JUNEAU -- Gov. Bill Walker's administration is pulling back from initial proposals to more aggressively invest Alaska's billions of dollars in savings. Instead, as deficits eat into those accounts, it is now looking at investing even more cautiously in the future than previous administrations.
That shift could result in less revenue for the state treasury, but also protect the state from big losses if markets now at all-time highs take a sudden tumble again.
Walker opened up the issue of Alaska using its unique savings accounts to make more money during an address to a joint session of the Alaska Legislature about the state of the budget.
"I have asked the revenue commissioner to explore ways to safely put the state's wealth to work," Walker said.
Alaska has nearly $100 billion in savings, but much of that, including the $52 billion Permanent Fund and $22 billion in retirement trust funds, is already managed on a long-term basis.
But the state has billions more, including in the Constitutional Budget Reserve, the Statutory Budget Reserve and other accounts. Most of that money is managed on a short-term basis and getting returns of 1 to 2 percent a year, compared to more than 15 percent in some years, such as last year, for the longer-managed funds.
But Walker's revenue commissioner, Randy Hoffbeck, was looking at even more risky strategies, including arbitrage. That means borrowing money, investing it and hoping those investments go up more than the interest on those borrowings costs.
"The idea is that we have these tremendous assets that allow us to borrow at very low rates," Hoffbeck said.
Some of that $100 billion could "be used as leverage to borrow very cheaply and then be able to reinvest in safe investments, and have the delta between the two available for operations," he said.
The state's stellar AAA credit rating is the key to the strategy because it keeps the borrowing costs low, Hoffbeck said.
But even safe investments can go down and investors can experience losses. Such strategies raise concerns among legislators knowledgeable on financial matters. That includes some critics and some who have encouraged such strategies in the past.
"Even in times of surplus, which we're not in, when you deal with the public purse we're a different entity than an investment house," said Sen. Bert Stedman, a Sitka Republican who owns an investment management firm. "Our obligation is K-12 education, health, welfare and safety of our citizens."
Stedman has long opposed Alaska using arbitrage, but Rep. Mike Hawker, an accountant and Anchorage Republican, has supported it. Hawker introduced legislation authorizing the state to use up to $5 billion of arbitrage to try to bolster the state's underfunded retirement plans.
That legislation passed, but has not been used, and the authority remains on the state's books.
Hawker said if the state had invested that full $5 billion at the market's low in 2009, and then sold at recent market highs, the state's profits would have been enormous.
"Literally we could have made $15 billion, paid off the $5 billion and had $10 billion in the bank," he said. "The timing was that good."
Hoffbeck said after analysis of the arbitrage possibilities, it no longer looks like the timing is good, in large part due to how much markets have risen in recent years.
"We've decided to back-burner that for now," he said.
Hawker said he supports that decision, whipping out a smartphone and pulling up a graph of the Standard & Poor's 500 stock market index showing all-time highs.
"I think in these current market conditions when we are seeing unprecedented highs in financial markets, the likelihood of a negative outcome would outweigh the likelihood of a positive outcome, or at least it would be 50-50, and that's not good enough to make that kind of investment," he said.
Senate President Kevin Meyer, R-Anchorage, said it was fine for a new governor to look at ways to make more from the state's savings.
"It sounds good, in theory," he said. But he said he agreed with the more cautious stance.
Sen. Bill Wielechowski, D-Anchorage, agreed, praising the decision to back away from arbitrage investments with markets currently so high.
The Alaska Retirement Management Board, getting an investment briefing from top investment adviser Callan Associates at a meeting in Juneau on Friday, heard similar concerns about investing at market highs.
"Stock market returns in the U.S. have been positive for six years in a row," said Paul Erlendson, senior vice president with Callan.
"If you look at market history, there's never been a seven-year period when they've been positive," he said.
Other options Hoffbeck has been looking at included moving some of the state's ultra-safe short-term investments into more risky but potentially more profitable investments, such as stocks.
The state's Statutory Budget Reserve, currently holding $2.2 billion, is entirely invested in conservative investments and holds no stocks, while the Constitutional Budget Reserve, holding $11 billion, has about half of that with higher-yielding investments such as stocks.
Those more aggressive investments earned the state profits of $1 billion last year.
It was that profit, along with the returns last year from the Alaska Permanent Fund and other savings, that caught Walker's eye.
"In 2014, the state earned more than $8 billion in investment income," he said. That was billions more than it received from oil, he said during the budget address.
But now Hoffbeck says even those investments may be too risky for the state.
The Department of Revenue is proposing that much of this year's deficit, which will be funded out of savings, come from a riskier account within the Constitutional Budget Reserve. That will limit its ability to make profits in the future.
And that department may not have much choice -- that higher-yielding Constitutional Budget Reserve account is required by state law to only include money the state won't need for at least five years.
With the state facing deficits of $3 billion or more a year, the state may need to rely on those savings to pay for the operating budget sooner than five years.
Walker is also seeking approval from the Legislature to manage the Power Cost Equalization Endowment Fund less aggressively than currently required by statute.
"This investment mandate requires the Commissioner of Revenue to invest with excessive or undue risk in a low-rate environment," said Walker, in a letter accompanying his proposed legislation
That fund provides money to help pay for the state's program that subsidizes electric costs in communities struggling with high-cost diesel power. If the fund loses money, the loss may have to be made up from general funds or power costs would have to increase.