State sells $4 billion in stocks because it may need the cash before long

FAIRBANKS -- The state is liquidating about $4 billion of long-term investments in stocks because it may need the money soon and can't afford the risk of a market decline.

The need to draw billions from the Constitutional Budget Reserve over the next few years prompted the move away from stocks, Revenue Commissioner Randy Hoffbeck said in a phone interview Thursday.

"If you need the money, you can't afford to take the risk," said Hoffbeck.

The state expects to empty the Statutory Budget Reserve, which now contains about $2 billion, and make withdrawals of roughly $4 billion from the Constitutional Budget Reserve to cover the state budget shortfall in the three remaining months of this fiscal year and the next fiscal year.

A state law sets up two sections for the Constitutional Budget Reserve, one of which is to take more risk and try to earn higher returns. But the law also says "the commissioner of revenue shall assume that those funds will not be needed for at least five years."

With the collapse in oil prices, state revenue has declined so much that a majority of the state budget is being funded by savings from the Constitutional Budget Reserve. The state may need the entire account within five years, triggering the stock sale, Hoffbeck said.

"The one advantage of doing it now is that markets are at an all-time high, so we're not having to sell at an inopportune time," he said.


The stocks have earned about $300 million for the state this fiscal year, while the other $6 billion in the Constitutional Budget Reserve -- mainly invested in fixed-income securities such as short-term Treasury Bills -- is expected to return about $25 million to $30 million per year.

In exchange for the relative safety of short-term investments, the state is essentially converting the budget reserve into a cash account that won't grow. "We're reducing the risk, we're reducing returns," Hoffbeck said.

Deputy Revenue Commissioner Jerry Burnett told legislators Wednesday, "we'll be managing more to avoid loss than to earn money in many cases" in order to have the money available to pay the bills.

In fiscal year 2014, the state earned nearly $1 billion from the Constitutional Budget Reserve, most of that generated from stocks. But stocks are volatile. While the portion of the reserve account invested for the long term earned bout $200 million in February, it lost more than $100 million in September.

The returns going forward are likely to be far lower because the account is shrinking and interest rates are exceptionally low. If the state budget situation changes to such an extent that deposits in the CBR can safely be set aside for at least five years, Hoffbeck said, stock investments may again make sense.

The Revenue Sources Book released in December had projected that the Constitutional Budget Reserve would earn $328 million in the next fiscal year on its stock market investments.

The life expectancy of the budget reserve fund will depend on what happens with oil prices, state spending levels and whether the state raises oil taxes or institutes new taxes.

The state Office of Management and Budget has projected that if oil drops to $50 a barrel on a sustained basis, the account could be empty by July 2017, or July 2018 if oil rebounds to $85 a barrel. If oil rebounds to the levels predicted in the December state revenue forecast -- more than $100 -- the account could last until 2022.

State officials have long contended that the account needs to contain some amount -- perhaps $1 billion -- to serve as a cushion to stabilize the budget against oil price fluctuations on the world market.

In a legislative hearing Wednesday, Sen. Bert Stedman, a Sitka Republican, said the shorter time horizon means the loss of an important investment opportunity that added $1 billion to the treasury last year. With short-term investments, "the yield's going to implode," he said.

"It's to the point, in my opinion, we're probably going to be measuring it in weeks before we hit zero, unless we slow down this burn rate," Stedman said.

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.