HomeMy WebLinkAbout2008 10 01 Third Document Distributed by Board Member FairDate: October 1, 2008
ATTACHED WAS THE THIRD
DOCUMENT DISTRIBUTED BY BOARD
MEMBER MARIA FAIR TO THE BOARD
OF TRUSTEES MEMBERS AT THE
OCTOBER 1, 2008 SPECIAL MEETING.
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Government Finance Officers Association
Recommended Practice
Use of Local Government Investment Pools (LGIPs) (2007) (CASH)
Background. In many states, the state treasurer or an authorized governing board (a local government
such as a county) oversees a pooled investment fund that operates like a mutual fund for the exclusive
benefit of governments within that state. These state pools typically combine the cash of participating
jurisdictions and invest the cash in securities allowed under the state's laws regarding government
investments. By pooling funds, participating governments benefit from economies of scale, full-time
portfolio management, diversification, and liquidity (especially in the case of pools that seek a constant
net asset value of $1.00). Interest is normally apportioned to the participants on a daily basis,
proportionate to the size of the investment. Most pools offer acheck-writing or wire transfer feature that
adds value as a cash management tool.
Government Sponsored versus Joint Powers Agreement Pools: Local government investment pools
(LGIPs) may be authorized under state statutes and sponsored by the state or local governments or may
be set up through intergovernmental agreements known as "joint powers" agreements. Government
investment pools operated for local governments generally are authorized by statutes and permit the
state or local treasurer or appropriate agency to pool investments and distribute income to the
participating local governments. In some cases, state funds are commingled with local government
funds; in other cases, the pools consist only of local government funds. Generally, the pool's portfolio
manager may purchase only the same investment instruments permitted for state and local governments
in that state. A few states permit a broader list of allowable instruments.
Joint-powers agreement pools have been established in several states by local governments joining
together to sponsor the creation of LGIPs that operate independent of the state government. The
investment authorization to pool funds is generally derived from state statutes that allow governments to
perform collectively any service or administrative function that they may undertake individually. A
board of trustees, normally made up of public officials, oversees these pools and typically selects a
financial services firm to provide services such as the following: investment management, custodial
services, participant record keeping, independent audits, and legal services. These pools may invest
only in securities otherwise allowed to individual governments.
Not All Pools Are the Same: Although there are many similarities between the various LGIPs, there
are also many differences. One such significant difference among pools that must be understood before
placing money in them are their investment objectives. When LGIPs were first created, most emulated
money market mutual funds with the objectives of maintaining a "constant" Net Asset Value (NAV) of
$1.00 and providing excellent liquidity for the investor. Such LGIPs invest in short-term securities with
average maturities sufficiently short to avoid market price risk. The "constant" NAV pools are
appropriate investments for funds that must be liquid and have virtually no price volatility.
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(AAAm and AAm). Any pool with above-average yields or longer maturities should be
further evaluated for risk.
9. Variable NAV LGIPs should be evaluated in relation to appropriate benchmarks.
10. Although ratings are not mandatory at this time, governments should seek LGIPs with the
highest ratings, where possible.
11. Procedures for establishing an account, making deposits and withdrawals, and allocating
interest earnings should be fully understood. There may be limits to the number of deposits
and withdrawals in a month. There may also be dollar limits to deposits, withdrawals and
balances. Deposits or withdrawals may require advanced notification, especially if they are
large. If so, investors should be aware of the deadlines.
12. Any additional services offered by an LGIP should be considered. For example: checking,
wire transfers, issuing paying agent services, setting up multiple accounts for an entity, and
arbitrage accounting for bond funds.
13. Government investors should confirm that an LGIP provides regular, detailed reporting to
pool participants and follows generally accepted reporting standards.
References
• Investing Public Funds, Second Edition, Girard Miller with M. Corinne Larson and W. Paul Zorn,
GFOA, 1998
• An Elected Officials Guide to Investing, Edition, M. Corinne Larson, GFOA, 1996
• Standard & Poor's Guide to LGIPs
Approved by the GFOA's Executive Board on March 2, 2007.