Protect yourself against losses. Consider bonding today

Do you remember the scene in the holiday classic “It's a Wonderful Life,” where George's Uncle Billy loses an $8,000 deposit and it nearly results in the ruin of the family's business? Absentminded Uncle Billy had somehow lost or misplaced the money on his way to the bank. In today's dollars, that deposit would be equivalent to about $96,000.

Wouldn't it be great to recoup a loss like that? This kind of loss would probably fall into the realm of a “mysterious disappearance” because it was baffling and unexplainable. Unfortunately, the family business didn't have a bond covering Uncle Billy, let alone one that covered mysterious disappearances of deposits.

A bond is essentially a contract under which one party—the surety—guarantees the performance of certain obligations of a second party, such as an employee or contractor, to a third party like a local government. Bonding employees helps local governments recover money losses that might occur because of acts of negligence, dishonesty or fraud by officials, employees and others.

Bond requirements in general

You can find many bond requirements in state law. Most target specific positions like the county auditor or city treasurer. You have to look at your authorizing statute to find what applies to you because requirements vary by government type.

Typically, a performance bond is required for these specific positions. This bond type covers financial losses should bonded officials fail to perform their duties. In other words, if they are negligent. Performance bonds typically won't cover theft or embezzlement unless they are written into your policy. You should check with your provider to assess your coverage.

For taxing districts like a port or public utility district, the most common requirement is bonding your treasurer if you are not using the county treasurer. Most statutes are not specific about the type of bond—just that you have a bond that protects against loss. Again, look up your authorizing statutes to find what applies to your government type. It's not the same for every government.

There is one state law that applies to most local government types. If your government pays bills before governing body approval, then you must bond your designated auditing officer and the person authorized to sign the checks or warrants (RCW 42.24.180). This bond requirement is for faithful performance of duties and must be for at least $50,000, but you can choose to do more.

Bonds for cash handlers

A fidelity bond gives you the ability to recover financial losses should an employee embezzle cash or other property. State law does not usually require governments to bond cash handlers. However, there are exceptions, such as for flood control districts. As we discuss in our Cash Receipting Guide, bonding cash handlers is an option to reduce the risk of financial losses.

As an additional control, employees will likely have to pass certain background checks to be bonded.

Blanket bonds

Some governments may choose to purchase bonding policies that cover all employees, also known as a blanket bond. These are allowable, as discussed in Washington Attorney General Memorandum 1993 No. 6 (2/23/93) and SAO's Budgeting, Accounting, and Reporting System (BARS) Manual.

Parting advice when purchasing bonds

Before purchasing any bonds, do your homework first about your statutory requirements, the various providers and coverage options. You might also want to consult legal counsel and your risk advisor for assistance.

You'll also want to read and understand your statutes carefully. In some circumstances, you may want to set bond amounts higher than the minimum thresholds to adequately cover your risk of loss.

Finally, check your policy terms to see if they cover losses related to theft, embezzlement, or mysterious, unexplainable disappearances. We also recommend the policy terms include recovery of investigation audit costs and allow your attorney, or the attorney general, to file on the bond for losses covered.

Learn more

For guidance on bonding, see SAO's BARS Manual.

Obtaining bonds is just one way to cover your risks. You can explore other options in our Cash Receipting Guide.

How to reach us for more assistance

Remember, we are here to help. If you have specific technical accounting questions or would like help identifying your bond requirements, submit them using our HelpDesk in the client portal.

We also have financial management specialists at SAO's Center for Government Innovation available to talk through projects you might be working on that could affect your internal control systems. For assistance, reach out to us at Center@sao.wa.gov.