The Austin City Council approved an agreement between the city and JP Morgan Chase & Co. that has alarmed groups concerned with the risks of a major bank handling public funds.

The agreement will make the large multinational bank the new depository for $1.1 million of the City’s funds for the next five years, according to the recommendation for council action issued March 22.

State law requires the city to reevaluate its contract with the institution that it deposits funds with every five years and to solicit alternative contracts from other firms, said assistant city treasurer Georgia Sanchez.

“An evaluation team of six professional staff issued a request for depository services in August of 2011,” she said. “The team evaluated the responses and scored the applicants.”

Sanchez said requests were sent to 112 financial institutions but only three responded: Bank of America Corp., Wells Fargo and Company, and JP Morgan Chase. Bank of America holds the current depository contract with the city.

“Three or more responses is considered to be adequate competition,” she said. “In the scoring conducted by the evaluation team, Chase earned the most points in its provision of services. That was the decisive factor in its selection.”

John Duffy, a city council candidate connected to OccupyAustin, said the competition and evaluation process did not allow for local alternatives to be considered.

“Occupy Austin staff contacted several credit unions who claimed they could handle the accounts,” said Duffy. “I think local banks would be happy to dedicate extra staff and resources to have the opportunity to manage larger clients.”

Sanchez said it is standard for only big banks to respond to requests for depository contracts because the services and collateral required by the city are too large and complex for smaller institutions.

“I think that local banks, such as credit unions, would be unable to meet the city’s day to day banking needs,” said Sanchez. “I have been told by credit unions that they could not justify segregating funds to collateralize the city of Austin’s accounts.”

The city code requires that its accounts be collateralized, meaning the bank must be backed by funds of an equal value of safe, highly-rated assets, said Sanchez. Those assets ensure that the city would not lose its deposits if the bank that held them defaulted, she said.

Duffy said large banks like JP Morgan Chase should not be trusted with public funds. Local institutions can provide a better alternative, he said.

“They [the city staff] have an obligation to the people of Austin to reach out to local banks and credit unions and to put the work into shaping their financial architecture as necessary to work to work with these institutions here in town,” he said.

Since local institutions cannot provide the depository services it needs, the city is looking for other ways to do business with them, said Sanchez.

“We are looking for other ways to incorporate credit unions and local banks into other city functions,” she said.