Alaska budget reserve suffers billion-dollar loss

STOCK MARKET: Change in state's investment strategy appears ill-timed.

January 28, 2009 

A change last year in how a key state savings account is invested has yielded nothing but pain so far -- a loss of about $1 billion.

The reason is the stock market meltdown that began last fall.

Because Department of Revenue officials plowed a big chunk of the Constitutional Budget Reserve into stocks shortly before the meltdown started, the state suffered the same kind of stinging losses many Americans have experienced in their personal retirement portfolios.

Revenue officials, as well as state legislators who encouraged the stock investments in hopes of generating bigger profits, acknowledge their timing was dreadful.

But they're hoping the market rebounds in coming years and the bet pays off over the long haul.

Others say they're concerned about further losses for the budget reserve, which legislators might have to tap as soon as this year to help balance the state budget.

"Are we still at risk for going down the tubes further?" asked Rep. Harry Crawford, an Anchorage Democrat and member of the House Finance Committee.

Alaska voters created the Constitutional Budget Reserve in 1990, and lawmakers have drawn money from it several times to cover state spending. High oil prices have negated the need to dip into the fund since 2003.

But with the recent steep decline in oil revenue, the state might be facing a big deficit this year and might need to spend part of its savings.

Over its history, the budget reserve has been plowed predominantly into relatively safe and stable investments such as bonds and Treasury bills. Such investments typically don't generate the same kind of big returns that stocks can, but they're not as risky and can be quickly sold to provide ready cash if needed.

During last year's legislative session, lawmakers had a huge stack of surplus dollars on hand because of a run of record-high oil prices, so they put more than $4 billion into the Constitutional Budget Reserve as savings.

Instead of parking the money in the reserve's conservative investment account, it was shifted to a subaccount that's invested more aggressively in stocks.

That subaccount had a market value of about $4.5 billion in the summer. But with the stock market crash, its value has plunged to $3.5 billion -- meaning a $1 billion loss, said Jerry Burnett, the state's deputy revenue commissioner.

The reserve's overall value today is about $7 billion.

In a House Finance Committee hearing last Thursday, state Revenue Commissioner Pat Galvin said legislators who write state budgets provide direction on how to invest the Constitutional Budget Reserve. State officials also rely on a professional money management consulting firm.

Burnett said officials had no reason last spring to expect the state would need to dip into the reserve anytime soon, and so investing in stocks made sense as they can deliver superior returns over a long period even though they can experience extreme swings up or down in any given year.

Despite last year's market collapse, state officials have no plans to change how the reserve is invested, Burnett said.

"Some years you're going to have a loss," he said. "You can even have a severe loss. But over time, you're going to do better than if you bought all Treasury bills and just held them forever."

State Sen. Kevin Meyer, an Anchorage Republican who last year co-chaired the House Finance Committee and helped write the state budget, agreed that he and other legislators advised Galvin to invest the reserve's new deposits more aggressively.

In years past, Meyer said, state officials have heard criticism for investing too conservatively as stocks soared.

He believes last year's investment shift can yet turn out rosy.

"I'm still not sure it was a bad decision," he said. "We've got some time, so hopefully the stock market will come back."

If the state does need money this year from the Constitutional Budget Reserve to cover a deficit, it can draw first on that portion of the reserve invested in bonds and other conservative instruments, Meyer said.

Anchorage Republican Sen. Con Bunde said he'd always heard the budget reserve was invested in conservative and highly liquid investments so that, in the event of a crisis such as an earthquake, the state could tap a reliable source of money quickly.

He worries the state is overspending, but he stopped short of assigning blame for the $1 billion loss.

"I guess I can't fault the Department of Revenue for probably making the same mistake most of us made in our 401(k)s," he said.

Evan Rose, chief executive for Alaska Permanent Capital Management Co., an Anchorage firm that handles investments for clients including the Alaska Permanent Fund, said whether to invest more aggressively in stocks depends on how soon investors believe they might need the money, and how much tolerance they have for risk.

"If you don't need the money quickly, you have a longer period of time to withstand the volatility of the market," he said.

Assuming the state's original considerations haven't changed -- it doesn't expect to need its savings in the next five years, and it can stomach the risk -- then officials needn't change course with how the Constitutional Budget Reserve is invested, Rose said.


Find Wesley Loy online at adn.com/contact/wloy or call 257-4590.

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