TexPool's Experiences in the 1990s: Policy Implications for Other State Investment Pools

Abstract

The State of Texas's local government investment pool, TexPool, has faced major challenges in the 1990s. This article provides an overview of two major events involving TexPool: (1) a $2.2 billion “run” on the pool in 1994 and (2) the out‐sourcing of TexPool's functions in 1997. The article describes these events and analyzes potential implications for other state‐administered investment pools. The article addresses issues such as: (1) the need to develop investment policies and practices that are suitable for a particular pool's objectives and purpose, (2) whether a state government has a responsibility to ensure that participants in a state investment pool do not incur losses, (3) the possible implications of having an elected official as the person with primary responsibility for overseeing the pool, and (4) concerns related to the outsourcing of state investment pools. This article is intended to encourage debate on the policies and practices of state investment pools, which currently are serving more than 15,000 local governments in the United States.

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

“…Previous literature surrounding local government withdrawal of funds from a state‐sponsored investment pool was primarily due to safety concerns local governments in Texas were experiencing when a publication compared TEXPOOL to the OCIP (Bunch ). In this case, the finance officers representing each unit were asked to provide a reason for withdrawing from the fund REAWDCMT.…”

“…TexPool purchased $5 billion worth of investments and leveraged $1.3 billion with other securities (Blumental ). Initially, TexPool lost $75 million or 2 percent of its portfolio, but all together it was estimated that the losses were approximately $2.2 billion or 59 percent of the investment pool's balance as a result of the “run” by local governments (Blumental ; Bunch ).…”

Investing During the Recession: How County Governments Utilized Idle Cash

“…Initial research in this area suggested higher rates of return due to available funds, diversification within the portfolio, and full time managers (Thompson & Gates, 1988;Strachota, 1991). 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).…”

Determinants of Depositor Demand for the Texas Local Government Investment Pool

“…Shortly after the Orange County disaster, the Wall Street Journal ran an article disclosing that TexPool, the state‐sponsored LGIP in Texas, had pursued an investment strategy similar to what led to the financial crisis in Orange County. That announcement led to a run on TexPool that resulted in a paper loss of between $55 and $97 million (Bunch ).…”

“…In explaining the performance of investment funds, prior studies of LGIP's emphasize prudent management measures as determinants of performance (Thompson ; Bunch ; Lynch, Shamsub, and Onwujuba, ; Pantages ; Kim ). In a study of North Carolina counties, Modlin and Stewart () test for the factors that affect the supply of cash invested by county treasurers in the state‐sponsored LGIP.…”