(February 2023)
Public officeholders have a public trust to perform their official duties. In order to guarantee that performance, they are required to furnish a bond before they qualify for office and must face the impersonal scrutiny of surety companies to do so.
Public officials are legally responsible for faithfully performing the duties of their offices. These duties include receiving, collecting, and properly handling funds and property that comes into their possession. They must also properly distribute funds, including funds from the sale of special bond issues to construct public projects. Public officials are responsible for their actions and acts or omissions of their deputies and subordinates. Public officials are required to keep proper accounts subject to certain requirements and turn over all property (including funds other than those legally disbursed during their term to their successors) and all securities, books, papers, and records that apply to their offices when they leave office.
Surety
bonds protect the public, not the public official. Public officials are still
responsible for the financial impact of their actions. Public Official bonds
simply guarantee that officials will fulfill their duties according to law. If
they do not, they must make good on any losses that result from their dishonest
acts and misconduct while in office. The surety's application for Public
Official bonds includes an indemnity agreement. Under its terms, the applicant
agrees to hold the surety harmless from any loss sustained because the
applicant failed to faithfully perform the duties mandated by law or statute.
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Example: Lydia is the county clerk. She starts helping some of her close personal friends with some county-related issues and then begins taking bribes as her circle of friends expands. After the scam is exposed and she is caught, the county estimates the losses due to her actions at $200,000. The public official bond pays the county for the loss, and Lydia is jailed for her actions. In addition, the surety company files a claim against her assets for the full $200,000 it paid. |
Other than the federal government, there are three principal levels of political jurisdiction that require the services of competent public officials. They are state, county, and municipal. This section of the analysis addresses these jurisdictions.
State officials receive their authority from (and perform some of the functions of) the state or commonwealth. Examples of state officials are the governor, secretary of state, state treasurer, attorney general, and commissioners of boards and bureaus.
County officials are the persons the county uses to exercise its usual political or governmental functions. Examples of county officials are the sheriff, county commissioner, county clerk, treasurer, tax collector, coroner, and county assessor.
Officials of lesser jurisdictions include those of cities, townships, villages, boroughs, districts, and other local political entities. Examples are mayors, city managers, city clerks, treasurers, tax collectors, marshals, constables, commissioners of various functions, and councilors. School, water, fire, and drainage districts are other local governmental bodies that are not usually under municipal or township officers' jurisdiction.
Public officials may also be divided into classes based on whether or not they handle public funds.
Treasurers, tax collectors, license fee collectors, disbursing officers, court clerks, and many other similar officials fall into the first group. The second group includes persons whose duties are largely administrative, such as county attorneys, auditors, and members of boards.
Note: Office titles do not necessarily indicate whether an official handles money. An official with a certain title in one state may handle funds, while an official with the same title in another state does not. In addition, some officials perform the duties of more than one office. For example, a municipal auditor or director of finance may also be a city treasurer, a sheriff may be a tax collector, and a trustee of a local high school may be its fiscal officer. It is important to understand these distinctions when making bond decisions.
The primary responsibility of a public custodian of securities is to invest the securities. If funds are used to purchase securities that are not approved legal investments (even if purchased under specific orders of a supervising body), the custodian is potentially subject to serious liability. Public funds may be invested in only certain types of securities as determined by enabling legislation. Officials who disregard investment restrictions do so at their own risk. If inappropriate investments reduce the value of the securities, the official may be required to make good on the loss that the respective political subdivision sustained that resulted from such transactions.
Excessive concern for the safekeeping of cash sometimes leads public officials (and their supervising bodies) to bypass their responsibility for the equally important job of safekeeping securities. Many municipalities invest proceeds of bond issues and surplus money in securities anticipating their need to pay for public improvement projects. Securities that belong to specified public trusts, pensions, and sinking funds must also be considered. They should be registered in either the name of the municipality or the name of the officer who acts in his or her official capacity. They should never be kept among the public official’s personal effects or commingled with other funds.
Public officials who have custody of public funds may be liable for losses due to the funds being deposited in a bank that fails. This liability arises when the official violates any law that governs depositing funds in banks. The statutes and laws of many states identify acceptable financial institutions where public funds may be deposited and also require that such depositories furnish collateral security. These laws usually exempt the official and its surety from liability for loss due to any designated and qualified depository failing.
