Local government investment pools - which consist of short-term funds - are a ripe and largely untapped source of assets for external money managers and consultants.
A new report by Standard & Poor's Corp., New York, gives an overdue systematic view of these obscure public investment pools. It estimates there are 187 pools, or LGIPs, with a total of $125 billion to $150 billion, according to Walter J. Dillingham Jr., a director in the managed funds ratings group, who led the study with Diane Brosen, a director in public finance.
Most of the money is run internally, mainly by state or county treasurers. But some of the short-term funds in the LGIPs - whose clients are municipalities and other local government units investing their operating cash and bond proceeds - is run by money management firms.
Few outside managers are involved in the LGIPs. Cadre Financial Services Inc., Ronkonkoma, N.Y., a unit of AMBAC Inc., New York, - not a household name in institutional investing - probably manages the largest number of pools, although not the most assets, according to the report. It handles mostly school district pools.
Of the 187 LGIPs, 37 are state-sponsored pools, 68 are county-sponsored, and 82 are sponsored by other entities like school districts, according to the S&P report. The county pools have $30 billion to $40 billion and the other government pools have some $20 billion to $25 billion. By far the largest amount in LGIPs is in the state-sponsored pools, with some $75 billion to $85 billion. Most of these state pools, as well as the other pools, are ripe for outside investment managers.
Only a handful of these state-sponsored pools are managed by outside investment managers, according to Mr. Dillingham. Louisiana's is managed by Banc One; Maryland's by Mercantile Bank & Trust Co., Baltimore; Massachusetts' by Fidelity Management & Research Co., Boston; New Hampshire's by MBIA Inc.'s Municipal Investors Service Corp., New York, and Gabelli-O'Connor Fixed Income Management Co., New York; North Carolina's by Fidelity; Texas' by Texas Commerce Bank, Houston; Puerto Rico's by Wellington Management Co., Boston, and MBIA-MISC; and the Virgin Islands' by Public Finance Management Inc., Harrisburg, Pa.
California has the largest number of LGIPs. Most are county pools run by the county treasurer, such as the Orange County pool that was run by the infamous Robert Citron. S&P had rated the county's debt, but S&P, which now rates some 30 LGIPs, didn't rate the pool.
The report notes new accounting and reporting rules for local government investment pools that will become effective in June, namely, GASB 31, issued by the Government Accounting Standards Board, could spur more local-government investors to consider investing their money with external money market funds, rather than continue with an LGIP.
One reason is the new standard will require LGIPs to mark their pools to market, possibly causing them to follow more conservative investment strategies, leading to lower returns.
S&P expects to issue another report on the LGIPs at the end of the month, including more details on the roughly 30 LGIPs it rates, Mr. Dillingham noted.
Aside from the LGIPs, Mr. Dillingham estimates there is even more money, another $600 billion to $800 billion, in public short-term assets not in the pools, which were mentioned only briefly in the report.
That total is invested mostly directly by government officials. He suggests possibly $170 billion is invested in money market-type funds, while the rest is invested directly into cash equivalent and short-term securities.
Like the funds in LGIPs, this money also deserves greater scrutiny. Both groups of funds could benefit from risk-and-return studies on performance and benchmarks by consultants and external investment management.