17414_Authority_April_2024

20 The Authority | APRIL 2024 Too Good to be True? Three questions local governments should ask before leaping into an investment By Matt Conlin, Senior Marketing Representative, PLGIT From time to time, municipal officials may be approached by someone selling a new investment or financial product — one that might carry the promise of higher yields or total returns. With the emergence of different types of instruments available to local governments, it’s the ideal time to review approaches and considerations for the nature of each investment or product. Local government officials and administrators can ask themselves these key questions before investing: 1. Have we done our homework? With the signing of Act 10 into law in March 2016, there have been a number of new investment options introduced into the fold of permitted investments for local governments. The result is greater potential for investment yields, yet that comes with the risk of some uncertainty as to what does and doesn’t qualify as now permitted by Code or by your own investment policy. There are some investment products that, despite being permitted, may carry some additional risk that might not be evident without doing careful research. Let’s review a few examples. Market-linked Certificates of Deposit (CDs) , also known as index-linked CDs or equity-linked CDs, refer to certificates of deposit with a return based on a market index (such as the S&P 500), a basket of equities or some combination of both. With few exceptions, the principal amount in market-linked CDs is insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum of $250,000. At first glance it may sound like a good deal, offering diversification, market-based returns and protection of principal, but there are some hidden risks, including a lack of dividends and an overall exposure to stock market risk. PLGIT’s CD Purchase Program enables investors to purchase directly from hundreds of FDIC-insured CDs from financial institutions across the country. 1 PLGIT’s Investment Adviser, PFM Asset Management LLC, reviews CDs for varying terms of maturity and competitive rates to help local governments make informed investment decisions related to CD purchases. Pension and Other Post-Employment Benefit (OPEB) obligation bonds make a case that the investment income that the government could earn on the bond proceeds would exceed the interest paid out to the bond buyers. Gaining this benefit requires the government issuer to correctly time the market so the borrowing period takes place during a time in the economy when the returns on investments exceed cost of borrowing—something that is easier said than done as markets are unpredictable. 2. Are our deposits or investments protected? When it comes to a local government’s public funds, safety is always the top priority, but how can you know how well your funds are protected? Public funds on deposit with banks in amounts exceeding $250,000, the current FDIC insurance limit, must be collateralized 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 collateral investments be limited to permitted investments under local governments’ various guidelines, which raises a critical question: What liabilities would a municipality have to assume in the event that it had to take ownership of the collateral? 1 PLGIT Investors have access to additional services authorized by the Board of Trustees and administered by the Trust's Investment Adviser, PFM Asset Management LLC.