an authorized depository for the LGU, and is the account type allowed under COA rules and LGC controls?

If not, the placement is vulnerable as an unauthorized deposit of public money.

5) Government Auditing Code (PD 1445): the “no authority, no placement” rule

The Government Auditing Code of the Philippines (Presidential Decree No. 1445) is a central statute for public funds. It reinforces the doctrine that:

government funds must be safeguarded,
officers who receive or keep funds are accountable, and
investments/placements of public funds must have legal basis and follow authorized forms and procedures.

Key practical principle: An LGU may not place money in instruments, accounts, or products that are not clearly authorized as deposits/investments for government entities, especially if they introduce additional risk or restrictions inconsistent with the nature of the fund.

6) COA rules and circular guidance: what usually makes or breaks an HYSA for an LGU

Even without citing specific circular numbers, COA guidance over the years tends to converge on these recurring requirements:

A. Funds may be placed in bank deposits under strict conditions

COA generally accepts placement of funds in:

demand deposits / current accounts for operations,
savings accounts for cash management,
time deposits for temporarily idle funds (subject to controls and approvals),
and in some contexts, authorized government securities.

But COA typically scrutinizes:

whether the account is with an authorized depository,
whether the placement was authorized by the proper local authorities,
whether the product has hidden risks or constraints,
whether there was loss of liquidity that harmed operations,
whether the LGU observed prudent cash management.

B. “High yield” features can be a red flag

COA risk increases when “high yield” is achieved by:

locking funds longer than permitted for that fund type,
imposing withdrawal penalties that function like an investment risk,
requiring cross-selling or bundled services not properly procured,
or resembling a structured deposit (returns tied to indices, FX, or other variables).

For LGUs, the safest legal posture is: an HYSA must remain a plain, low-risk deposit—not a quasi-investment product.

C. Documentation and decision trail is essential

COA commonly expects to see:

legal basis and sanggunian authority (where applicable),
designation/authority of the depository bank,
cash flow analysis showing the funds are temporarily idle (if not operational),
comparative rate canvass or justification (if policy requires),
board/committee approvals (if the LGU has a treasury/cash management committee),
terms and conditions showing the account is a deposit with acceptable liquidity,
accounting entries and reconciliations,
and proof of compliance with internal controls (dual signatories, bank reconciliations, etc.).

7) The fund matters: not all LGU money is treated the same

A frequent audit pitfall is treating all cash as one pool. Legally and audit-wise, LGU funds typically fall into categories with different constraints:

A. General Fund (GF)

Often the most flexible, but still subject to appropriation rules and cash programming.
HYSA placement is most defensible here if liquidity and depository rules are satisfied.

B. Special Education Fund (SEF)

Legally earmarked for education purposes; placement must not undermine the earmark.
COA may scrutinize whether earnings remain within the fund and whether placements align with SEF constraints.

C. Trust funds / fiduciary funds / special accounts

Held for specific purposes or beneficiaries.
Often subject to stricter handling and sometimes require separate accounts.
Using “high-yield” products that restrict access can be problematic if funds must be readily available for their intended purpose.

D. Loan proceeds, grants, donations, and project funds

Many come with conditions in loan/grant agreements.
Those conditions can be as binding as statutory restrictions for audit purposes.
Always check whether the agreement requires accounts in specific banks or prohibits interest-bearing placements outside defined options.

Bottom line: The legal permissibility of an HYSA is often fund-specific, not LGU-wide.

8) Who must authorize what: the local roles in lawful placement

A. Local Treasurer

Primary custodian and cash manager.
Responsible for ensuring funds are deposited properly, accounted for, and safeguarded.
A treasurer who places funds in an unauthorized product can be exposed to accountability and audit findings.

B. Local Chief Executive (Governor/Mayor)

Exercises general supervision and control over executive operations of the LGU.
Often a required signatory/approver in bank arrangements and in major financial decisions.

C. Sanggunian (Panlalawigan/Panlungsod/Bayan)

Holds legislative and policy authority, including approving ordinances/resolutions and authorizing arrangements that have policy implications, including (in practice) banking/depository designations and financial management policies.

D. Local Accountant / Budget Officer

Accounting classification, recognition of income, and ensuring placements don’t violate budgetary rules.
Ensures interest income is recorded to the correct fund and used consistently with legal restrictions.

Practical standard: If the placement is not routine operational banking (e.g., it changes where funds sit, adds restrictions, or changes cash management policy), it is safer when supported by a sanggunian resolution/ordinance and a written cash management policy.

9) “Deposit” vs “Investment”: the line you must not cross casually

LGUs generally can:

deposit funds in authorized depository banks, and
invest temporarily idle funds only in authorized instruments and within authorized procedures.

If an HYSA is truly a savings deposit account, it usually stays on the “deposit” side. But if the product:

has a fixed term,
penalizes withdrawals heavily,
is marketed as an investment substitute,
or ties returns to non-deposit benchmarks,

then COA may treat it as an investment/placement requiring specific authority and compliance.

Legal risk driver: An LGU cannot justify an unauthorized investment by calling it “a savings account” if its features behave like an investment product.

10) Procurement and selection issues: can you “shop” for the best HYSA?

Whether RA 9184 (Government Procurement Reform Act) applies to choosing a deposit account is not always straightforward because deposits are not classic procurement of goods/infra/consulting services. However, audit and governance expectations still demand transparency and reasonableness.

