06-20-07 FPAC Minutes - Laserfiche WebLink

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• • G 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 a check-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. i