State treasurer reacts to wild market during Prescott visit
PRESCOTT - The State of Arizona racked up $83 million in unrealized losses in the stock market late last week, but Arizona Treasurer Doug Ducey seemed to be holding onto his cool Monday during a visit to Prescott as the stock market continued its steep decline.
His office had not yet calculated the unrealized losses the state received Monday since the stock market hadn't closed yet. By the time it closed Monday it was down 634 points, the first day it was open since Standard & Poor's downgraded the U.S. credit rating. That's the Dow's sixth-worst point decline in 112 years.
The state's stock market investments were $700 million in the black during the past 12 months, Ducey noted during a visit to The Daily Courier offices Monday. Losses aren't true losses until one sells, his spokesman Kevin Donnellan noted.
The treasurer manages $10.2 billion in assets with 85 percent in bonds and 15 percent in stocks. Basically the only money the treasurer uses for stock market investments is the interest on the $3.2 billion Permanent Land Endowment Fund, Ducey said. That fund gets its money from state trust land sales and has 13 beneficiaries, with the K-12 education system as its main beneficiary.
The fund's market value was at an all-time high of $3.29 billion as of June 30 after earning a record return of 16.14 percent in the past year, Ducey said.
Especially since the state invests only the interest on the fund, not the principal, Ducey believes the 15/85 investment split is fiscally conservative.
"I'm confident we're going to navigate through this just fine," he said. "I do think this market will come back over time."
Since the bond market is rallying, the state actually could see an increase in its trust revenues, he noted.
But the volatile stock market still is sure to be a hot topic at the Aug. 23 Arizona Board of Investment meeting, Ducey said. The board oversees state investments.
The stock market certainly was among the topics during Ducey's meetings with Yavapai County and Prescott finance officers Monday, as well as his talk before the Yavapai County Republican Men's Forum luncheon.
"Markets like this make for interesting meetings," Ducey said.
Yavapai County Supervisor Carol Springer, who served as state treasurer in 1999-2002, said she agreed with Ducey's statement at the Republican luncheon that the state is not likely to feel any immediate impacts from the stock market drop, but it's hard to tell in the long term.
Long-time Yavapai County Treasurer Ross Jacobs is a former member of the state Board of Investment, and he said he's quite comfortable with the board's 15/85 investment split.
State law doesn't allow county treasurers to invest local government money in the stock market, Jacobs said, and he wouldn't want to because safety and liquidity are important to the local taxing authorities. Interest is gravy, he said.
Jacobs' office handles about $500 million in tax revenues for the county, community college, school districts, fire districts and special improvement districts.
If interest rates go up because of the federal government's downgrading, it would help local governments that don't do much borrowing but increase costs for capital improvements, Jacobs noted.
Both Jacobs and Ducey agreed that the U.S. government needs to reduce spending.
"If the federal government doesn't get its debt under control, a lot of markets are going to have problems," Jacobs said.
Ducey issued a written statement criticizing the final deal to raise the U.S. government's debt limit, calling it a "weak and half-hearted first step."
He said the feds need to reform spending on huge entitlement programs, then talk about tax reform.
Arizona credit status down
Moody's Investor Service changed Arizona's debt outlook from stable to negative at the end of March. Moody's cited the loss of federal stimulus money, the state's reliance on a Medicaid spending waiver request to try to balance its budget, and the May 2013 expiration of a temporary sales tax that brought in $1 billion annually.
State leaders responded to the lower credit status by balancing the budget in a sound manner, Ducey said, so that should help its credit status in the future. And the downgrade has no effect on the state's interest rates, he said.
Moody's kept Arizona's debt rating at Aa3, still a high-grade rating. But that's still lower than all but five states.
Barclay's Capital investment bank issued an assessment of states' dependency on the federal government July 26 that concluded Arizona is more dependent on the feds than the average state in three areas.
The statistics showed that 32 percent of Arizona's revenues come from the federal government, the state spends 28 percent of its money on Medicaid, and 2.5 percent of its non-farm payroll comes from the feds.
EDITOR'S NOTE: This online version contains a correction with regards to the assets managed by the state treasurer.