LGIP Investment Pool Structure

Local government investment pools (LGIPs) are established by states to provide other governmental entities (e.g., cities, counties, school districts or other state agencies) with a short-term investment vehicle, often formed as a trust, to purchase shares or units in an investment portfolio. Generally state law outlines the rules that govern a municipality’s participation in an LGIP. LGIPs may be structured as state-sponsored, county treasurer-sponsored or through intergovernmental agreements known as “joint powers” agreements. In state-sponsored LGIPs, the state treasurer or other authorized governing board oversees and administers the LGIP for the benefit of the municipalities and public entities within that state. Alternatively, if allowed by state law, local governments may join together through a joint powers agreement to create an authority to sponsor an LGIP that operates independent of the state government. In this case, the authority is typically governed by a board of trustees made up of professionals experienced in government treasury and investment practices.

The board may select financial services firms to act as an investment advisor, administrator/transfer agent, or distributor, provide custodial services, participate in record keeping, conduct independent audits or retain legal services. [1] Typically the governing board meets quarterly to review the performance of the LGIP, including portfolio investments, mark-to-market deviations and marketing efforts to attract new LGIP participants.

Types of LGIP Investments
Generally assets are invested in a manner consistent with the LGIP’s stated investment objectives. Most states do not permit localities to invest in money market funds. However, in most instances, the operating characteristics of LGIPs are similar to those of money market funds. An LGIP’s investment policy or pool offering statement document details the allowable investments and other portfolio characteristics. Additionally, credit quality and maturity parameters may also be outlined as part of the LGIP’s investment policy.

The state sponsor or investment advisor invests in a manner consistent with both the cash management needs of the governmental unit participants, as well as the stated investment policy. Examples of investments that an LGIP policy may deem appropriate include obligations issued or guaranteed by the U.S. government or agency thereof, negotiable certificates of deposit from domestic banks, commercial paper, corporate notes, money market mutual funds that are registered with the Securities and Exchange Commission (SEC) and municipal obligations issued by state and local governments. LGIP investment policies may include the allocation and diversification parameters for allowable investments.

LGIP’s investment policy and investment objectives, as permitted by state law, will also determine if an LGIP maintains a fixed $1.00 Net Asset Value (NAV), or whether a floating NAV will be permitted. LGIPs that aim to maintain a stable NAV operate similar to money market mutual funds with the goal of providing high levels of liquidity and minimum price volatility. These LGIPs may obtain credit ratings that generally take into consideration the safety of principal and the LGIP’s ability to maintain a $1.00 NAV, among other credit rating criteria.[2] LGIPs with a variable NAV may include securities with longer maturities and duration, and may operate similar to a short-term bond fund. For those LGIPs, credit ratings also take into consideration sensitivity to changing market conditions as a measure of volatility.

LGIP program documents generally include an Information Statement, Investment Policy and Operating Procedures. The information statement typically details the management fees associated with participation in the LGIP.

LGIP Oversight
LGIPs are not required to register with the SEC and are not subject to the SEC’s regulatory requirements for mutual funds given that LGIPs fall within the governmental exemption of Section 2(b) of the Investment Company Act of 1940. However, investment guidelines and oversight for LGIPs vary from state to state and some LGIPS are mandated by state statute to meet the basic requirements of SEC Rule 2a-7 except for the requirement to file with the SEC (characterized as being 2a-7-like). LGIPs are subject to the accounting standards and financial reporting requirements set forth by Governmental Accounting Standards Board (GASB) Statement No.31, Accounting and Financial Reporting for Certain Investments and For External Investments.

To learn more about LGIPs see:

[1]   LGIP administrators that operate as broker-dealers are required to adhere to MSRB rules, specifically those related to advertising and promotional materials that stipulate how yields must be calculated and displayed in advertising and promotional materials.

[2]   LGIP credit rating analysis includes quantitative and qualitative components. Quantitative components include, among others, overall portfolio credit quality, individual security credit quality, counterparty risk and exposure, diversification of securities, credit deterioration, credit defaults, net asset value stability, weighted average maturity  duration, maturity structure, pricing, liquidity, shareholder composition, and asset volatility. LGIP credit ratings analysis qualitative components include, among others, depth and stability of organization and management team, experience and track record of manager, operating policies and risk preferences, internal controls, and governance. U.S. Municipal Pool Program Debt, Moody’s Investors Service, March 29, 2013 and Fixed-Income Funds: Principal Stability Fund Rating Methodology, Standard & Poor’s, February 1, 2016.