Among the California cities that have rent control, most have ordinances requiring landlords to not only pay interest on security deposits, but to place the deposits in a bank insured by the FSLIC (Federal Savings & Loan Insurance Corporation) or the FDIC (Federal Deposit Insurance Corporation).

If the interest-bearing accounts at these institutions pay less interest than that required by the ordinance, landlords do not have to pay the rate required by the ordinance -- they need pay only the interest that the bank is paying. (Action Apartment Association v. Santa Monica Rent Control Board, 94 Cal.App. 4th 587 (2002).)

However, at least one city -- San Francisco -- does not require landlords to place deposits in an account insured by these corporations. Because these landlords can theoretically invest the deposits in higher-yield ways, they must pay the rate of interest mandated by their ordinance, even if it is higher than the rate offered by money-market accounts that are insured by the FDIC or the FLSIC. (Small Property Owners of San Francisco, et al. v. City and County of San Francisco, 2006 DJDAR 10479, ___ Cal App 4th ____ (2006).)