JUNEAU - Stock markets are at all-time highs, which might make this a risky time to invest in equities. Bonds are no better, with yields so low that investing there won't do much good, and might be risky as well.
But it is those financial markets in which state chief investment officer Gary Bader was handed $1 billion to invest, and he was told he's expected to make at least 8 percent per year on it for 30 years.
Oh, and he'd better not lose it, either.
"There's going to be a lot of eyes on how this is invested, and we just want to do it as prudently as we possibly can," said Bader.
The money goes into the trust funds for the Public Employees' and Teachers' Retirement Systems, and is the first installment of $3 billion sought by Gov. Sean Parnell and approved by the Alaska Legislature to shore up the underfunded pension plans.
The decision about how to invest a sudden lump sum of cash is one that regular citizens sometimes face as well, but on a far smaller scale, whether from selling a house or winning the Nenana Ice Classic.
It can be risky to invest all at once, but while holding money in cash feels safer, it means you are not getting a return on it.
Looming over Bader's investment decision-making is the history of the last time the state wound up investing such a windfall. During years of deficits, the state had borrowed many billions from the Constitutional Budget Reserve with which to balance yearly budgets.
But several years ago, a combination of high oil prices and the new ACES oil tax meant the state treasury suddenly had money available to pay back the budget reserve. But it did so at an inopportune time, just before the 2009 stock market crash.
"It looked like a billion-dollar loss right out of the chute," Bader said.
That made for some uncomfortable legislative hearings for top Department of Revenue officials, who oversee both the retirement trust funds and the budget reserve funds and had made the decision to make the big contribution to pay back the budget Reserve.
This time, Bader said, the state will use a couple of strategies, including diversification as well as staggering the $3 billion infusion in the trust funds over many months.
Department of Revenue Commissioner Angela Rodell told the Alaska Retirement Management Board in June that the first deposit would be July 15, with the next in November and the final $1 billion in March.
The cash infusion comes from the most conservatively managed part of the $12 billion Constitutional Budget Reserve, a portion expected to earn between 2 percent and 3 percent per year, compared to 8 percent in the more aggressively invested retirement trust funds.
The board sets an annual asset allocation for the trust fund's investments in stocks, bonds, infrastructure, real estate and such categories. Each individual allocation includes a range, and if the investment rises or falls outside its range, Bader's staff re-balances the portfolio back within those ranges.
Such a strategy is intended to result in selling rising investments and buying laggards, with a goal of earning more over time. In June, the board increased the size of those ranges so state investment managers won't feel pressure to rush into investments just to meet the asset allocation mandate.
"Our plan is to invest this money in a variety of assets, stock and bonds, as they are now invested in the pension portfolio," Bader said. "It takes time to do that, and we know that we aren't going to be able to put all the money to work where we would like it on day one."
The first investments may go to some areas that have recently been on the low side of their investment ranges, such as international equities and infrastructure," he said.
At the June retirement board meeting, contract investment adviser William Jennings praised Rodell's staggered investment plan, likening it to "dollar-cost averaging."
That's an investment strategy in which a set amount of money is invested at regular intervals. While the market may sometimes be high and sometimes low, dollar-cost averaging limits the risk of making an investment at the wrong time but still offers some potential for gains.
It's commonly used for contributions to 401(k) plans and other personal investments.
While fears of a repeat of the 2009 market losses remain, this year Bader reported to the Legislature that the Constitutional Budget Reserve had stuck with those investments and that the rising stock market in the years since had made back those losses and much more.