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Low rates noted as state's interest earnings decline

by Michael R. Wickline | August 18, 2021 at 3:01 a.m.

Amid low rates, the interest earnings on the state treasury's investment portfolio of nearly $5 billion dipped to $35.4 million in the fiscal year that ended June 30, state Treasurer Dennis Milligan reported Tuesday.

The Benton Republican told the state Board of Finance that he is proud of how hard his investment team has worked over the past year.

"I don't have to tell you how difficult the last year has been for investors," he said. "My investment team has been relentless in pursuing opportunities to provide our portfolio with as much cost-saving and interest-producing opportunities as possible, exceeding even our own internal projections for [fiscal] 2021."

Afterward, Grant Wallace, chief deputy treasurer for programs and services, said the treasurer's office initially projected $25 million to $27 million in interest earnings in fiscal 2021.

The fiscal 2021 annualized return was 0.675%, said Milligan spokeswoman Stacy Peterson.

Milligan told the finance board that the state treasury earned more money in fiscal 2021 than it did in fiscal 2015, when interest rates were similar. Earnings totaled $22.3 million in fiscal 2015, according to Milligan's report to the board.

Fiscal 2021 was the second consecutive fiscal year in which the treasury's interest earnings declined, the report showed.

In fiscal 2020, earnings dropped to $80.7 million from $116.9 million in fiscal 2019. The previous high was $113.1 million in fiscal 2008. Milligan took office in January 2015.

Milligan said the treasury's long-term investment portfolio in the last quarter earned about $10.5 million. That portfolio is made up mostly of agency and U.S. Treasury bonds and mortgage-backed securities, Peterson said afterward.

The Federal Open Market Committee is continuing its quantitative easing program and purchasing U.S. Treasury bonds and mortgage-backed securities, which has kept interest rates low and asset prices inflated across all sectors of the market, Milligan said.

"The market is flush with cash as investors wait for rates to rise, and any time there is an upward fluctuation, bonds are picked up quickly," he said. "This, along with the Fed's continual purchases, has limited the bond supply. Simply put, there just aren't enough bonds for the amount of cash investors have."

As investors wait for opportunities to present themselves, "they, like we, are watching the bond market intently, ready to buy as soon as rates fluctuate higher," Milligan said. "This is how we have been operating my entire administration and are well-prepared to make those purchases when it is advantageous to the treasury."

He said the state treasury's short-term investment portfolio, which consists of demand and money market accounts and commercial paper, earned roughly $659,000 in the quarter that ended June 30. This portfolio's earnings are heavily dependent on the federal interest rate, which has been sitting under 0.25% for quite some time, he said.

Milligan said the treasury's investment portfolio has grown from about $3.5 billion to nearly $5 billion.

"We are setting up a solid foundation on which [future] treasurers can build upon, and by which taxpayers can rest assured they are getting the most out of their hard-earned money," he said.

Milligan is barred from seeking reelection under the state's term-limits amendment. He has announced his bid for state auditor next year, a post held by term-limited Russellville Republican Andrea Lea since 2015.

Milligan said his office last month hired senior investment manager Steve Pulley of Conway to work with his investment division.

"We are excited to have him on board and ... in keeping with my policy of having multiple sets of eyes on the work that we do for the state," Milligan said.

Pulley has served as president and founder of Chickasaw Ventures Inc., a startup management consultancy, since 2020, according to his resume. His resume shows that he was first vice president of Crews & Associates Investment Bankers of Little Rock from 2008-19 and also worked for the firm from 1984-2006, and was senior vice president and corporate risk mitigation specialist at Stephens Insurance Group in 2007. His salary at the treasurer's office is $110,000 a year, Peterson said.

David F. Freeman Jr., a partner with Arnold & Porter of Washington, D.C., said in a memo distributed to the finance board that the state treasury may improve its investment return and reduce the portfolio risk by seeking the board's approval of an amendment to the state treasurer's investment policies manual to make four changes.

Freeman said these changes are:

• Allowing investment in any corporate debt obligations that are rated BBB or higher by at least two national rating agencies.

• Allowing investment in rated investment-grade bank deposits as corporate obligations, with or without collateral or deposit insurance.

• Allowing investment in any fund or investment pool whose assets are limited to those that the treasurer could invest in directly.

• Making clear that the treasurer is permitted to invest in corporate debt obligations that are privately issued.

"We are in an environment of pervasively low interest rates," said Amy Michaliszyn, executive vice president of Federated Hermes in Pittsburgh. "The market is tumultuous. There is tremendous pressure on the short end of the yield curve, pushing rates down even further. There is some scarcity of commercial paper. There is a a convergence of issues like we have never seen before, so it is very important that investment policies have the depth and breadth they need to have to control risk, but also for appropriate opportunity."

She told the finance board that she is not charging for any advice to the state treasury.

"We are just industry colleagues with the Arkansas state treasury," Michaliszyn said. "I would hope that at some point that the treasury may consider to use some of our investment vehicles, but there is no obligation to do that."

She said Federated Hermes works with a total of 37 states.

Wallace told the finance board that "we would be looking at probably the November meeting to bring back some recommendations, some thoughts for the board to consider and hopefully having those available to take [to the Arkansas Legislative Council] in January."

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