In today’s highly charged markets, state treasurers and other government entities overseeing local government investment pools (LGIPs) must have access to accurate, timely reporting, along with an ability to seamlessly self-service their accounts.
However, many of these investors lack the operational and technological infrastructure to efficiently perform these activities. This problem is further compounded by the fact that local governments are also dealing with serious budget shortfalls and stretched resources.
These challenges have prompted more local and state governments to embrace automation when managing their LGIPs.
Operational inefficiencies prove taxing for investors
The ongoing reliance on legacy technology stacks is causing problems for both LGIPs and their investors. The absence of automation in the investment chain sometimes makes it difficult sometimes for state treasurers and other local government bodies to obtain certain information from their LGIPs.
“Some pool participants are very technology-savvy, but others will want communications or reporting to be conducted in a hard copy paper format or via email,” said Hannah Chavez, Investment Transaction Supervisor at New Mexico’s State Treasurer’s Office.
This dependency on antiquated systems can occasionally result in client reporting being very slow, manual-based, and error-strewn, which, in turn, creates risks for end investors, especially when markets are behaving erratically.
This could mean that a treasurer, for example, does not receive timely information about the nature or market value of the securities in their pool, leading to possible losses. In some cases, a treasurer might breach their investment mandate if they belatedly discover that certain securities in a pool are not compliant with the government’s investment policies.
Treasurers can better manage their liquidity by being notified in a timely manner of funds that are either available or requested.
Complicating matters further is that LGIPs will typically have thousands of underlying clients, each with their bespoke reporting time horizons.
“LGIPs never know when people will want certain information. For example, an LGIP cannot predict when a government department is going to want information about its balances. While an LGIP can provide them with month-end balances, nobody’s world really works on a month-end basis,” said one state treasurer. “A lot of the information requests are often ad hoc in nature, and this can cause complications and disruption for LGIPs, especially if they do not have an administrator dealing with the requests.”
Managing fund flows into LGIPs
The ease of investing in and withdrawing funds from LGIPs is being impeded by the continued use of substandard technology systems at a number of allocators.
This is a major obstacle, as state treasurers may, in some instances, need to withdraw money from LGIPs suddenly, either because of a spike in market volatility or due to a shortfall in their tax take. Executing these sorts of transactions without process automation can be difficult, leading to potential funding crunches.
It is not uncommon for investors to still use manual processes, such as fax or telephone authorization when withdrawing money from their LGIPs. Such manual processes can increase the risk of error or fraud for both the investors initiating the transaction and the treasurer's office executing the transaction.
As a result, treasurer’s offices are often forced to add personnel to manage the increased risks caused by these manual processes, leading to higher operating costs. Moreover, the extra reviews and approval processes carried out by new personnel do not completely eliminate the risk of errors happening either, partly because these new review and approval processes are often manual intensive too.
The use of a system with defined user roles can help implement automated controls to ensure the appropriate personnel at the investor initiates the transaction(s), and that the appropriate personnel at the treasurer’s office reviews, approves and documents the process before any funds are released.
Dealing with new risks like cyber-crime
A dependency on older technology increases the chances of treasurers falling victim to cyber-crime.
With their highly privileged access to cash flows and bank account information, treasurers—both within the public and private sectors—are a highly prized target for cybercriminals.
According to data from the Center of Internet Security, cyber-attacks against local and state governments are becoming more frequent. The study found malware attacks against local and state governments were up 148%, while ransomware incidents jumped by 51% in the first eight months of 2023 compared to the same period in 2022.2
“Cyber-security is something which all treasurers need to pay close attention to,” said Chavez.
The pressure is on treasurers
Failure to adopt automation creates additional barriers for state treasurers and government bodies, whose operating models are already under significant pressure.
By continuing to use aging technology when allocating to LGIPs, state and local government entities will find themselves saddled with further unnecessary costs, especially as their budgets and internal resources are being badly squeezed.
According to a report by Truth in Accounting, a non-for-profit organization, 66% of the seventy-five most populous cities in the US are sitting on debts totaling $266.5 billion, with New York, Chicago, Honolulu, Portland, New Orleans and Philadelphia among those most in the red. 3
New York, for example, presently has a debt pile totaling $171.5 billion, while Chicago and Portland’s debt burdens stand at $38.2 billion and $5.2 billion, respectively.4
“This is a hot topic in a number of states right now. In today’s market environment, it is expensive to run government, and many municipalities are stretching their dollars about as far as they can go. A lot of municipalities are facing huge budget restrictions, and this is a problem. We are having to do more with less resources,” said one state treasurer.
Many local and state governments are also dealing with acute labor shortages, an issue that appears to be worsening.
This is echoed by the state treasurer. “It is not just a monetary problem. A lot of governments and businesses have had to cut staff because of financial pressures, and this is creating resourcing challenges,” they added.
