The state treasury's interest earnings for July-September reached $25.4 million, the best performance in any quarter in 10 years, the state Board of Finance learned Tuesday.
The fiscal 2019 first-quarter earnings were on an investment portfolio of $3.5 billion and the largest since the fourth quarter of fiscal 2008, when they totaled $27.7 million.
Treasurer Dennis Milligan, a Republican from Benton, said the treasurer earned $18.5 million in the same quarter a year ago.
"Higher interest rates naturally have driven up the returns, but we are also using the interest rate hikes to our advantage," Milligan said.
In fiscal 2018, which ended June 30, the treasury earned $77.2 million in interest -- up from $57.6 million in fiscal 2017 and nearly $49 million in fiscal 2016, which was Milligan's first full fiscal year as treasurer.
Milligan took over as treasurer in January 2015, succeeding former Legislative Auditor Charles Robinson of North Little Rock, a self-described independent who was appointed. The treasury's interest earnings totaled $22.3 million in fiscal 2015.
Robinson was appointed as treasurer by then-Gov. Mike Beebe, a Democrat, in May 2013, after Treasurer Martha Shoffner of Newport was arrested on an extortion charge and she resigned.
In 2015, Shoffner was sentenced to 30 months in federal prison after a jury found her guilty of six counts of extortion, one count of attempted extortion and seven counts of receipt of bribery in connection with a series of cash payments she received from broker Steele Stephens between 2010 and 2013.
Milligan told the Board of Finance that "now the pressure is really on to continue" increasing the treasury's interest earnings. He was re-elected last week to a second four-year term that starts in January.
Milligan said the treasury's short-term investment portfolio earned interest of about $13 million in the first quarter of fiscal 2019, most from commercial paper investments.
The treasury's long-term investment portfolio, consisting of mortgage-backed securities, earned $12.4 million in the quarter, he said.
"Our portfolio has becomes more liquid over the course of the last 12 to 18 months in anticipation of the higher interest rates," Milligan said.
"As the economy improves, we are studying the market and evaluating the plans in the state's long-term portfolio. With the economy gearing back up, there is the potential to move investments to the longer term and get better rates. However, our strategy at this time still focuses on staying liquid by investing in short-term securities as we monitor developments in the bond market."
Board Chairman Larry Walther said the increased earnings have helped finance Gov. Asa Hutchinson's highway plan to raise $50 million a year to match $200 million in federal highway funds; agencies with accounts in the treasury; and the Long-Term Reserve Fund, which helps the state's bond rating.
The Long-Term Reserve Fund's balance totals $126.6 million, Scott Hardin, a spokesman for the state Department of Finance and Administration, said after the board meeting.
Hutchinson's highway plan, enacted by the Legislature in a 2016 special session, relies largely on $20 million a year in treasury interest earnings and on using 25 percent of general revenue surpluses to match federal highway dollars. The plan took effect in fiscal 2018.
The Board of Finance endorsed legislation proposed by Milligan for the upcoming regular legislative session, which starts Jan. 14. Chief Deputy Treasurer Jason Brady described the bill as including two technical corrections.
The legislation would no longer require all purchases and sales of securities by the treasurer to be "made upon receipt of no less than three quotation bids from" securities brokers. It would instead require all transactions by the treasurer to be made "in a competitive procedure approved by the state Board of Finance which demonstrates the goal of optimal price, value and showing no favoritism towards any securities broker."
The endorsed bill also would clarify allowable investments in a corporate obligation with an investment grade rating of at least BBB, A2, P2 or an equivalent grade as indicated by at least two nationally recognized statistical rating organizations. This would be instead of an investment grade rating of BBB or higher.
Senior Investment Manager Ed Garner told the board that "we actually see 10 or 15 brokers and we can click [electronically] and execute and get the best price, so actually if we were to follow the three-bid process we would pick up a phone and that would actually cause us a worst price as dealers faded in that time frame.
"With commercial paper, treasuries, any number of instruments that are electronically traded, we can demonstrate operationally that we are getting best price and we are not showing favoritism to any broker," he said. "Everything we are doing here completely fulfills the intent of the law, which is to have the best price and spread the business around, not favor one broker over another."
Metro on 11/14/2018
Print Headline: State treasury's 1Q earnings rise; $25.4M called 10-year record