Maybe it’s the current high level of interest rates that have disadvantaged banks; maybe it’s the growth of the New Hampshire local government investment pool, which more than doubled in size to $530 million in the year ending June 30, 2023. New Hampshire banks are pushing legislation that would rein in the New Hampshire Public Deposit Investment Pool (NHPDIP) by requiring all funds to be invested or deposited within the state and insured or collateralized.
The background: The NHPDIP was established in 1993 and until last year was supervised by the Banking Commissioner; the State Treasurer now supervises it. It may receive and invest funds on behalf of the state, state agencies and local government entities. It operates as a stable net asset value fund, and has an outside investment advisor, PFM Asset Management LLC. As of June 30, 2023, about 65% of its investment portfolio consisted of commercial paper and negotiable certificates of deposit with the balance in Treasuries and repurchase agreements.
New Hampshire had 19 FDIC insured banks as of September 30, 2023. Three are regional/international banks (TD Bank, Citizens Bank and Bank of America) and they hold about 55% of public deposits. It is likely the smaller banks, who do not have access to the wholesale funding markets, are behind the legislation.
Zoom in: The New Hampshire Bankers Association has had the NHPDIP in its sites for a few years as the pool’s presence in Hampshire grew. Last year the association commissioned a report that argued that requiring the deposit of the NHPDIP balances in New Hampshire banks would benefit small businesses to the tune of $182 million of loans. Based on this the association is promoting the legislation as a way of “keeping taxpayer funds in New Hampshire” for “potential” economic benefits of up to $200 million of GDP growth.
There is no specific requirement in the bill that deposits be put to work in New Hampshire. Indeed, it is hard to imagine how such a requirement could be implemented or monitored, especially with regard to the three large banks that have a majority of overall deposits.
NHPDIP currently offers a yield of about 5.40%, similar to the yield of other state LGIPs and prime money market funds. The June 30 NHDIP balance, invested at 5%, would earn a bit more than $25 million in a year for its participants.
The New Hampshire banks could bid for public funds deposits by matching or exceeding the yields offered by NHPDIP. But they are unwilling to match current money market rates. So, it is likely that public funds investors will suffer a loss of interest earnings if the bill becomes law.
A representative of the New Hampshire GFOA indicated that their organization and other local government organizations had not taken a position on the bill “at this time.” (A legislative hearing is scheduled on the bill this week.)
Bottom line: If the bill became law, it seems unlikely that NHPDIP would continue to operate. The pool would have to direct all funds into New Hampshire banks, regardless of rates offered. Limiting investments to deposits and collateralized certificates of deposit would not be consistent with the operation of a constant net asset value fund that offers daily liquidity. And it would be unlikely that the fund’s current credit rating, AAAm from S&P Global, could be maintained.
The banks would be able to raise deposits at a lower cost without the pool as a factor. The rest, as they say, would be conjecture.
LGIP Assets: Strong Growth Continues a Seasonal Pattern
Local government investment pools tracked by S&P Global grew strongly in the past two months. The combined total assets of its AAA and AA rated pools were $356.6 billion for the week ended January 12, up $35 billion, or nearly 11% compared to last year.
Some of the growth may be due to seasonal revenue flows, as local tax receipts in a number of states are concentrated in the December-February period. Assets of AAA and AA rated pools grew $37 billion in the same period last year.
Bank deposits from all sources grew modestly in the same current period, gaining about $100 billion, or 0.5%.