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municipalauthorities.org │ 43 s trENgtH iN u NCErtaiNtY LGIPs and economic risk assessment in times of volatility By Courtney Mulholland, Director, PFM Asset Management, a division of U.S. Bancorp Asset Management, Inc. Local Government Investment Pools (LGIPs) play a critical role in managing public funds on behalf of local governments, school districts, and other entities. While LGIPs like PLGIT place safety as its top priority when it comes to public funds, in a climate of economic uncertainty—currently characterized by concerns over tariffs and trade disputes—extra attention to the goal of safety becomes even more important. Escalating trade tensions between major economies have reintroduced inflationary pressures and market unpredictability. As experienced in prior circumstances, these dynamics can ripple through state and local economies, impacting revenue streams and raising credit risk for public entities 1 . In this environment, risk assessment becomes an additional, critical component of LGIP management along with the day-to-day protocols of oversight and guidance. Although LGIPs like PLGIT are not regulated by the Security and Exchange Commission’s (SEC) Rule 2a-7 (which mandates risk assessments or “stress testing” for registered money market funds) 2 , many LGIPs assess fund resilience by adopting voluntary stress-testing programs which follow the SEC mandates. In this article, we will review this type of risk assessment, as well as the standing practices to monitor safety and liquidity that some LGIPs bring to the table. Economic Risk Assessment Strategies for LGIPs The purpose of risk assessment is to evaluate how large shifts in market conditions might affect the pool’s goals of safety, liquidity, and yield. These analyses help LGIPs like PLGIT anticipate different scenarios such as in times of heightened economic volatility. LGIPs can employ a variety of economic-risk monitoring methods. For example: • Track key economic statistics (GDP growth, inflation, unemployment, consumer spending, etc.) and leading indicators (PMI, consumer confidence, employment trends). Sudden deterioration in these indicators often precedes market stress 3 . By watching for signs of economic slowdown or excessive inflation, LGIP managers can gain early warning of shifts in monetary policy or credit conditions. • Analyze Interest Rate Trends and Yield Curves. The slope of the yield curve (difference between short- and long-term Treasury yields) is a recognized recession signal: an inverted curve has historically been one of several potential indicators of an impending economic downturn. 1 Brookings Institution & Public Financial Management (PFM). (2019). Stress-testing local governments: Recovery and resilience in the face of recession. 2 Securities and Exchange Commission, (2014). Money Market Fund Reform; Amendments to Form PF 3 Federal Reserve Bank of St. Louis. (n.d.). FRED – Economic data. Continued on page 58.