Using Local Government Investment Pools (LGIPs) to Build Fredericksburg’s Strategic Reserves

What is a Local Government Investment Pool (LGIP)?

A Local Government Investment Pool (LGIP) is a cooperative investment program that allows public entities (cities, counties, school districts, etc.) to collectively invest their idle cash in a diversified, professionally managed portfolio. LGIPs are typically established by state governments or authorized authorities to serve as a short-term investment vehicle for municipalities msrb.org. In practice, an LGIP functions much like a money market fund exclusively for public funds: participants purchase shares or units in the pool, and their money is invested in high-quality, short-term instruments allowed by law msrb.org msrb.org. State laws outline the rules governing a municipality’s participation, ensuring that LGIPs invest only in instruments permissible for public funds (such as U.S. government obligations, highly rated commercial paper, certificates of deposit, etc.) msrb.org.

There are different structural models for LGIPs. Many are state-sponsored pools administered by the State Treasurer or a Treasury Board for the benefit of local governments msrb.org. In other cases, local governments can form a joint authority to operate an LGIP (if state law allows) msrb.org. Regardless of structure, LGIPs share common goals: to preserve capital, maintain liquidity, and provide a competitive yield on public funds in a legal and transparent manner trs.virginia.gov. Most LGIPs strive to maintain a stable net asset value (often $1.00 per share) similar to SEC-regulated money market funds, and many obtain credit ratings (such as AAAm) reflecting their strong capacity to maintain principal stability trs.virginia.gov msrb.org. Importantly, LGIPs are exempt from SEC registration (as government pools), but they typically follow “2a7-like” guidelines for safety and liquidity established by government accounting standards pwcva.gov msrb.org. In sum, an LGIP is a tool that lets a city like Fredericksburg join thousands of other local agencies in pooling funds for safe, short-term investment gains.

Benefits of LGIPs for Municipal Reserves

For a city government, using an LGIP offers several key benefits, especially when building strategic reserves for projects and infrastructure:

Safety and Legal Compliance: LGIPs prioritize the security of principal. They invest only in high-quality instruments permitted by state law and are subject to strict investment policies trs.virginia.gov. Many LGIPs (including Virginia’s) carry the highest money-market fund rating (AAAm), indicating an extremely strong capacity to maintain principal stability trs.virginia.gov vre.org. This gives municipalities confidence that their reserve funds are protected and managed within the legal guidelines for public monies trs.virginia.gov.
Liquidity: Funds invested in an LGIP are readily accessible. Most state pools offer daily liquidity, meaning a city can withdraw money on short notice whenever it’s needed for a project or emergency trs.virginia.gov. This is crucial for strategic reserves – Fredericksburg could invest money in the pool and still retrieve cash in time to pay for a sidewalk repair or park improvement when required. (Virginia’s LGIP even offers same-day or next-day liquidity for the standard pool, and weekly liquidity for a slightly longer-term portfolio, as discussed below trs.virginia.gov trs.virginia.gov.)
Better Returns on Idle Funds: By pooling resources, LGIP participants earn competitive interest rates on their idle cash, typically higher than what a small city could get in a basic bank account. The Virginia LGIP, for example, leverages professional investment management and economies of scale to maximize returns within safe parameters trs.virginia.gov. Over the years, participants have earned strong rates of return while still preserving liquidity trs.virginia.gov. For instance, the Virginia LGIP’s 7-day yield in July 2025 was around 4.4% trs.virginia.gov – a substantial return compared to standard municipal checking accounts. These earnings directly boost a city’s reserves: interest accrued can be used to fund additional projects or accumulate toward future capital needs. Even in lower interest rate environments, pooled investing often outperforms leaving funds idle or in non-interest-bearing accounts.
Diversification and Professional Management: An LGIP gives Fredericksburg access to a diversified investment portfolio managed by experts. Rather than the city treasurer having to invest in a few individual instruments, the pool spreads investments across U.S. Treasuries, agencies, high-quality commercial paper, repurchase agreements, etc., reducing risk trs.virginia.gov trs.virginia.gov. Professional portfolio managers (in Virginia’s case, the State Treasury’s investment team) handle day-to-day decisions following strict guidelines and oversight by a governing board trs.virginia.gov. This level of expertise and oversight would be costly for a single city to replicate on its own. By using the LGIP, even a mid-sized city like Fredericksburg benefits from the same prudent management that oversees billions in assets for all participants.
Low Fees and Administrative Ease: LGIPs are designed to be user-friendly for local governments. Management fees are usually very low due to the scale of the pool – for example, Virginia’s LGIP charges an annual fee of only 0.04% (4 basis points), which is built into the yield trs.virginia.gov. There are no additional commissions or surprise costs, and all earnings reported to participants are net of fees trs.virginia.gov. Opening or managing an account is straightforward: the city needs only to submit a simple application form through the State Treasurer’s office to start investing trs.virginia.gov. In Virginia, the minimum to open an LGIP account is just $1,000, with as little as $1 required to keep it open trs.virginia.gov – an accessible threshold for any municipality. This ease of entry and maintenance means Fredericksburg can implement an LGIP investment with minimal administrative burden.

In summary, an LGIP allows a locality to earn more on its reserves without sacrificing safety or flexibility. The interest income gained can expand the funding available for general use projects (like road repairs, storm drain upgrades, park facilities) or help build up a reserve fund faster, all while keeping the money accessible for when those projects move forward.

Virginia’s LGIP Program and Performance

Virginia operates one of the longest-running and most successful LGIP programs in the country. The Virginia LGIP was created by statute in 1980 as a voluntary pool to serve all local government units of the Commonwealth trs.virginia.gov. It is administered by the Commonwealth’s Treasury Board and managed day-to-day by the State Treasurer’s investment division trs.virginia.gov vre.org. Key features of Virginia’s LGIP include:

Regulatory Framework: The pool is governed by the Local Government Investment Pool Act (Code of Virginia §2.2-4600 et seq.), which authorizes local officials to aggregate their funds for investment in the LGIP trs.virginia.gov. The Treasury Board sets the investment policies in line with the state’s Investment of Public Funds Act, ensuring all LGIP investments are legally permitted for public funds trs.virginia.gov. In essence, the State has pre-vetted the pool’s investment options for legal compliance, simplifying the task for localities. (Fredericksburg’s own investment policy explicitly lists the Virginia LGIP as an authorized investment vehicle under state law fredericksburgva.gov.)
Portfolio Structure: Virginia’s program actually offers two pooled portfolios under the LGIP umbrella. The primary LGIP portfolio is a stable-value pool designed for daily operational cash needs (maintaining a constant $1 NAV). Additionally, an LGIP Extended Maturity (LGIP EM) portfolio was introduced for public funds that can be invested for slightly longer horizons (up to 5 years maturity) trs.virginia.gov trs.virginia.gov. The LGIP EM has a fluctuating NAV and provides weekly liquidity, aiming for a modest yield pickup while still prioritizing safety and liquidity trs.virginia.gov trs.virginia.gov. This two-tier structure gives Virginia localities flexibility: they can keep most funds in the regular daily pool and optionally allocate longer-term surplus cash to the extended pool for higher return potential.
Credit Quality and Oversight: Virginia’s LGIP is very highly rated and tightly overseen. The main LGIP fund carries a ‘AAAm’ rating from Standard & Poor’s, which is the highest possible rating for a government investment pool trs.virginia.gov vre.org. This rating reflects the fund’s extremely strong capacity to maintain principal stability and fulfill redemption requests. S&P monitors the portfolio on a daily basis as part of the rating process trs.virginia.gov. The Commonwealth’s Treasury Board meets monthly to review the LGIP’s performance, compliance, and any needed policy adjustments trs.virginia.gov. All investments are made under conservative guidelines – the portfolio primarily includes U.S. Treasury and Agency securities, secured bank deposits, top-tier commercial paper, repurchase agreements collateralized by government securities, and other such high-grade instruments trs.virginia.gov trs.virginia.gov. As a result of these safeguards, the LGIP has a long track record of never losing principal for participants.
Yield and Performance: Despite its conservative nature, the Virginia LGIP consistently achieves competitive yields thanks to professional management and scale. Participants earn interest daily. For example, in the current interest rate environment (mid-2025), the Virginia LGIP’s annualized yield is around 4.4% trs.virginia.gov. This rate is comparable to or better than many private money market funds and far above typical bank deposit rates. Historical data shows the LGIP’s yield moves with market rates: e.g., prior to the 2008 recession when short-term rates were higher, the LGIP yielded about 4.97% (daily yield in Nov 2007) louisacounty.gov. In low-rate periods (e.g. 2010s), yields dipped accordingly, but the pool still optimized returns within the constraints of safety. What matters for Fredericksburg is that whenever interest rates rise, an LGIP allows the city to immediately take advantage of those higher rates for its cash balances – and when rates are low, the LGIP’s cost efficiencies still squeeze out as much return as possible. All the while, liquidity is maintained (the Virginia LGIP permits same-day or next-day withdrawals on the standard pool), so the city’s money is never locked away when needed trs.virginia.gov.
Scale and Participation: Virginia’s LGIP has grown to a substantial size, indicating widespread use by local entities. As of late 2024, the pool’s assets were on the order of $12–13 billion trs.virginia.gov, consisting of funds from countless counties, cities, towns, school districts, and authorities across the Commonwealth. Participation is entirely voluntary, yet the size underscores that most Virginia local governments find value in the LGIP. For instance, the Virginia Railway Express (a regional transit authority) alone held about $65.9 million of its funds in the LGIP as of mid-2023 vre.org. Many counties and cities routinely use the LGIP for investing general fund balances, bond proceeds, and reserve funds. The pool’s large scale benefits all participants by achieving economies of scale in trading and administration trs.virginia.gov – savings that show up as higher net yields and very low fees for everyone. Fredericksburg can be confident that by joining the LGIP, it’s using a well-established, widely trusted platform for municipal investing in Virginia.

