16851_Authority_Aug_2023

!" !!! !"#$%&'"()*'+ !!"!!#$%$&'!()(*! E ndorsEd P rogram Apples and Oranges Contrasting Differences Between PLGIT and Depository Institutions By Paul Robinson, Senior Marketing Representative, PLGIT In March of this year the Federal Deposit Insurance Corporation (FDIC) took control of California-based Silicon Valley Bank (SVB) to help prevent the loss of billions of dollars in depositors’ funds. A few days later, worries over the origins of the SVB collapse caused a destabilization of Signature Bank in New York and subsequent intervention by the FDIC to prevent similar losses. Although banks can offer investment products, and local government investment pools (LGIPs) like PLGIT - the Pennsylvania Local Government Investment Trust - offer cash manage - ment products, the two institutions are different: banks take in deposits and loan funds as a business model. LGIPs were organized in a cooperative model by local governments as a way to easily accomplish short-term invest - ing in a manner that seeks safety of principal, liquidity when needed, and a market rate of return. In this month’s article, we hope to draw a few distinctions between deposits at a financial institution and investments in an LGIP like PLGIT, as well as highlight a few of the mech - anisms that are built into PLGIT to ensure the safety and liquidity of local government funds. Most local govern - ments utilize both banks and PLGIT as “depositories” and while at times they are thought of as the same, here are a few of the differences: Maintaining a stable net asset value vs. collateralization Public funds on deposit with banks in amounts that exceed the limits of FDIC insurance – currently $250,000 per institution – must be collater - alized under Pennsylvania Act 72. Banks usually maintain that collateral in a pool for all public entities that make deposits at the institution. Act 72 provides a minimum standard for banks to follow, but does not provide guidance on the length of investments to be held in a pool. Furthermore, Act 72 does not require that collater - al investments qualify as permitted investments for PA local governments under state statute. Other options for collateral include a Federal Home Loan Bank (FHLB) Letter of Credit. By contrast, PLGIT portfolios are consistently invested and held to earn income for the Trust and its investors. PLGIT’s portfolios seek to maintain a stable net asset value (NAV) of $1.00 per share for each dollar invested by investors, meaning that the market value of the portfolio holdings should match dollar-for-dollar to the out - standing shares in that portfolio. As shares are purchased and redeemed by investors and as the market fluc - tuates on a daily basis, PFM Asset Management LLC (PFMAM), PLGIT’s investment advisor, monitors the market and buys and sells permitted investments from national and re - gional broker-dealers and direct from certain government agencies to keep PLGIT’s assets in line with liquidity needs of its investors and with the stable NAV goal. In short, instead of having to set aside assets as collateral, PLGIT maintains shareholder investments in actual assets. Safety first: a multi-layered system PLGIT has built in a number of protec - tions and a system of oversight that has been in place since the founding of the Trust. For example: PLGIT is governed by its members. PLGIT’s 11-member Board of Trus - tees is made up entirely of local government officials and is elected each year. The Board of Trustees sets investment goals and spurs the devel - opment of new services, and includes representatives from schools and the local governments represented by the governing associations. The Board of Trustees developed and maintains the investment policies of the Trust, which are described in the PLGIT Information Statement. PLGIT is guided by your investment rules. PLGIT invests solely in invest - ments permitted by the codes gov - erning local governments, municipal authorities and schools in Pennsylva - nia. Those investments include: • U.S. Treasury Bills/Notes. • Short-term debt of highly rated federal agencies such as the Fed- eral Home Loan Bank. • Appropriately collateralized certif - icates of deposit and time depos - its in banks. • Commercial paper. • Negotiable certificates of deposit. • Debt issued by the Common - wealth of Pennsylvania, a state-level agency, or general ob - ligation debt of a municipal issuer in Pennsylvania. PLGIT invests in short-term securities — with a maximum maturity of 397 days or fewer, and a maximum weight - ed average portfolio maturity of 60 days — to minimize interest rate risks, the importance of which has been demonstrated in the current fast-rising rate environment. PLGIT’s investment policies include best practices found in Securities and Exchange Commission