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.
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.