A deputy is the official substitute for a principal official. In common law, the deputy’s acts are the official's acts. However, while officials may honestly and efficiently perform the duties of their offices, there is no guarantee that their subordinates will do the same. Public officials can protect themselves from this liability by requiring bonds from their subordinates.
There are two types of holdover officials. One is a public official who has been elected or appointed to succeed himself or herself in the current office. The second is the official who continues in office beyond the limit of his or her term while awaiting election or appointment of his or her successor. Holdovers prevent vacancies in offices that could temporarily interrupt or inhibit government functions.
Officials held over after their legal terms expire are usually considered officers de facto. The additional time served in office is usually treated as part of the original bond term.
As for deputies, the general rule on a deputy's bond is that there is no holdover liability. However, there is an exception where an official to whom the process has been delivered (or who commences the service or execution of such process during his or her term) is authorized to continue and complete it even though the term has expired. The deputy may be held responsible if he or she is guilty of default with respect to such writ or process after the term expires.
When public officials assume office and provide a receipt to their predecessors, they should be sure there are no undiscovered losses in the accounts for which they may be held accountable. This can be determined only by properly examining the office by qualified auditors or certified public accountants. As a result, the laws of most states provide and explain the procedures to use for such examinations.
Many public offices still have antiquated accounting and bookkeeping systems that have resulted in staggering losses to many communities. Public officials who encounter such outdated or inefficient systems are entitled to have modern systems installed or to overhaul the existing system and eliminate its faults and deficiencies.
Most states have departments whose sole function is to audit accounts, modernize accounting and bookkeeping systems, and provide recommendations on new installations or improvements. Public officials who decide not to take advantage of these services are responsible for errors or problems that could have been resolved with such changes.
The relationship between bonded public officials and their corporate surety is both formal and close. It is formal in that it must comply with legal requirements and statutory limitations. It is also an excellent working arrangement proven to benefit public officials and be generally satisfactory to sureties because the interests of both parties are mostly identical.
The bonds that public officials furnish protect taxpayers and guarantee that they will fulfill their legal duties. The fact that a surety writes a bond on a public official is evidence of its faith in the official’s honesty and integrity.
The primary objective of the Public Official bond is to protect the public and its funds. This is tremendously important to both the official and the surety because the surety's service is usually measured by how it performs to safeguard the public interest.
The two general classes of Public Official bonds are Statutory bonds and Common Law bonds. Under Statutory bonds, the obligee or beneficiary (the public entity) is entitled to all the remedies and processes granted by statute. Under Common Law or Voluntary bonds, the same processes and remedies are granted based on an ordinary contract.
Most Public Official bonds are required by law and guarantee the public official's faithful performance of duty. In most cases, the law prescribes the form of bond to be used, and it should comply with all applicable statutes. If the form of bond required is not specified, a Common Law form that also requires a public official's faithful performance of duty may be used.
The duration or term of a Public Official bond is usually the same as the official's term of office. It usually remains in force throughout the term or until a successor is elected or is qualified and appointed. If the official is re-elected or reappointed, a bond should be filed for the new term. Some non-statutory officials hold office for indefinite periods, and a bond with an indefinite term should be filed in those cases.
The principal hazard under Public Official bonds is the possibility of loss caused by or that arises out of a public official's dishonesty. For this reason, these bonds are treated similarly to Fidelity or Employee Dishonesty insurance.
Public Official bonds are available as follows:
The bonds above can be written as either an aggregate penalty bond or a multiple penalty bond.
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Example: Mitzie, Franny, and Joe are members of the local school board. They form a majority of the board and have considerable influence on purchasing decisions. Each is covered under a position schedule bond for $50,000. An investigation reveals that they accepted bribes to direct purchasing to certain vendors. The cost to the public is $150,000. Scenario One: The bond is issued as an Aggregate Penalty Blanket Bond. Because the three colluded and the position bond is $50,000 for each position, only $50,000 is available for the loss. Scenario Two: The bond is issued as a Multiple Penalty Blanket bond. Each board member has a $50,000 bond, so the total penalty of $150,000 is available for the loss. |
Public Official bonds protect taxpayers, and the bond penalty (or bond amount) should be adequate to protect their interests. There is no standard rule to determine the amount of each Public Official bond. In some states, statutes require bonds for an amount equal to 100% of all public funds the official handles. This is especially true of tax collectors. The most common and practical approach is to make the bond penalty equal to the largest amount of cash, checks, and securities under the official's control at any one time. While this amount may not always adequately protect the public against hidden losses that accumulate over the course of time, it is a reasonable approach to take to establish the bond penalty amount.
