LGIPs make a lot of sense. These liquidity pools – “Local Government Investment Pools” for the uninitiated – have been around for a long time and have come a long way since the Orange County scandal of 1994. Now, they’re pretty-much taken for granted—but they shouldn’t be.

I’m not alluding to risk factors, although risk management typically is a high-priority, as it should be. Rather, I’m referring to the extreme range of actual efficiencies gained through LGIPs. In short, some states have figured it out, and others are still working on it. The prize can be elusive, but need not be.

Background

Many states have initiated pooled investment funds for the benefit of various public entities within the states, including county and city governments, fire departments, housing authorities, school districts, pension funds, and so on. The list is extensive. The idea, and a proven one at that, is that significant leverage and, in effect, buying power, can be gained by pooling the liquidity resources and needs of the many governing entities within a state. Higher returns are obtained, liquidity is increased, diversity is obtained, and risk is reduced. Everyone benefits when it is done right. It’s really all about economies of scale—but that’s where the hurdles are often encountered and where the biggest winners separate themselves from the pack.

The Problem

LGIPs, to achieve their promised potential, must, in an operational sense, be extremely efficient. Otherwise, the economy of scale is lost. Fewer people doing more things better, faster, and more accurately—that is the challenge. The tasks that have to be managed efficiently exist at both the LGIP common fund level as well as at the participant level (the school districts, municipalities, etc. that need to move liquidity in and out of the pool). At the pool level, the functions include handling phone calls and faxed messages from participants; writing transaction tickets; initiating and settling trades; custodian reconciliation; income accrual and distribution/reinvestment; tracking individual participant and common fund balances; investment earnings apportionment; generating participant statements; and maintaining common fund balances and participant historical transaction activity. In parallel, compliance, risk management, and security issues must all be properly addressed. All-in-all, it’s dark and lonely work, but ... You get the picture.

At the participant level, the challenge is different. The days of delivering a bag of cash for investing, in most cases, is gone forever; but there are still many time consuming, manual processes that, if eliminated or reduced, can have a significant impact on investment returns and overall quality of life—at least for those involved in the participant’s interaction with the LGIP.

A Better Way

How can a LGIP sponsor provide quality service and achieve overall goals for its participants while maintaining a minimal staff? How can the sponsor take on a significant number of new participants without adding staff? How does a LGIP participant easily and effectively move money in, around, and out of the pool? The answer, in the case of those states that run the most-effective LGIPs, is by empowering participants. By providing an environment where participants can track their investments in real-time 24X7, where they make decisions and selections that initiate highly-automated electronic processes, and through similar capabilities that give participants a high degree of control, an LGIP can better service its clients and make life easier on the pool-level people that have to keep it all running.

Let’s look at some examples. I’ll call them “old model” and “new model” for simplicity. (If these terms imply the writer’s bias for one over the other, it is purely intentional):

• Old Model – In this environment, a participant has a number of investment fund alternatives to choose from. Indeed, they may well have as many choices as does their neighboring-state friend has in his “New Model” type of LGIP platform, and those choices may be providing equal or even better performance results. However, that’s not the issue. What is the issue is how the participant interfaces with the pool. Before the widespread adoption of the Internet as a powerful business tool, pool administrative staff were required to take handwritten phone or fax messages and instructions from participants, write out transaction tickets, and manually enter transactions into their funds processing, order management, and accounting systems. These time consuming, manual processes did little to promote operational efficiency, data accuracy, and employee morale, and subsequently cause some states to shy away from implementing LGIPs.
  
  
• New Model – In the modern version of LGIP management, most old-school, laborious processes have been replaced by real-time, automated actions, and the actual participants have been empowered to initiate the actions remotely using software and Web services. Using a web browser and new, powerful applications designed specifically for LGIP participant access, participants can now check account balances, initiate transactions and distributions, and print confirmations. These streamlined access and initiation methods offer increases in both efficiency and accuracy. This approach virtually eliminates the time-consuming functions of the old model, allowing investment personnel to spend more time working on other aspects of the investment business. When this participant access is combined with real-time common fund processing at the LGIP sponsor level, even further efficiencies are realized. Now, for example, at the click of a mouse, income is instantly distributed from the fund to the participant accounts.
  
  Clearly, this new model of LGIP management offers increased profitability and reduced operating costs and is leading more state treasuries to test the pool waters.

Summary

There are many potential winners who stand to benefit from an optimized LGIP service. They include not only the state’s administrative staff and the participating governing agencies, but also state residents who, ultimately, are the end clients. This optimization and the advantages to be realized can only be achieved through the empowering of participants and that, in turn, requires the wise use of technology. The internet and Web-based LGIP participant access applications have proven to be such powerful tools.

About QED Financial Systems

Based in Marlton, New Jersey, QED Financial Systems is a unique provider of totally integrated LGIP and investment accounting solution to the public sector. QED’s Internet Participant Access System (iPAS), is recognized as the industry’s foremost participant access system. A small, privately owned company, QED builds strong client relationships and provides clients with an extraordinary degree of initial and ongoing service. As a result, QED has a 100% referenceable client base that is the envy of its industry. QED's clients account for approximately $1 Trillion in assets managed with its largest single client managing approximately $180 Billion.

About the Author

Matt Mille is a Senior Account Executive with QED. Over the past twenty-five years he has held senior account management and marketing positions with other financial services companies such as SunGard, SEI Investments, SS&C Technologies, Financial Models Company, Netik LLC, and Premier Solutions.