How Fredericksburg Could Leverage the LGIP for Strategic Reserves

Fredericksburg, VA could tap into the Virginia LGIP program to strengthen and grow its strategic reserves for infrastructure and general projects. Here’s how the city could proceed and what the impact might be:

Account Setup and Governance: To start investing in the LGIP, Fredericksburg would simply need to open an LGIP account with the Virginia State Treasurer’s office. This involves a short application form signed by the City’s Chief Financial Officer or Treasurer trs.virginia.gov. Once submitted (with a minimal opening deposit of $1,000 trs.virginia.gov), the city can transfer funds into the pool at any time. Each participating locality has its own account within the LGIP – the funds are commingled for investment purposes, but accounting records keep Fredericksburg’s balance separate and secure pwcva.gov pwcva.gov. The City would continue to control how much to invest or withdraw, and all transactions are executed through the State Treasurer’s online portal or by coordinated bank transfers. Importantly, Fredericksburg retains full ownership of its invested funds (the LGIP is essentially a trust on behalf of participants), and the City’s investment policy already authorizes use of the LGIP as an approved investment vehicle up to a high percentage of the portfolio fredericksburgva.gov. In fact, the City’s policy allows as much as 75% of its total portfolio to be placed in the LGIP, reflecting strong confidence in the pool’s safety fredericksburgva.gov.
Deploying Idle Cash: Once the account is active, Fredericksburg could periodically sweep idle cash or surplus funds into the LGIP to earn interest until those funds are needed. For example, suppose the City has unspent budget funds at year-end that Council intends to reserve for capital projects (like future park improvements or major maintenance). Rather than sitting in a non-interest-bearing account, those monies can reside in the LGIP, accruing interest. Similarly, bond proceeds or grant funds received in advance of project expenditures can be invested in the pool (notably, Virginia also offers a separate State Non-Arbitrage Program (SNAP) for bond proceeds, but the LGIP itself is often used for interim investment of capital funds) fredericksburgva.gov fredericksburgva.gov. The LGIP’s daily liquidity means that as project bills come due – say the City starts construction on new sidewalks – Fredericksburg can withdraw the exact amount needed from the pool, typically with one-day notice, and pay contractors without missing a beat. Any funds not yet needed remain invested and earning interest up until the moment of expenditure.
Earning Interest to Grow Reserves: The chief advantage of using the LGIP for strategic reserves is the interest earnings. All interest accrues to the participants based on their share of the pool, and earnings are usually credited monthly. This effectively creates a virtuous cycle for reserve funds. For instance, if Fredericksburg were to maintain a balance of $5 million in the LGIP (as part of a capital reserve or rainy day fund), and the LGIP yields roughly 4.4%, the city would earn about $220,000 in interest over a year trs.virginia.gov. That $220,000 could then be available