Local government investment pools have flourished in Texas and its local governments have benefitted from the highly competitive marketplace that provides a myriad of options, many at very low cost. But recently the industry has attracted the attention of state legislators who have introduced bills that would alter the landscape, likely to the detriment of Texas localities.

This is a strange story because it’s not clear what is behind these moves. The usual cause is a “problem” that arises—a financial loss, or an upending of normal. But that does not appear to be behind these moves.

Texas may have the best local government investment pool industry in the nation. Eight statewide programs offer a total of 17 pooled investment options. The programs have assets of around $140 billion and expense ratios that are as low as four basis points and are generally less than national averages. And they all operate under a detailed state law that sets accounting and operating standards and promotes transparency.

Yet the Texas LGIP industry has attracted the attention of state legislators who have introduced bills that would restrict LGIP activities and alter the competitive landscape.

  • One proposal would effectively give the state-sponsored pool a monopoly and eliminate the ability of local governments to use other programs.
  • A second would require that at least 35% of the investments made by a local government be placed in Texas banks without regard to the effect this might have on local government interest earnings.
  • A third proposal would prohibit an LGIP from entering into a sponsorship agreement with any organization and seems particularly directed at a program sponsored by the Texas Association of School Boards.

There are no reported operating problems with LGIPs. Sponsors of the legislation and representatives of the Comptroller of Public Accounts, which operates the state-sponsored LGIP, did not respond to a request for comment. And the proposals have not elicited much in the way of public response by local governments, school or municipal associations or LGIPs that might be forced out of business by the moves.

The biennial Texas legislative session ends on June 2, so one way or another these proposals will be resolved in short order.

Deep Dive.

It’s not as if an operating problem precipitated these proposals. The Texas LGIP industry is the largest in the nation with a long operating history.  What problems it experienced go back 30 years when the state program had a liquidity problem. This resulted in a state law that established an operating framework for pools. The Public Funds Investment Act permits local governments to invest in a pool only if it meets specified disclosure, accounting, reporting, and operating standards, and its investments are limited to those otherwise permitted for direct investment by its participants. You could consider this statute to be a much scaled down version of Rule 2(a)-7 that applies to money market funds.

Texpool, the existing state-sponsored program, operates under this statute. It was restructured after the 1995 run. It is managed now by Federated Hermes under supervision of the Comptroller of Public Accounts. It operates with a high degree of transparency: Its disclosures, which exceed those required by the state statute, are in many (good) respects like those of money market mutual funds operating under Rule 2(a)-7. Texpool’s total assets were nearly $50 billion as of December 31, 2024. Its expense ratios are 4.5 basis points for the government portfolio and 5.5 basis points for the prime portfolio. They are much lower than the expense ratios of many local-sponsored LGIPs. The average for all government pools rated by S&P Global is 13 basis points, and for rated prime pools it is 17 basis points. It appears that Texpool’s fee structure has influenced those of other Texas-based pools, most of whose expense ratios are at or below the S&P average.

One might think that a state-sponsored program and standard-setting statute would discourage competition but the history in Texas is the opposite. A number of LGIPs were created in the last 20 years, with the most recent opening last year. The result is that local governments have more choices than available in any other state. Offerings include government and prime oriented stable value portfolios, portfolios that offer fixed term fixed rate investments and longer-duration variable net asset value portfolios.

Texpool’s assets represent about 40% of the Texas LGIP assets. Seven other LGIPs represent the balance, with their assets between $26 billion and about $300 million for the recently started pool.

Current Legislative Initiatives.

Senate Bill 404, sponsored by Senators Mayes Middleton and Adam Hinojosa (and a companion bill House Bill 5260 sponsored by Representative Pat Curry) would mandate that local governments can only invest their funds in pools under the management of the Texas Comptroller of Public Accounts (or the Texas Safekeeping Trust Company, an entity of the Comptroller). After a phase-in, other investment pools would no longer be legal. Interestingly, however, local governments could still invest in money market mutual funds. So, at least in theory, a LGIP might convert into a registered investment company and continue to accept local government funds.

Why would a state that is known as the home of free market economics promote a state monopoly? We do now know. Nor do we know whether the Comptroller favors the legislation; his legislative staff dd not respond to as request for comment. (Side note: Glen Hegar, the Comptroller, was recently named chancellor of the Texas A&M University System.)

While the rationale for SB 404 is not clear, the rationale is clear for a second proposal, contained in House bill 3900 (and Senate Bill 2329) that that would require at least 35 percent of a local government’s funds be invested in interest bearing deposit accounts in a Texas bank. This is consistent with efforts promoted by banks in other states from time to time to tilt the investment table in their favor. Last year bankers in New Hampshire pursued similar strategies.

Bankers argue that requiring local government funds to be placed within the state would support mortgage and business lending within the state. But there is nothing in the proposal that would require local deposits to be used in the community or the state. In Texas the top three banks (Charles Schwab, JP Morgan Chase, and Bank of America), account for about 80% of total Texas bank assets. They all have businesses that span the globe. Without specific requirements that local government deposits remain local and add to existing local loans and mortgages, the deposits might well be used to fund out of state or international activities.

Meanwhile local government investment earnings could take a hit as PFII data show national rates for collateralized public funds deposits have been lower than those on other high quality money market investments. (This is based on the CD Rate indices that PFII compiles.)

The third proposal, contained in House Bill 5270, introduced by Rep Curry, would prohibit an investment pool from making sponsorship or royalty payments to an association or organization. Sponsorship arrangements are not uncommon in the LGIP industry nationally. This bill might be aimed at the activities of In the Texas Association of School Boards which administers and distributes the Lonestar Investment Pool. Pools, through their administrators or investment managers, also sponsor conferences and workshops organized by state and local government associations. It is unclear whether these specific sponsorships would be prohibited by the legislation.

Bottom Line.

These proposals may be a case where an investment program is a victim of its own success. Individually or collectively they would make major changes to the local government investment environment in Texas.