Quarterly interest gain on state investments falls $6M, treasurer reports
Amid declining rates, the state treasury’s interest earnings totaled $23.1 million the past quarter — a drop from the $29 million reached in the same quarter a year ago, according to records in state Treasurer Dennis Milligan’s office.
The state’s investment portfolio totals about $4.5 billion. The quarter ended March 31.
For the first nine months of fiscal 2020, interest earnings totaled $69.3 million, down from $82.9 million earned in the same period in fiscal 2019, the records show. Fiscal 2020 ends June 30 this year.
When fiscal 2019 ended June 30 last year, the treasury’s interest earnings reached $116.9 million, exceeding the previous record high of $113.1 million in fiscal 2008.
“Long before the full impact of the covid pandemic hit, the state treasury was already seeing a decline in portfolio yields due to falling interest rates,” Milligan told the state Board of Finance on Tuesday during a videoconference on Zoom.
Interest rates have been dropping since January 2019, he said.
“The actions of the Federal Reserve in March only accelerated those declines,” said Milligan, a Republican from Benton.
He said the Federal Open Market Committee between March 3 and March 15 approved two emergency interest rate cuts, from a range of 1.5% to 1.75% down to a range
of zero to 0.25%, including the largest onetime cut since 2008.
Milligan said when he became state treasurer in January 2015, interest rates “were pretty much what they are now,” and “we were able to double our investment returns from what they had been previously by actively managing the portfolio.”
“We have been in an interest rate climate such as this before and we will come through it again,” he said. “The market will undoubtedly rebound, hopefully sooner rather than later. But for now, uncertainty remains, which affects investors as well as the every day Arkansan.”
The treasury earned $22.6 million in the quarter that ended Sept. 30 and $23.4 million in the quarter that ended Dec. 31.
The treasury’s short-term investment portfolio earned $7.7 million in the past quarter and that’s less than it earned in the previous two quarters, he said.
At the end of the quarter, the short-term portfolio, made up of commercial paper, money market and demand accounts, had roughly $1.58 billion, Milligan spokeswoman Stacy Peterson said after the board’s meeting.
“When the virus began to show up in the United States, my staff, working in close conjunction with the staff at the state Department of Finance and Administration Department, began to allow our holdings in commercial paper to mature and did not reinvest,” Milligan said. “Given the uncertainties of the market, we wanted to ensure we had plenty of cash on hand for the state to operate during this time.
“Because of large amounts of state funds coming back to the treasury, we opened up several new money market funds and demand accounts at state banks,” he said. “While these are great opportunities for us to protect the state’s money and help hold up the state’s economy, these accounts don’t generate as much in yield as other types of investments.”
The treasury’s interest earnings for the long-term investment portfolio totaled $15.4 million in the past quarter and that’s higher than the earnings in the previous two quarters, he said.
The long-term portfolio, made up of mortgage-backed securities, and callable and other bonds, had roughly $2.87 billion at the end of the quarter, Peterson said after the finance board’s meeting. Callable bonds are those that can be paid off before they mature.
“The continued growth in receipted income is due in part to my investment team diversifying the longterm aspects of the portfolio by adding agency mortgage-backed securities, agency callable bonds and floating rate instruments,” Milligan said. “Another aspect of this increase is the work my investment team has done to work out of the legacy CMOs or collateralized mortgage obligations. They have been able to gain a profit on sales and move those into higher yield instruments. … In the most recent months, we were able to sell out and gain additional liquidity for the state, as we did in the short-term portfolio.”
Despite the current economic conditions, the state treasury in the first nine months of fiscal 2020 is only about $8 million short of its interest earnings of $77.2 million for all 12 months of fiscal 2018, Milligan said.
The treasury’s return on investment was 2% during the first nine months of fiscal 2020, Peterson said.
In August, the finance board set a goal of a 2% return on investments in fiscal 2020, a dip from the previous fiscal year’s target of 2.5%, at the recommendation of board chairman Larry Walther, who said, “The market is changing.” Walther also is secretary of the Finance and Administration Department.
Milligan also announced that he is proud that “we fulfilled our annual statutory obligation of $20 million to the highway fund and $5 million to the budget stabilization fund.”
The state treasurer’s office is required to provide $20 million a year in interest earnings to the highway fund under Gov. Asa Hutchinson’s’ 2016 highway plan enacted by the General Assembly. That highway plan also relies on using 25% of the annual general-revenue surplus and several million dollars in reallocated state funds to raise about $50 million in state funds to match $200 million in federal highway funds.