This week's Beyond the News has commentary on recent market moves, proposed local government investment pool legislation in Nebraska and a capital raise by Public Trust Advisors.

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Recent Market Moves Have Had Almost No Effect on LGIP Yields

The bond market has had a bumpy couple of months. Two year Treasury yields have ranged over 75 basis points since the end of November and longer-maturities have had similar moves. Not so for LGIP yields. They’ve been almost untouched by these swings, as their direction is closely tied to the Federal Funds rate.

And watching Federal Funds these days is a little like Waiting for Godot. Investors are primed for the Fed to begin cutting short-term rates. Soon, but not just yet. At one point recently the futures market signaled this would begin in March (?).

Meanwhile. . .. The PFII Index of Government LGIP yields has barely moved. Since November it is two basis points lower. The PFII Index of Prime LGIP yields is down seven basis points, largely because long-maturity commercial paper and negotiable CD rates have dropped from fall levels of nearly 6.00% to the area of 5.20%. (Yes, the money market yield curve is inverted.)

We noted in the December 19, 2023 Beyond the News that prime LGIP yields were likely to decline by five to10 basis points, even without a change in central bank policy. They are well on their way.

Meanwhile, since the fall assets of LGIPs have grown by 10% for government-oriented pools and six percent for prime/general purpose pools. This according to the S&P Global Government Investment Pool Indices. They have outpaced the growth of money market funds, which are up about 3% in the period (based on Securities and Exchange Commission data).

Proposed LGIP Legislation in Nebraska Focused on "Guardrails"

Nebraska, close to the center of the country, is also a center for local government investment pool legislation. Though it is modest in size (1.9 million people), it has three LGIPs with assets guesstimated at $1.5 billion. (Lack of uniform disclosure/transparency makes this a “guesstimate.”) The oldest of these was formed in 1988, the most recent opened last year. They were formed relying on broad intergovernmental cooperation authority. The state has no role in any of them.

Now the Nebraska Legislature has taken an interest in local government investment pools.

One bill is LB 1167, introduced in January. Its sponsor, Senator George Dungan, describes it as an effort to put "guardrails" on the operation of LGIPs "to protect taxpayer dollars."

The bill has several notable provisions. It would

• Create a framework for operation of LGIPs.
• Permit a local government investment pool to invest in commercial paper, however limiting it to issues of a “United States corporation” with maturity of no more than 270 days, and 40% of funds available for investment by the pool.
• Require that all advertising, marketing materials and pool websites disclose that investments in a pool are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. It would also require a specific risk disclosure with language contained in the bill.
• Require that any “agent, employee, or representative of an investment advisor" who solicits on behalf of the pool maintain a Financial Industry Regulatory Authority mutual fund or general securities license.

The commercial paper provision may limit current practice. Two of the exiting pools disclose that they already invest in commercial paper. though the details are not published. A bill introduced last year, but later withdrawn, contained more liberal authority to invest in commercial paper: maturity could be as long as 390 days and issuers would not be limited to United States corporations.

The FINRA license requirement may be unique. LGIPs generally are organized to be exempt from the Federal requirement that mutual funds be registered with the Securities and Exchange Commission. Nevertheless, some but not all of the companies that advise/market LGIPs nationally have chosen to be regulated by FINRA. A check of FINRA records indicates that one of the three companies that manage the current Nebraska pools is not a FINRA member.

A second bill, LB 268, introduced in January 2023 would direct the State Treasurer to establish an investment pool and authorize Nebraska public entities to participate in it.

The sponsor, State Senator Steve Halloran, said his prime reason for introducing the bill was “to increase competition in local government investment pools in Nebraska.” At a hearing on the bill last year, he stated that the two pools then existing had “high fees compared to other states” and were using fees “to subsidize the very associations that encouraged their members to participate in the pools.”

The opening of a third pool in Nebraska after LB 268 was introduced seems to have addressed the senator’s concerns, as he has agreed to hold the bill in a legislative committee to see how the new pool would affect competition.

Public Trust Advisors Raises New Capital

Public Trust Advisors, which manages $81 billion of assets with a focus on the public sector, including twelve statewide LGIPs, announced last week that it had received a significant equity investment from Flexpoint Ford, a private equity investor.

The investment will enable PTA “to expand its product offerings, accelerate its core growth, and complete strategic acquisitions” according to the announcement.

A PTA representative commented “since our founding in 2011, PTA has experienced tremendous growth as the trend for states, municipalities, and other public sector entities to outsource the investment management function has exploded. Since 2019 PTA has nearly doubled in size in terms of assets under management, number of clients, and total employees.”

The representative said that as a result of the investment PTA would be able to “formalize our long-term succession plans” and expand investment in technology and cyber-security.

PTA was founded in 2011 and grew rapidly as an employee-owned company. It sold a minority interest in 2019 to Bear Creek Asset Management. With the investment of Flexpoint Ford, Bear Creek appears to have exited as an investor in PTA. Flexpoint Ford will own more than 50% of the company but the founding members and members of the management team will remain, according to the representative.

PTA’s $81 billion of assets under management rank it second among companies focused on the public funds space, behind PFM Asset Management, which had nearly $154 billion of discretionary assets under management as of December 31, 2023. PTA’s LGIP assets of $68 billion under management at the end of 2023 would rank it second in the LGIP business behind Federated Hermes and ahead of PFM Asset Management.

The public funds investment space has seen significant capital raising and consolidation in recent years, as the leading firms raised outside capital or were sold. In addition, the industry has attracted new entrants. State Street Global Advisors won a mandate to manage the CalTRUST LGIP late last year and Meeder Investment Management acquired the business of FHN Financial Main Street Advisors, a Nevada-based investment advisor formerly a part of Horizon Bank, that works in the public funds space.