Arkansas Treasurer’s office describes increase in returns

State Treasurer Dennis Milligan’s office has earned $42.21 million during the first 11 months of the year, double the $22.31 million earned in 2015.

This year’s amount is the most earned by the office since 2009, when the state earned $47.5 million. In 2007, it earned $112.5 million at a time when interest rates were much higher. Autumn Sanson, the office’s chief investment officer, told the state Board of Finance that the federal funds rate that year was 5.25%, compared to .25% this year, while the three-year Treasury rate was 4.72%, compared to 1.01% this year.

“The quick analysis is this: We are producing better results than in the past years with less favorable interest rates,” she said.

Milligan said the state’s short-term portfolio, which consists of commercial paper, money market accounts and other investments had generated more than $10 million during the year’s first 11 months. The long-term portfolio has produced $32.14 million in investment returns.

The increased returns will be used to help fund Gov. Asa Hutchinson’s highway plan passed by the Legislature this year: $1.5 million from the treasurer’s office this year, $20 million each year from 2017-20, and $25 million in 2021.

Additional returns will be placed in a long-term reserve fund also created by the Legislature. The money will be reinvested until it is needed for a budget shortfall.

Milligan said his office had increased returns by moving “from a passive manner to an aggressive manner” where his investment team is closely watching the markets. The office has increased its commercial paper investments, which involve short-term debt of up to 180 days issued by companies, and is purchasing mortgage-backed securities, which are fixed income bonds based on pools of mortgages and backed by the government.

The collapse of mortgage-backed securities contributed to the recent national recession. Sanson and Ed Garner, the office’s senior investment manager, said these are different kinds of mortgage-backed securities.

Sanson said the office is being more defensive on mortgage-backed securities while it waits to see whether the Federal Reserve increases interest rates. The office has decreased its holdings in mortgage-backed securities from $2.1 billion to $1.7 billion and focused its purchases on two-year securities.

Sanson and Garner said the office is no longer doing agency bonds, which produce low returns.

The seed money for the investments is generated by the state’s cash flow. The treasury’s balance ranges from $2.8 billion to $3.2 billion as money is spent on the state’s obligations. All money spent by state agencies coming from state taxes, federal funds and other sources first goes through the state treasurer’s office.

“It would be like water flowing into the bucket and there is a hole in the bucket, and water flowing out,” Garner said. “Now, if you followed a single drop, it would flow into the bucket and flow out, but there’s always an amount of money in the bucket.”