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Author:  W. Bartley Hildreth.

Source: Volume 38, Number 01, Spring 2017 , pp.1-78(78)

Municipal Finance Journal

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State and local government asset and liability management demands attention of market participants. This issue offers studies examining both sides of the balance sheet. Local governments can invest their idle cash themselves or, as in most states, participate in state-wide investment pools that offer ready access to competitive rates of return in relatively safe investments and with relatively low overhead for administrative costs. Public administration faculty members Julius Nukpezah and Robert Bland examine how competition among multiple local government investment pools affects both depositor demand and pool performance. They find that the entry of new vendors does not affect depositor demand; there is no zero-sum outcome for depositors. A central issue today in municipal credit analysis is the status of public pension plans and their impact on state and local finances. Municipal market strategist Christopher Mier offers a penetrating examination into the complexity of public pensions, including modeling funded ratios and investment portfolios. His work confirms that the time path of investment returns looms large in the funding of public pensions. A controversial actuarial assumption is the discount rate used to calculate the present value of future pension benefits. Some studies call for use of a risk-free rate (such as the U.S Treasury bond rate). Public administration professors Kenneth A. Kriz and Gang Chen offer a simulation of different investment portfolios. Using historical investment return data, they find that a pension asset invested over the long term had a higher growth rate than the risk-free rate, leading to unnecessarily large estimates of unfunded liabilities. Pension issues are influencing state and local credit decisions. Municipal credit analyst Natalie R. Cohen reports on recent credit downgrades and the impact of retiree benefit concerns.

Keywords: Local government investment pools, public pensions

Affiliations:  1: Georgia State University.

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