LGIPs vs. Cash Management Firms: What Municipal CFOs Should Know

When municipalities have significant cash to manage, Local Government Investment Pools (LGIPs) are often one of the first places finance leaders look. They are designed for public entities, generally provide convenient liquidity, and can simplify the investment of public funds.

But the local LGIP does not have to be the only solution.

One important distinction is sometimes overlooked: an investment in an LGIP is generally not an FDIC-insured bank deposit.

For municipalities managing millions of dollars in taxpayer funds, understanding that distinction, and knowing how a cash management firm differs, can help finance leaders build a strategy that better balances safety, liquidity, yield, and administrative efficiency.

What Is an LGIP?

A Local Government Investment Pool allows eligible public entities to pool their cash with other government participants. The pool then invests those funds according to its established investment policies and applicable state requirements.

LGIPs are popular with municipalities because they can offer:

• Convenient access to funds
• Professional investment management
• Competitive short-term yields
• Diversification across underlying investments
• Relatively simple administration

Those are meaningful benefits, particularly for operating cash and other short-term funds.

However, municipalities should understand what they own, and what protections apply, when they place money in an LGIP.

Are LGIPs FDIC Insured?

No. An investment in an LGIP itself is generally not insured or guaranteed by the FDIC or another federal government agency.

That does not mean LGIPs are inherently unsafe. It means they provide a different form of risk management than an FDIC-insured deposit account.

Can a Municipality Lose Money in an LGIP?

LGIPs are generally managed with preservation of principal and liquidity as major objectives, and many seek to maintain a stable net asset value (NAV).

A stable NAV means the pool seeks to maintain a consistent value, often $1.00 per share. However, maintaining that value is an objective and should not be confused with a federal guarantee of principal.

Depending on the particular LGIP, its underlying investments, and its structure, investment risk may still exist. Some LGIP disclosures explicitly state that an investor could lose money.

Are LGIPs Regulated by the SEC?

LGIPs also operate differently from conventional registered money market mutual funds.

Governmental investment pools can be exempt from SEC registration, and their oversight, investment requirements, and operating structures may instead be established through state statutes, regulations, governing boards, and individual pool policies.

A municipal CFO evaluating an LGIP should know:

• What securities and deposits can the pool hold?
• How is principal stability managed?
• What liquidity is available?
• What happens during periods of market stress?
• What protections exist for participants?
• Is the municipality’s investment federally insured?
• What oversight and reporting requirements apply?

The Question Isn’t Necessarily, “Should We Stop Using Our LGIP?” A better question may be, “Does all of our cash need to be there?”

Municipalities frequently maintain cash for several different purposes. Treating all of those dollars the same can mean giving up opportunities to improve protection, liquidity management, or earnings.

Instead, municipalities can evaluate how much liquidity they actually need and whether a cash management firm could complement the LGIP for some or all of their remaining balances.

LGIP vs. a Cash Management Firm: What’s the Difference?

LGIPs are often a natural first choice for municipalities managing large cash balances. They’re familiar, but a cash management firm can offer a different, and often broader, approach. In addition to helping municipalities prioritize FDIC insurance and competitive rates, a cash management firm can provide services that support the day-to-day management of public funds.

One of the biggest differences is how the municipality’s money is held and managed.

With an LGIP, the municipality purchases an interest in an investment pool. The LGIP itself is generally not FDIC insured or guaranteed by the federal government.

With a cash management firm, such as American Deposit Management (ADM), eligible deposits can be allocated across a network of participating FDIC-insured financial institutions, with balances maintained within applicable insurance limits at each institution. This can provide access to millions of dollars in aggregate FDIC insurance eligibility without requiring the municipality to independently establish and manage relationships with numerous banks.

ADM can also actively monitor available rates and rebalance eligible deposits daily across participating financial institutions. Rather than selecting a rate when the account is opened and leaving funds there, ADM continually evaluates available rates and can reposition eligible deposits to help optimize interest earnings while maintaining the municipality’s required liquidity and deposit protection.

More Than Rates and Deposit Protection

For a municipal finance team, however, managing public cash involves more than determining where funds should be held.

A cash management firm can provide additional strategy and administrative support that an LGIP alone may not provide. Depending on the municipality’s needs, ADM can help with:

• Arbitrage rebate support: Helping manage arbitrage rebate requirements associated with tax-exempt bond proceeds.
• Vendor payments: Supporting payments associated with projects and other public expenditures.
• Cash visibility: Providing an online portal where finance teams can view balances and activity, giving them greater visibility into where cash is positioned.
• Dedicated support: Providing a dedicated point of contact who understands objectives, cash-flow needs, and overall strategy.
• Consolidated reporting: Bringing information from multiple deposit placements into centralized reporting rather than requiring the organization to track numerous financial institution relationships independently.
• Daily rate optimization: Monitoring available rates and actively rebalancing eligible deposits across participating institutions as opportunities change.
• Liquidity planning: Working with the municipality to understand upcoming expenditures and structure cash accordingly.

This can make the distinction between an LGIP and a cash management firm about more than comparing two rates.

An LGIP is a place to invest public funds. A cash management firm can help a municipality manage the broader strategy and administration surrounding those funds.

