Assessing Participation in the State‐Sponsored Local Government Investment Pool during the Recession: An Examination of North Carolina Counties

Abstract

This study examines county government participation in the state-sponsored investment pool, the North Carolina Capital Management Trust (NCCMT), during the recession years. Using panel data of all 100 counties in North Carolina with additional survey data from finance officers concerning annual practices between fiscal years 2008-2011, findings suggest that county sales taxes were the most influential revenue stream on NCCMT cash portfolio participation while the accumulation of alternative revenue sources decreased participation. The findings also determined that the NCCMT was the safest investment option for idle local government funds during the recession.

Investing During the Recession: How County Governments Utilized Idle Cash

“…The most popular in recent years has been the local government investment pool (LGIP). The amount of research surrounding the use of investment pools has increased substantially over the past decade (Berry, 2008: Pantages, 2009Modlin & Stewart, 2013;Bland, Nukpezah, & Shinkle, 2015). In most cases, the pools primarily consist of the investments from multiple local governments in a single state with a minimum contribution amount.…”

“…Riskier investments by managers forced many states to re-examine portfolio investment practices (Bunch, 1999). Subsequently, many local governments have determined that the investment pool has become one of the most risk-free securities (Modlin & Stewart, 2013;Kim, 2016). For portfolio purposes, it could be considered a risk-averse asset in some states (Tobin, 1958).…”

“…For many counties in this sample, it exceeded 50%. Collection rates for counties in both states are also high and exceed 90% annually (Modlin & Stewart, 2013). Unless there is an immediate spending need at the beginning of the fiscal year when property taxes are disseminated, the funds can immediately be invested.…”

“…For example, if most counties stated investing at least 25% of idle funds in a security versus only 10%, that is the representation illustrated. Based on additional data, county governments for this sample were investing a minimum of 40% of idle cash in state-sponsored investment pools (Modlin and Stewart, 2013). As mentioned earlier, the CD was utilized frequently, but most respondents only invested approximately 5% of available funds.…”

“…The literature thus far has provided little insight into the investment choices of government officials during the recession. The only thing for sure is that finance officers placed safety first when determining the utilization of idle cash (Modlin & Stewart, 2013;Modlin, 2016). These same decisions also provide some information concerning official perception of recession duration due to the maturity dates of various instruments in relation to immediate expenses.…”