to appropriate for additional projects like sidewalk extensions or park upgrades – or it could be left to compound, further enlarging the reserve. Over a span of years, interest income can materially increase the funds available for infrastructure, reducing the need to raise taxes or borrow for these routine projects. In a real example, Louisa County, VA reported earning about $1.47 million of interest in a year when LGIP rates were around 4.9% louisacounty.gov, illustrating how meaningful the returns can be when substantial balances are invested. For Fredericksburg, every dollar earned in interest on its reserves is a dollar that can be put toward improving streets, storm drains, parks, or saved for emergencies – effectively making the City’s money work harder for the community.
Maintaining Flexibility for Projects: By design, LGIP participation would not hinder Fredericksburg’s ability to use its money when needed. The City can tailor its LGIP usage to its project timelines. If certain funds are earmarked for near-term projects, those can stay in the main LGIP pool (stable $1 NAV, daily access). If other funds are truly long-term (not needed for a year or more), the City could consider the LGIP EM extended portfolio for a slightly higher return, knowing those funds can still be accessed on a weekly basis if plans change trs.virginia.gov trs.virginia.gov. This approach ensures that liquidity matches the City’s project schedule: no funds will be locked away beyond the horizon of their intended use. Moreover, there’s no penalty or cost to move money in or out of the LGIP – withdrawals simply stop earning interest once the cash is out, and deposits start earning from the day they hit the pool. This flexibility means Fredericksburg can confidently commit funds to investments, knowing it can retrieve them to deploy on projects like sidewalks, stormwater drains, or park facilities at any moment those projects are ready to go.
Transparency and Reporting: Investing in the LGIP would also integrate smoothly with Fredericksburg’s financial reporting and oversight. The State Treasurer provides regular statements of the City’s account, showing the balance and interest earned. For audit and budget purposes, LGIP holdings are typically reported as cash equivalents (since they are highly liquid) vre.org. The City’s Finance staff and Investment Committee would still review these investments as part of overall portfolio management, but since the LGIP is a government-sponsored pool, it requires less hands-on management than individual securities. The LGIP’s performance and compliance are monitored by state authorities and rating agencies, adding an extra layer of assurance. Many local governments find that using an LGIP simplifies their investment operations and reporting – a valuable benefit for a lean city staff. Fredericksburg’s leaders could easily track how much reserve money is growing via interest, and this could become part of the City’s strategy for funding its Capital Improvements Plan (CIP) or maintaining a healthy fund balance.

Feasibility and Considerations

Adopting the LGIP as a tool for strategic reserves in Fredericksburg is highly feasible, and in fact, aligns with practices already enabled by law and policy:

