The state Board of Finance and the treasurer are "prudently" managing state funds, but should take more risks with the state's investments to increase returns over time, an investment consultant told the board Tuesday.
The investment strategy was one of 42 recommendations laid out in a 61-page report by Hewitt Ennis Knupp of Chicago and presented to the state treasurer and Board of Finance, which have oversight of the state's nearly $3 billion investment portfolio.
Treasurer Charles Robinson, who was appointed by Gov. Mike Beebe in May, said the office already is working to implement some of the recommendations -- including creating an updated ethics policy for the Treasury and one for the Finance Board -- but that others could not be done for several years.
The review, which was conducted between August and October, evaluated the state's portfolio and "internal organizational structure, policies and practices of the Board and Treasury Department and its investment program" and compared them with industry standards and best practices, according to the report.
"[W]e conclude that although the assets are being prudently managed in a very conservative manner consistent with current stated goals and policies, there is room for increased efficiency. Furthermore, we believe it is appropriate and prudent for the Treasury portfolio to assume some additional market and credit risk to increase the return and diversification of the portfolio consistent with modern portfolio management practices," the consultants wrote in the report.
The report, however, cautioned that "[a]ny changes to the portfolio would need to be made carefully over a reasonable period of time."
Robinson said he liked that section of the report.
"The first thing we've got to do is to come up with a good reliable analysis of our cash-flow needs. That's the No. 1 priority. Then, after we do that, then I think we can start looking at different scenarios and probably look at different investments starting with some of the safer ones, depending what our cash-flow needs are. And then what we'll do is go from there," Robinson said in an interview.
Any recommendations adopted from the report would have to first be approved by the board, he added.
The treasurer's portfolio has fluctuated since July 2009 from a low of $2.1 billion to a high of about $2.6 billion. The fund was valued at $2.605 billion on Aug. 31 -- the end of the report's review.
The total portfolio consists of direct investments, money-market mutual funds, deposit demand accounts, bonds, money-management funds, and the Arkansas Capital Corp. investments, which include obligations issued under the Arkansas Development Finance Corporate Act, according to the report.
But the consultant's report focused on Treasury funds that were "100 percent invested in short-term fixed income securities, bonds and money market instruments."
The consultant found that the board and treasurer "have put in place and continue to establish many good practices. Documenting key practices, procedures, and new and existing policies will be important to institutionalize knowledge and to mitigate risks going forward."
The Arkansas Legislative Council approved the $215,000 contract to review the investments in June after a federal grand jury indicted former Treasurer Martha Shoffner on 14 charges, including extortion and bribery.
Shoffner resigned three days after her May 18 arrest.
Beebe appointed Robinson, a retired Legislative Audit Division chief, to serve out the rest of Shoffner's term, which ends in January 2015.
P.J. Kelly, a partner at the consulting firm, told the board that one of the key recommendations from the report was to adopt an investment structure consisting of three liquidity layers to increase the risk and return.
The structure was explained in the report as a "primary liquidity" layer made up of existing money-market funds, a "liquid core" layer, "which is still conservative and may include short-term fixed income," and a layer of long-term funds, made up of "growth assets," designed to "return enhancement and diversification."
The growth assets -- categorized as "public equities and floating rate fixed income portfolios," such as bank loans -- would allow the portfolio "to benefit in periods of economic expansion, provides diversification to the portfolio especially in periods of rising interest rates, and provides the ability to earn higher returns for the portfolio."
Kelly said the firm would recommend 15 percent-30 percent of the state's investment portfolio be allocated to primary liquidity, with 40 percent-60 percent allocated to liquid core investments and 10 percent-20 percent to long-term funds.
State Securities Commissioner Heath Abshure questioned whether the treasurer would be allowed to invest in some of the long-term items recommended in the report, such as corporate equities, because of restrictions on state investments.
Article 12, Section 7 of the Arkansas Constitution states that "the State shall never become a stockholder in, or subscribe to, or be interested in the stock of any corporation or association."
State law further prohibits certain investments by the Treasury, including securities and bank certificates.
Richard Weiss, the director of the Department of Finance and Administration and chairman of the Finance Board, said any new investments would have to be reviewed to make sure they complied with the law.
But Weiss said in an interview that he was pleased with the report's recommendations and that his agency's legal team would work with the treasurer's office to see what investments would be possible.
"One of the things that I was personally gratified for was that the study confirmed that, despite all the political turmoil that went around all of this, our investments were safe. They're not making as much money as they should be, but we do have a good system," Weiss said.
In other business, the board approved the treasurer's fiscal 2015 budget and hired Autumn Sanson to serve as the treasurer's chief investment officer. Sanson served in the position under Shoffner and Robinson, but Act 1088 of 2013 gave the board the responsibility of selecting the treasurer's chief investment officer.
The new law also expanded the Board of Finance from five members to 10 and increased oversight of the treasurer's investments.
The old makeup of the board was the governor, state treasurer, state auditor, state bank commissioner and the director of the Department of Finance and Administration. The new law added the state securities commissioner, a person with knowledge and experience in commercial banking, a person who is or has been a licensed general securities representative for at least five years, a licensed Arkansas certified public accountant with at least five years of experience and one member of the general public.
Metro on 01/08/2014