8003 FEDERAL LETTER OF CREDIT
(Revised 9/79)
A Federal letter of credit is a commitment certified by an authorized official of a Federal program agency, specifying a dollar limit available to a designated grantee (i.e., State agency). It is used in Federal programs requiring large advances of cash to State agencies, enabling the agency to withdraw cash from the U. S. Treasury concurrently with disbursements and as frequently as such disbursements are made by the agency. Currently, as provided by U. S. Treasury Circular No. 1075–Fourth Revision, if a Federal program agency has a continuing relationship with a recipient (State) organization for at least one year involving annual advances aggregating at least $l20,000, the letter of credit method of advance funding may be used.
The grantor Federal agency is responsible for developing instructions and reporting and internal operating procedures for State agencies relating to letters of credit and will monitor the State agency's use of the funds. State agencies will be advised of and shall comply with the Federal agency's requirements in connection with advance funding. Generally, the State agency commits itself to: (l) initiating cash drawdowns only when needed to meet actual disbursements and in minimum amounts necessary for immediate disbursement needs; (2) the timely reporting of cash disbursements and balances as required by the Federal program agency; and (3) the imposition of these same standards upon any secondary recipients (entities receiving Federal funds advances from the State agency—commonly local governments).
There are two separate and distinct systems for obtaining cash advances with a letter of credit. Letters of credit will be established with the Federal Reserve banks and branches (FRB System) or the U. S. Treasury regional disbursing office (RDO System). The particular system to be used will be at the discretion of the Commissioner, Bureau of Government Financial Operations, or that person's designee.
FRB System (Federal Reserve Bank)
The FRB System is used with checks paid, delay of drawdown, and single letter of credit techniques for obtaining cash advances, as described in U. S. Treasury Circular No. 1075–Fourth Revision. When Federal funds are needed pursuant to a letter of credit–FRB System, Sacramento-based agencies will submit a completed Payment Voucher, Department of the Treasury Form TFS 5401, to the State Treasurer's Office along with the duplicate and triplicate copies of the Controller's Remittance Advice, Form CA 21. In the "Name and Address of Drawer's Bank" block of the Payment Voucher, agencies processing Payment Vouchers through the State Treasurer's Office will insert "Bank of America, 8th and I Street Branch, Sacramento, California."
For Sacramento-based agencies the State Treasurer's Office will forward the Payment Vouchers to the Sacramento bank for collection from the Federal Reserve Bank. As soon as the funds are credited to the State's account, the State Treasurer's Office will send the duplicate copy of the Controller's Remittance Advice to the State Controller's Office.
Agencies not located in Sacramento may submit Payment Vouchers with a deposit slip directly to their local bank for collection from the Federal Reserve Bank. When agencies receive notification of collection from their local bank, the agencies will forward the original, duplicate, and triplicate copies of the Controller's Remittance Advice, Form CA 21, an Agency Trust Check and the duplicate and triplicate copies of the Report of Deposit, Std. Form 44l , to the State Treasurer's Office. The State Treasurer's Office will send the original copy of the Controller's Remittance Advice and the triplicate copy of the Report of Deposit to the State Controller's Office.
Agencies are reminded that under a letter of credit, there usually is a limitation on the amount which may be drawn each period. If an agency is not careful, it may "lose" funds by submitting a Payment Voucher too late during a period with the result that the amount withdrawn will be charged to the next period's limitation. This may occur since withdrawals are charged against the period in which the Payment Voucher is received and processed by the Federal Reserve Bank. To prevent this and to ensure that each period's funds are utilized to their fullest extent, agencies should plan withdrawals in such a manner that the State Treasurer's Office and the agency's commercial bank be given sufficient time to process the Payment Voucher so that it could be presented to the Federal Reserve Bank before the end of the period. Departments will make sure that payment vouchers are charged against the same period by the Federal Reserve Bank as is recorded on the requesting department's records. Departments which have questions regarding the period charged by the Federal Government may contact the State Treasurer's Office or the Federal Reserve Bank. Departments which request large draw downs (over $10 million) at the end of a period should contact the Federal Reserve Bank to verify that funds are available.
RDO System (Regional Disbursing Office)
The RDO System is used by State agencies not under the checks paid, delay of draw down, or single letter of credit techniques. Draw downs are made using Federal Standard Form 183 "Request for Payment on Letter of Credit and Status of Funds Report," furnished by the Federal program agency. The completed form is to be forwarded to the U.S. Treasury Disbursing Office in San Francisco, and a copy sent to the Federal program agency. The State agency will also submit the original of Form CA 21 "Controller's Remittance Advice" to the State Controller's Office and the duplicate and triplicate copies to the State Treasurer's Office. Upon approval of the Request for Payment, the Treasury Disbursing Office will issue a U.S. Treasury warrant to the State Treasurer's Office for deposit into the appropriate fund. The State Treasurer's Office will send the duplicate copy of Form CA 21 to the State agency through the Controller's Office as notification of receipt of funds.
Payment Vouchers (FRB System) and Requests for Payment (RDO System) should not be drawn more frequently than daily or for amounts less than $5,000 and in no case more than $5,000,000 unless so stated in the letter of credit.
Only individuals with authorized signatures on file with the Federal Reserve Bank or the Treasury Disbursing Office may sign Payment Vouchers or Requests for Payment.