Consideration	LGIP	Cash Management Firm Like ADM
Primary role	Pooled investment vehicle for public funds	Broader cash management relationship and treasury support
How funds are held	Municipality invests in a pooled investment vehicle	Eligible deposits can be placed across participating financial institutions
FDIC insurance	The LGIP investment itself is generally not FDIC insured	Eligible deposits can receive FDIC insurance up to applicable limits at each participating insured institution
Principal protection	Generally managed with principal preservation as an objective, but investment risk may remain	Eligible deposits within applicable limits are backed by FDIC insurance
Liquidity	Generally designed to provide short-term liquidity	Can be structured around the municipality’s specific liquidity and cash-flow needs
Rate management	Return is based on the performance and structure of the pool	ADM monitors available rates and can rebalance eligible deposits daily to help optimize interest earnings
Cash visibility	Reporting and visibility vary by pool	Online portal provides visibility into balances, activity, and where cash is positioned
Vendor payments	Primarily an investment vehicle	Can support vendor payments and movement of funds for municipal expenditures
Bond proceeds support	Municipality manages related administrative requirements separately	Can provide additional services such as arbitrage rebate support for bond proceeds
Service model	Support structure varies by pool	Dedicated point of contact who understands the municipality’s cash strategy and needs
Administration	Centralized investment through the LGIP	Cash management, reporting, deposit placement, rate monitoring, and other services can be consolidated through one relationship
Best fit	Often useful for short-term operating liquidity	Particularly useful for municipalities seeking FDIC insurance eligibility, active rate optimization, treasury support, visibility, and reduced administrative workload

Ultimately, the distinction isn’t simply about determining which option has the better rate.

Municipal CFOs should consider the full amount of work required to safely and effectively manage public cash.

The question becomes:

“Are we simply looking for a place to hold our cash, or do we need a partner to help us manage it?”

Does a Municipality Have to Choose Between an LGIP and a Cash Management Firm?

No. An LGIP and a cash management firm can be used together as part of the same municipal cash strategy.

For example, a municipality may determine that a portion of its cash is appropriately positioned in its LGIP. Other balances could be managed through ADM to access FDIC-insured deposit solutions, active rate management, and a different liquidity structure.

This is why the more useful question may not be:

“Should we use an LGIP or a cash management firm?” Instead, municipal finance leaders should ask, “How much of our cash actually needs to be in the LGIP, and could the rest be working differently?”

For a municipality managing millions of dollars, answering that question can uncover opportunities to strengthen deposit protection, improve earnings, maintain appropriate liquidity, and reduce the administrative burden of managing cash across multiple financial institutions.

Where Does American Deposit Management Fit?

American Deposit Management provides municipalities with an alternative or complement to a traditional LGIP strategy.

Rather than requiring finance teams to independently open accounts, monitor rates, move funds, and manage relationships across numerous financial institutions, ADM brings those functions together through one cash management relationship.

ADM helps municipalities evaluate their cash-flow needs and determine how much liquidity they require. Eligible deposits can then be allocated across participating FDIC-insured financial institutions while ADM continually monitors available rates.

This approach can help municipalities:

• Access millions in aggregate FDIC insurance eligibility through participating insured institutions
• Maintain liquidity based on anticipated cash needs
• Benefit from daily rate monitoring and active rebalancing
• Help optimize interest earnings as available rates change
• Reduce the workload associated with managing multiple financial institution relationships
• Consolidate reporting through one relationship
• Continue using an LGIP for the portion of cash where it makes sense

The goal isn’t necessarily to replace an LGIP. It’s to make sure the municipality isn’t defaulting to one solution for every dollar simply because that’s how its cash has always been managed.

5 Questions Municipal CFOs Should Ask About Cash Currently Held in an LGIP

1. How Much of Our Cash Actually Needs Daily Liquidity?

If a municipality has $10 million in an LGIP but expects to need only $2 million in the near term, it may be worth evaluating whether the remaining $8 million could be positioned differently.

2. What Protection Does Our Current LGIP Actually Provide?

Review the pool’s disclosures. Understand whether the municipality’s investment itself is federally insured, what assets the pool holds, how principal stability is managed, and what risks participants assume.

3. Are We Receiving a Competitive Return—and Who Is Monitoring It?

Looking at today’s rate is only part of the equation.

Municipal CFOs should also consider how frequently rates are being evaluated and what happens when a better opportunity becomes available.

If rates change tomorrow, next month, or six months from now, does someone proactively evaluate whether the municipality’s cash could be earning more? And if a better rate becomes available, who is responsible for moving the funds?

A cash management firm that provides ongoing rate monitoring and active rebalancing can take that responsibility off the municipality’s internal finance team.

4. Could Different Portions of Our Cash Serve Different Purposes?

Operating cash, reserves, bond proceeds, and longer-term balances may have very different liquidity requirements. Understanding those differences can help determine how much cash should remain in an LGIP and whether other balances could benefit from a different cash management approach.

5. Are We Evaluating Our Overall Strategy—or Simply Using the Option We’ve Always Used?

LGIPs are familiar and convenient. But familiarity alone shouldn’t determine where millions of dollars in public funds are held.

Periodically comparing an LGIP with a cash management firm can help municipalities evaluate differences in FDIC insurance, liquidity, rates, active management, reporting, and administrative workload.

Can Municipalities Use ADM and an LGIP Together?

Yes. Using ADM, or another cash management firm, does not necessarily require a municipality to stop using its LGIP.

The result can be a more intentional approach in which each cash management solution has a specific purpose.

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