While the Legislature confirmed Randy Hoffbeck Sunday as commissioner of the Alaska Department of Revenue by a vote of 47-12, the leaders of the Senate Finance Committee voted to reject him, with one claiming that an investment decision he made last month cost the state tens of millions of dollars.
Eagle River Sen. Anna MacKinnon, a Republican, said Sunday that Hoffbeck is a "wonderful man," but not a wonderful choice for the revenue job. MacKinnon joined Sen. Pete Kelly, R-Fairbanks, the other co-chair of the finance committee, in opposing Hoffbeck's confirmation.
Asked to respond to the accusation Monday, Hoffbeck, who has decades of experience in tax administration and valuation, said he followed state law in switching investments and challenged the statement about causing a loss. MacKinnon said on the House floor that it was "$100 million or less," but on Monday she said she should have said it was $75 million.
MacKinnon's assertion concerns the subaccount of the Constitutional Budget Reserve, which had been invested for the long-term, with 60 percent allocated to the stock market. Hoffbeck moved the money into short-term investments in March, saying the state can't afford to take the risk of stock market uncertainty with money it will need over the next few years.
With greater risk comes the potential for greater profits and losses. When oil was at higher prices, the state didn't see an immediate need for the money and could afford more risk, with a payoff of larger profits if successful.
The $4 billion account has either gained or lost more than $50 million in 11 out of the last 12 months. The value of the subaccount climbed by more than $200 million in February, then dropped by about $84 million in March.
Because of the action Hoffbeck took with the subaccount, MacKinnon said she questions his grasp of "global economies." She criticized him for not consulting financial experts, suggesting they would have known the right time to sell. Stocks overall declined in March.
"It may have only cost us a little bit of money, $100 million or less. Moving $4 billion, that may be an appropriate move. But I would just place for your consideration that we lost an opportunity with those assets," MacKinnon said.
Hoffbeck said Monday that the subaccount would have declined by the amount it did in March whether the transfer took place or not.
"Only time will tell whether that potential lost opportunity actually occurs," Hoffbeck said. But he added it is an "academic exercise since the statutes required the action to occur."
He said state law requires he assume that funds in the subaccount "will not be needed for at least five years." The idea is that a five-year horizon is enough to deal with short-term dips that hit the stock market even when the market is generally rising. He said he cannot make that five-year assumption because current budget projections show that all funds in the reserve may be exhausted in two or three years.
The subaccount earned $179.3 million on its investments from July to the end of March. In 2014, it earned about $1 billion, mostly because of a rising stock market.
The entire $10 billion account is now invested in fixed-income securities, which have had returns close to zero, though they have been slightly positive in most months this fiscal year. With the need for lower risk comes lower returns and the prime goal is not growth, but of preventing a loss.
The cost of liquidating the equities was slightly less than $1 million, "but even that is not the whole story since those fees would have occurred whether we liquidated the assets today or at some future date," Hoffbeck said.
He said the state spent about $130,000 to invest in fixed-income securities. Without stocks to deal with, the state will not be paying about $800,000 a year in outside management fees for the reserve.
If oil prices stay down, when the Legislature meets in 2016 to pay for the budget for fiscal year 2017, the reserve may be down to a point where its main function could be as an emergency reserve, not a long-term savings investment.