COA and good governance principles typically support:

a documented basis for choosing the depository/product,
avoidance of conflicts of interest,
ensuring fees and conditions are fair,
and showing the LGU acted prudently.

If the HYSA comes bundled with paid services (cash management systems, advisory, etc.), then procurement issues are more likely to be implicated.

11) Interest income, restrictions, and use

A. Where interest should go

As a general accounting and audit principle, interest earned by a fund should be credited to that fund, especially where the principal is restricted (e.g., SEF, trust funds). Mixing interest into the General Fund without basis can trigger audit observations.

B. Tax treatment (handle with care)

Banks often apply withholding taxes on interest depending on classification. For government entities, tax treatment can involve special rules and documentation. In practice:

Some government deposits may be treated differently than private deposits, but
banks may still require proof/documentation to apply any exemption or special handling.

Because tax and withholding treatment depends on current BIR and banking implementation, LGUs should coordinate with:

their accountant,
the depository bank’s compliance unit,
and, where needed, BIR guidance or rulings.

12) Common COA red flags and how to avoid them

Red flag 1: Depositing in a non-authorized bank or non-depository arrangement

Avoidance: Ensure the bank is an authorized depository for the LGU and the account is opened under proper authority and documentation.

Red flag 2: Treating restricted funds as free cash

Avoidance: Keep separate accounts as required; document fund source, restrictions, and permitted uses.

Red flag 3: “High yield” achieved by locking funds needed for operations

Avoidance: Maintain a cash program. Only place demonstrably idle funds in accounts with acceptable liquidity.

Red flag 4: Poor documentation of decision-making

Avoidance: Keep a paper trail: authority, term sheet, comparative analysis, and approvals.

Red flag 5: Product complexity (structured deposits)

Avoidance: If the return depends on market variables or contains embedded risks, presume it needs higher-level legal review and likely specific authority—or avoid it.

13) A defensible legal theory for using an HYSA (when it can work)

An LGU’s strongest legal position typically looks like this:

The bank is a proper depository for the LGU under applicable rules and local authorization.
The “HYSA” is a true deposit account, not a structured product.
The placement does not violate the nature of the fund (GF vs SEF vs trust).
The LGU maintains adequate liquidity for obligations; the “high yield” features do not impede disbursement schedules.
There is written authority and internal policy (e.g., sanggunian resolution and a treasury cash management policy).
Interest income is properly recorded and credited to the correct fund.
Controls are in place (segregation of duties, bank reconciliation, dual signatories, audit trail).

If any of these are missing, the arrangement becomes increasingly vulnerable to audit findings.

14) Practical compliance checklist for LGUs considering an HYSA

A. Authority & governance

Written legal basis (LGC + PD 1445 principles + COA rules)
Sanggunian resolution/ordinance authorizing the depository arrangement/product (best practice for non-routine placements)
Executive approval and treasurer accountability documentation

B. Bank & product validation

Confirm bank status as authorized depository for LGU
Obtain product terms: liquidity, minimums, tiering, penalties, fees
Confirm it is a deposit product (not structured/linked)

C. Fund restrictions

Identify which fund will be placed (GF/SEF/trust/etc.)
Ensure placement and interest treatment remain within fund restrictions
Maintain separate accounts if required

D. Cash programming

Cash flow forecast demonstrating “idle” portion
Maintain operational balances in readily accessible accounts

E. Accounting & audit readiness

Proper account titles and signatory controls
Monthly bank reconciliation
Recording of interest income and any bank charges
Complete documentation file for COA review

15) What LGUs should not do

Chase the highest rate if it requires placing funds outside authorized depository arrangements.
Use restricted funds to meet minimum balances for higher yield if it compromises fund purpose or liquidity.
Enter products whose returns depend on market movements unless clearly authorized and vetted.
Rely on verbal bank assurances; COA will look at written terms and legal authority.
Treat interest as “free money” that can be spent without appropriation and fund-consistency.

16) Suggested structure of a local policy (template outline)

If an LGU wants a strong legal posture, it often adopts a Cash and Investment Management Policy (name varies), containing:

Statement of principles (safety, liquidity, yield; primacy of legality)
Definition of allowable deposit accounts (current, savings, time deposit) and prohibited instruments
Eligible depository institutions (authorized depositories only)
Authority and approvals (roles of treasurer, LCE, sanggunian; thresholds)
Fund segregation rules (GF vs SEF vs trust)
Liquidity minimums and cash programming requirements
Documentation standards for every placement
Reporting (monthly reporting to LCE/sanggunian; audit file maintenance)
Ethics/conflict-of-interest safeguards

This kind of policy doesn’t replace legal requirements—but it reduces audit risk by showing disciplined compliance.

17) Bottom line

An LGU in the Philippines may lawfully place money in a “high-yield savings account” only if the HYSA is, in substance and documentation, an authorized bank deposit with an authorized depository, supported by proper local authority, compliant with COA audit rules, consistent with the restrictions of the specific fund, and implemented with strong internal controls and cash programming.

If “high yield” is achieved through lock-ins, penalties, complexity, bundling, or quasi-investment features, the legal risk rises sharply—because public funds must be handled under the principle: no authority, no placement; no prudence, no defensibility.

This article is general legal information for Philippine public finance governance and audit compliance and is not a substitute for advice tailored to a specific LGU, fund type, and bank product terms.