Legal and Policy Readiness: Virginia law explicitly permits localities to invest in the LGIP, and Fredericksburg’s own investment policy incorporates this authority pwcva.gov fredericksburgva.gov. There are no special approvals needed beyond routine City Council or Treasurer decisions to allocate funds to the pool. The framework is already in place – meaning the City could begin or expand LGIP investments with a simple administrative action.
No Significant Costs or Risks: The cost to participate is negligible (virtually no fees beyond the minimal 0.04% internal fee which is offset by returns trs.virginia.gov). There is no long-term lock-in; the City can withdraw all or part of its funds at any time if priorities change. Credit risk and market risk in the LGIP are kept very low by the pool’s conservative mandate and AAAm rating vre.org. In practical terms, the biggest “risk” is that interest rates could fluctuate – e.g. if rates decline, LGIP yields will go down. However, even then, the City would still be in a better position earning something on reserves than nothing. And when rates rise, the City reaps the benefit quickly through the pool’s market-adjusted yields. Unlike longer-term bonds, the LGIP doesn’t lock the City into a fixed rate; it adapts with market conditions while preserving capital.
Best Practices and Diversification: From a best-practice standpoint, using the LGIP complements other aspects of fiscal management. Fredericksburg would likely not put all its cash in one vehicle – and indeed it doesn’t have to. The City can diversify by keeping some funds in local bank accounts (for day-to-day transactions and to support local banking relationships) and investing the rest in the LGIP for interest earnings. In fact, Fredericksburg’s policy limits LGIP to 75% of the portfolio fredericksburgva.gov, implicitly encouraging a mix. This balanced approach ensures operational cash is immediately at hand while surplus cash is working in the pool. Many Virginia localities follow this model: they maintain a basic liquidity buffer in the bank and send the excess to LGIP. This way, they enjoy higher income on the majority of funds without compromising daily bill-paying ability. Given the LGIP’s strong liquidity, even funds in the pool are just about a day away from the City’s bank if needed, so the distinction between “in the bank” and “in LGIP” is mostly about earning interest, not about true accessibility.
Case Example – Building Reserves: To illustrate the potential impact: Suppose Fredericksburg is aiming to build a strategic reserve for capital projects – say $10 million over several years to fund a new park or major infrastructure upgrade. Placing monies into the LGIP during the accumulation period can accelerate reaching that goal. If the City appropriates, for example, $2 million per year into a capital reserve fund, investing those funds in LGIP during the interim could add tens of thousands of dollars in interest. Over a 5-year horizon, with compounding interest, the reserve might reach the target faster or exceed it, providing extra budget room. This is essentially “free” money for the city (interest earned at no risk), which can either reduce the tax burden on citizens or allow more project features to be funded. Numerous local governments leverage LGIPs in this manner – earnings from LGIP investments become a funding source in their capital plans. Fredericksburg stands to gain similarly by systematically utilizing the pool.
Operational Example: It may help to note how easy adjustments can be: If an urgent need arises – say an unplanned repair to a storm drainage system – Fredericksburg could draw on its LGIP-held reserves immediately to cover costs, then later replenish the reserve. The LGIP thus can function as a rainy-day fund mechanism as well, providing both growth and quick availability. Conversely, if the City finds itself with higher-than-expected fund balances at year’s end, it can promptly deposit the surplus into LGIP to earn interest until leaders decide how to allocate it. This agility in managing cash is a hallmark of well-run municipalities, and the LGIP is a facilitator of that agility.

In conclusion, enrolling Fredericksburg’s funds in the LGIP is a sound strategy to bolster the City’s financial position. It is both a prudent investment and a practical liquidity management tool. By harnessing the state-sponsored LGIP, Fredericksburg can safely earn more on taxpayer funds and thereby grow its strategic reserves for general use projects – whether it’s repaving streets, extending sidewalks, improving storm drains, or upgrading parks and facilities. The experience of other Virginia localities and authorities shows that LGIPs are a reliable vehicle to “make every dollar count” for the public. With virtually no downside and a well-established operational framework, using the Local Government Investment Pool can help Fredericksburg build a stronger financial foundation for current and future community needs. The City can move forward confidently, knowing its reserves are earning interest, protected by high-quality investments, and ready for deployment whenever community projects call for funding. trs.virginia.gov vre.org

Sources:

Virginia Department of the Treasury – Local Government Investment Pool (LGIP) program overview trs.virginia.gov trs.virginia.gov.
Virginia Department of the Treasury – LGIP Frequently Asked Questions (statutory authority, objectives, fees, account setup) trs.virginia.gov trs.virginia.gov trs.virginia.gov trs.virginia.gov.
MSRB Education Center – Explanation of LGIP structures and investment practices msrb.org msrb.org msrb.org.
City of Fredericksburg Investment Policy – Authorized investments (including Virginia LGIP, up to 75% of portfolio) fredericksburgva.gov.
Standard & Poor’s Fund Profile for Virginia LGIP – Pool objectives, management, and credit rating trs.virginia.gov vre.org.
Virginia Railway Express FY2023 Annual Financial Report – Example of LGIP usage and description of the LGIP as a money market fund for public entities vre.org vre.org.
Louisa County, VA FY2007 Financial Report – Noted LGIP yield and interest earnings example louisacounty.gov.