From the LGIP Administrator
LGIP switches to a Daily Earnings Factor
Since the LGIP inception, all income during a month has been pooled and distributed at month-end to participants based on their pro rata share of the average daily balance during the month. Effective March 1, 2013 the LGIP will begin operating with a daily earnings factor. Net earnings, which are the gross earnings minus expenses, will accrue daily to each LGIP account. Below you will find a list of Frequently Asked Questions (FAQ) to help explain the what, why and how of this positive change in the administration of the LGIP. As always, if you have further questions please feel to contact me at the LGIP toll-free number (1-800-331-3284).
Why is the LGIP moving to a daily factor?
The move to a daily accrual of interest aligns the LGIP more with the private money funds and is a more equitable method of allocating earnings, especially when the Fed is in play and rates are moving up or down. Earnings will continue to be credited to participant accounts on a monthly basis and will be available on the first business day of the following month.
The current one-day allocation factor represents the daily net income dividend declared by the Pool divided by the Pool’s daily net assets. It is calculated by dividing accrued income minus expenses by the actual closing balance of the fund on a given day.
Historically, LGIP participants have been given an anticipated gross earnings rate for the current month. This was done to give participants an estimate of the gross earnings rate for the month to allow participants to make comparisons with other investment options. Some financial institutions would use that rate to set the rate they offered to customers on interest bearing deposit accounts. The Office of the State Treasurer (OST) will continue to provide an estimated LGIP yield for the current month but it will be an estimate of the net monthly yield.
The Monthly Statement will change slightly with calculating the daily factor. It will show the earnings and overdraft fees being distributed after the month-end balance giving a Net Ending Balance. The rates and fees will be calculated based on each participants balance throughout the month.
Yes. Since inception the LGIP Administrative Fee has been a flat rate, which for many years has been 3.5 basis points. Beginning in March 2013 the fee will be based on the actual expenses anticipated for each fiscal year.
For many years the LGIP Administrative Fee has been 3.5 basis points. At the end of the year participants receive a rebate, which for the past several years has amounted to over 70% of the fees that were collected. Beginning in March the LGIP Administrative Fee will be based on the estimated expenses for the fiscal year. With the current size of the LGIP the difference between the gross and net yield will go from 3.5 bp to about 1 bp. This is significant because in this very low interest rate environment the excess fees amounted to 16% of the total earnings of the LGIP and now this will be available to you as it is earned instead of held until the end of the fiscal year for the LGIP.
Since the transition to a daily factor is occurring in the middle part of state fiscal year 2013, there will still be a rebate in July 2013. After the rebate is distributed for fiscal year 2013 there will no longer be a rebate.
Please contact me with any questions you may have: