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NOTE 3 - CASH AND INVESTMENTS (CONTINUED) B. Collateral and Categorization Requirements All cash deposits in banks are fully insured or collateralized. California state law requires that public fund deposits be collateralized by either government securities with a value equal to 110% of the deposits or first trust deed mortgage notes having a value equal to 150%. Per state law each institution must use a third party (which may be the institution's trust department) to hold the pledged collateral in a pool to secure all the institution's public fund deposits. The code states that collateral pledged in this manner shall have the effect of perfecting a security interest in such collateral superior to those of a general creditor. Thus, collateral for cash is considered to be held in the City's name. Banks and savings and loans in California are subject to state-mandated reporting requirements to ensure that the required levels of control are maintained. The City may waive collateral requirements for deposits, which are fully insured with each financial institution up to $100,000 by the Federal Deposit Insurance Corporation (FDIC). The carrying amount of the City's cash and deposits was ($282,587) and $1,220,589 at June 30, 2004 and 2003, respectively. Bank balances before reconciling items were $2,425,759 at June 30, 2004. Of the total bank balances, $224,854 was insured or held by the City or its agent in the City's name (Category 1) and $2,200,905 was collateralized (Category 2). Three categories of risk level have been developed by the Governmental Accounting Standards Board Statement No.3 to disclose the risks associated with deposits and investments of public money: Deposits: Cate gory 1 - insured or collateralized with securities held by the entity or by its agent in the entity's name; collateralized with securities held by the pledging financial institution's trust department or agent in the entity's name; unco llateralized. Category 2 - Category 3 - Investments: Cate gory 1 - insured or registered, or securities held by entity or its agent in the entity's name; uninsured and unregistered, with securities held by the counterparty' s trust department or agent in the entity's name; uninsured and unregistered, with securities held by the counterparty, or by its trust department or agent but not in the entity's name. Category 2 - Category 3 - The foregoing categorizations do not address the risk of loss due to changes in fair value. Investments in pools managed by other governments or in mutual funds are not required to be categorized pursuant to Governmental Accounting Standards Board Statement No.3. 34