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Example: Tony was well loved by the community. He served as its treasurer for 20 years and helped it weather some major financial storms. Thanks to the way he handled each and every crisis, the town survived but, at times, was forced to cut some services and increase taxes. Tony served during the administrations of three different mayors, and each one respected him. A new mayor who was also a CPA was elected on her platform to reform the government. Her first stop was Tony’s office. She was surprised to discover a number of inconsistencies and submitted her initial findings to federal officials. In turn, they then spearheaded an investigation that discovered that the major problem with the community’s finances was Tony’s extravagant lifestyle. Unfortunately, Tony’s public official bond amount was not high enough to pay even one year’s worth of his pilfering. |
Most courts apply especially harsh and stringent rules with respect to a public official's liability to safeguard and account for public funds. Public officials are not relieved from liability for the loss of public funds, even when it is not due to their fault or neglect. This feature makes bonds on public officials who handle public funds more hazardous than bonds on officials who do not.
Officials who do not handle public funds present hazards such as:
Officials who handle funds present additional bonding hazards. Examples include the following but are not limited to just these:
A Statutory Surety bond is a sealed contract that cannot be cancelled before the official's term expires or until he or she dies or resigns. However, the surety's liability may be terminated under specific conditions recognized by law. No official, board, or commission can give an effective release on a Public Official bond unless a statute authorizes it to do so. This also applies to a superior official who cannot release a deputy's bond given in a legal relationship.
Treasurers and other fund custodians have underlying fiscal and legal responsibilities for funds generated by publicly financed bond issues. The principal's primary obligation is to safeguard these funds and disburse them according to their proposed purposes. The bond form used for these obligations protects the public interest and guides officials charged with this responsibility.
One of the methods used to safeguard these funds are Corporate Surety bonds that can be used to either bond the custodian to the proceeds of the bond issue or to bond the construction project to be financed by those proceeds. This special Surety bond is not statutory. For this reason, a suggested form was developed that most communities that engage in this procedure approved. The bond’s “whereas" clause describes the obligation as follows:
"The principal, as treasurer of (insert
community) will receive into his or her custody the proceeds to be derived from
the sale of bonds of the bond issue authorized by resolution of (insert
resolution date) and numbered (insert resolution number) in the amount of
(insert amount) dollars for (insert purpose)."
The Surety bond is then issued for the authorized bond issue’s amount.
Because the treasurer is usually the custodian of the general and other funds of the issuing governmental unit, he or she has custody of the special bond issue funds as well. The bond custodian's responsibility to issue funds is a serious one. For this reason, an adequate Surety bond should be furnished to safeguard the public's financial interest.
The public is not usually aware of the often-faulty theory that cash equals the finished product. If part or all of the funds are lost through a custodian's dishonesty or failure, the bonds themselves could depreciate in value or even go into default. The taxpayers of a tax-supported facility would probably have to bear the loss without the benefit of revenue to pay off the principal and interest of a given project.
It is extremely important to issue any Corporate Surety bond on the custodian for an amount at least equal to the fund balance. In many cases, a treasurer's general Surety bond does not consider the amount of funds handled, not to mention potentially large amounts realized from the sale of special bond issues. In other words, some Surety bond requirements have not kept pace with the realities of modern day techniques to issue public bonds.
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Example: The City of Responsible receives voter approval to issue bonds to cover the costs of a new wastewater facility. The city issues bonds worth $125 million. The required public official bond is $100,000. The broker who handles the sale of the wastewater bonds explains to the city council that bond holders demand security and that the $100,000 public official coverage is woefully insufficient. If the city council agrees, it can require a higher public official bond amount or purchase a corporate surety bond for only this special wastewater bond issue. |