The Great Recession still sends shivers down the backs of Wyoming lawmakers.
The sentiment echoed at the Legislature’s Select Committee on Capital Finance and Investments early this week. Members of the committee were thrilled to see record-breaking capital gains entering the state’s coffers, but the fear of another collapse and memories of a $1 billion reduction in the market value of the state’s investment portfolio still linger in the minds of lawmakers.
Wyoming Treasurer Mark Gordon and his staff attempted to curb lawmakers’ anxiety about the state’s financial future during Monday’s meeting at the Wyoming Oil and Gas Commission in Casper. They showcased the current good health of the state’s financial portfolio and explained the philosophy of Wyoming’s long-term investment plan.
Sen. Curt Meier, R-LaGrange, asked Gordon if the nation was headed toward another crisis.
Gordon, a former member of the Federal Reserve Bank board of directors in Kansas City, said there’s always a possibility for a financial meltdown.
But he quickly eased Meier’s concerns.
“I don’t think that’s a likelihood,” Gordon said.
For the short term, the state Treasurer’s Office is focused on dealing with the Federal Reserve’s $85 billion-per-month stimulus of financial markets.
The money has galvanized markets and set the stage for the stock market’s five-year highs, which have reaped headlines and roused growth for shareholders of the nation’s publicly traded companies. Wyoming has been a beneficiary in the market run-up. The state earned $936 million in interest income in fiscal year 2013 — $300 million more than the state’s previous high in FY 2008.
The monthly injections of cash by the Federal Reserve are known as quantitative easing. The Federal Reserve actions have kept interest rates low and encouraged banks to lend money.
The technique has been a boon for Wall Street investors and companies looking for cash, but the low rates haven’t fared well for bond markets.
Of the state’s $16.5 billion portfolio, the Treasurer’s Office invests 29.2 percent in the stock market and the remaining in the bond market.
The Federal Reserve has signaled that it will taper its monthly stimulus. That’s good news for bonds and bad news for stocks.
The Federal Reserve’s gestures prompted Gordon and the state’s chief financial officer, Michael Walden-Newman, to take action to ensure the long-term security of the state’s funds.
After a yearlong study, they switched managers of the state’s $10.4 billion bond portfolio. The move allowed the state to put the money in funds that will allow asset managers to take advantage of the high rates likely to emerge when quantitative easing ends. By switching managers, the state was also able to make a $200 million profit. The profit will allow the state to ride out any short-term losses it may incur until the rates begin to rise.
“The portfolio is in better shape than it would have been,” Gordon said.
The strategy was a push to position the state for success down the road. The stock market can provide big gains quickly but uncertainty outside of the foreseeable future.
“We do things for the long term,” Walden-Newman said.
Wyoming is one of the few states with billions in savings. The state’s tight-fisted practices habitually draw criticism from those who believe some of the money could be put to use on the ground.
The symbiotic relationship between state government and the energy industry has been both lucrative and unprofitable in the past. Today, state severance taxes from the mineral and energy industry pump money into five of the state’s nine savings accounts. The fallout from the bust in the 1980s was the driver to lock up money.
With the uncertainty looming in the coal markets and low natural gas prices, there is unease among lawmakers about the state’s fiscal future, said committee chairman Drew Perkins, R-Casper.
Accounts yielding high rates of investment income make life easier for lawmakers when they’re budgeting in Cheyenne, he said.
“They save our bacon every year,” he said.
The investment income is earned via nine separate accounts. The Permanent Mineral Trust fund holds around $5.8 billion. Its investment revenues brought the state’s general fund $233.6 million for lawmakers to spend and deposited $133 million back into savings in FY 2013.
The state agency pool, which acts as Wyoming’s checkbook, earned $275.5 million. The Common School Permanent Land Fund earned $143 million. The Hathaway Scholarship Fund earned $33 million. The five other pools of money all earned more than was originally projected by the state’s Consensus Revenue Estimating Group.
“It was a better year than we’ve ever seen before,” Gordon said.