State and local governments have also been disproportionately impacted by the large number of workers who exited the labor market during COVID, a trend otherwise known as the “Great Resignation.”
“We are seeing many baby boomers retire across municipalities, and they are being replaced by fresh sets of eyes, which is great. However, these newer joiners do not immediately have the same level of institutional knowledge, and this is creating challenges,” noted the state treasurer.
In some cases, state and local governments are finding it difficult to attract and retain talent, as they cannot compete with the generous remuneration packages available in the private sector.
The scale of this problem should not be underestimated.
While private sector employment now exceeds its pre-pandemic levels, state governments are still missing 200,000 jobs, a 3.8% decline relative to February 2020, while local governments are currently down 305,000 jobs, a 2.1% drop-off over the same time horizon. 5
The copious lack of investment in technology means that already constrained resources at local and state governments are having to be diverted to deal with mundane operational issues involving LGIPs.
Navigating the pitfalls
Despite the challenging headwinds, there are solutions to help investors manage their LGIPs.
Customizable investor portals provide automation and allow investors, treasurers and administrators to conduct business (e.g., book of record and shadow accounting, data management, reporting, regulatory reporting, etc.) and interact with accounts in real-time.
“Automation in any regard is great as it reduces manual intervention and improves operational efficiency, especially if you are operating in a resource-constrained environment,” said Katie Smith, Chief Financial Officer, State of Wyoming Treasurer's Office.
Such tools support investors when managing their accounts, enabling them to seamlessly monitor account balances, deposit and withdraw cash, transfer cash between accounts, review and view investor communications, manage user credentials, monitor transaction activity and retrieve current or historical account statements.
By leveraging a rules-based configuration and employing sophisticated security controls, these portals ensure that investor activity complies with fund governance procedures and policies, in areas such as investment balance limits, transaction limits and transaction approval limits.
Better transparency ultimately helps improve trust between all the parties involved in the investment process. It also makes life easier for investors, especially those with large and complex LGIP portfolios. Furthermore, customizable investor portals can help treasurers manage risks, such as cyber.
The use of technology when overseeing LGIP investments will help eliminate some of the friction and operational pain points in the day-to-day activities of state treasurers and local governments.
Broadridge’s Internet Participant
Access System (iPAS) Overview
Broadridge’s Internet Participant Access System (iPAS) is an online solution for the processing of monetary transactions and viewing fund participant account information via an environment with multiple layers of security. iPAS is designed to meet the needs of all types of common funds, including Local Government Investment Pools (LGIPs), commingled funds, and fund of funds, as well as master and sub-funds managed as fixed or variable net asset value programs.
What iPAS Can Do
iPAS allows authorized participants to:
- Deposit cash in authorized funds
- Withdraw cash from authorized funds
- Transfer cash from one authorized fund to another authorized fund
- Print confirmations of all iPAS-executed transactions
- Display and print account statements and inventories of investments held in any authorized fund
How iPAS Empowers Funds
iPAS greatly increases the organization's efficiency and accuracy, alleviating most of the labor-intensive functions normally associated with administering a common fund, such as:
- Answering phone calls and faxes from participants
- Manually writing transaction tickets
- Manually entering transactions into your funds' processing system
iPAS virtually eliminates all of these time-consuming functions, allowing your investment personnel to spend more time working on other aspects of your business. The bottom line is increased profitability and reduced operating costs and overheads.
iPAS is fully integrated with Broadridge Investment Accounting (BIA) in real time. All transaction activities submitted by fund participants via iPAS are immediately recorded within BIA, and BIA contains a real-time transaction monitor and audit trail that enable fund sponsors to instantly observe participant iPAS activity.
Client Testimonials
Katie Smith, Chief Financial Officer, State of Wyoming Treasurer's Office:
“Broadridge’s iPAS solution has been a huge step forward for us to manage our various WyoSTAR Programs, which are our LGIPs. iPAS has given us the ability to manage these pools effectively and keep track of our participants. Participants can log into iPAS and initiate transactions, instead of having to carry out these processes by email or telephone. A lot of processes can be done by simply clicking a button with iPAS. From a transparency perspective, participants can also look at their funds in real time. Ultimately, iPAS has helped us achieve enhanced automation and given us better transparency, which in turn has facilitated operational efficiencies and meaningful cost savings.”
Hannah Chavez, Investment Transaction Supervisor, New Mexico’s State Treasurer’s Office:
“iPAS helps us communicate with participants as it allows us to pull reports and see what has been entered for the day, or if there are any upcoming investments. iPAS has allowed us to implement more rigorous cyber-security checks. When a participant wants to log into their portal, security steps have been introduced, such as security walls and additional approvals when validating and confirming requests.”