State interest earnings hit $254M in fiscal ’23

Jun 25, 2023

With the help of rising interest rates and a larger investment portfolio, the Arkansas treasury's interest earnings skyrocketed to $254.5 million in the fiscal year that ended June 30 -- far exceeding the $69.9 million earned in the previous fiscal year -- state officials said.

The treasury's interest earnings total in fiscal 2023 was the highest amount since at least 2005. The next-highest since then was $116.9 million in fiscal 2019.

The treasury's investment portfolio in fiscal 2023 reached $10.9 billion, said Steve Pulley, senior investment manager for the treasurer's office.

The state treasury's increased interest earnings in fiscal 2023 are the result of the increased size of the overall investment portfolio and increases in yields.

The state treasurer oversees the state treasury's investment portfolio.

Benton Republican Dennis Milligan was state treasurer for the first half of fiscal 2023 and the late Maumelle Republican Mark Lowery held the office for the second half after he was sworn in on Jan. 10. Milligan was elected state auditor last year.

Lowery, 66, died on Wednesday. Gov. Sarah Huckabee Sanders will appoint the next treasurer to serve until January 2025, and a new treasurer will be elected in the 2024 general election to serve the final two years of Lowery's four-year term.

The day before Lowery was sworn in as state treasurer and Milligan was sworn in as auditor, Milligan announced that the state treasury earned $99.7 million from July 1 through Dec. 31, 2022 and is "on pace to exceed the highest fiscal year recorded in state treasury history."

At that point, Milligan said the highest investment receipts recorded, dating back to 2005, which he said was as far back as treasury records went, was $116.9 million in fiscal 2019.

Pulley said Friday that "I would say to [the] best of our knowledge that this year's receipted income is the largest recorded."

State Board of Finance Chairman Larry Walther said Friday in a written statement that "I appreciate the knowledgeable and talented investment team within the Treasurer's Office.

"These record earnings will benefit the state for years to come. From funding for highways to increasing our Catastrophic Reserve Fund, we are in a stronger position because of Treasury's work," said Walther, who also is secretary of the state Department of Finance and Administration.

Milligan, who serves on the state Board of Finance, said Friday in a written statement that "I'm so proud to see this year's investment returns of more than $250 million for the state of Arkansas.

"As interest rates have continued to climb and the office has been able to take advantage of higher yields, I'm not entirely surprised at such a high rate of return," he said. "Treasurer Lowery took the helm from me in January and finished the fiscal year strong.

"We created a stable foundation on which the state could rely in times of economic uncertainty, and I'm proud of the work they've accomplished," Milligan said. "The investment team that I hired at the Treasury is highly skilled at their jobs and the proof is in the pudding, as they say. These results are just as much a credit to Treasurer Lowery and his leadership as they are to me."

According to the treasurer's office, the state treasury's investment portfolio consists of mortgage-backed securities; U.S. Treasury, municipal and agency bonds; U.S. Small Business Administration loans; commercial paper; certificates of deposit; and demand and money market accounts.

In the quarter that ended March 31, the state treasury reported $71.9 million in interest earnings -- up from $17.5 million in the same quarter in 2022.

In the the quarter that ended June 30, the state treasury's interest earnings totaled $82.8 million -- up from $24.8 million in the same quarter in 2022, Pulley said.

Asked for the state treasury's investment return in fiscal 2023 compared with the target investment return, he said, "The target return is set each quarter at the SBOF [state Board of Finance meeting] not on an annual basis."

The state treasury's investment return in the last quarter of fiscal 2023 was 3.22%, with the state Board of Finance having a target range of 3% to 3.1%, said Heather McKim, a spokeswoman for the treasurer's office. The treasury's investment return in the last quarter of fiscal 2022 was 1.33 %, with the state Board of Finance having a target rate of 1% to 1.1%, she said.

The state treasury's interest earnings go into the state's securities reserve fund.

The largest recipient of funds from the securities reserve fund in fiscal 2023 is the state's catastrophic reserve fund, which received $166.4 million, according to information provided by Scott Hardin, a spokesman for the state finance department.

The state's catastrophic reserve fund balance is $1,529,616,019, Hardin said. The catastrophic reserve fund is a fund that could be tapped to shore up state programs in economic downturns.

Among other recipients of funding from the state's securities reserve fund in fiscal 2023, the Arkansas highway transfer fund received $20 million, the budget stabilization trust fund received $18.3 million, and the state Department of Transportation fund received $16.2 million, he said.

Arkansas Code 19-5-905(a)(10) requires an annual transfer of $20 million to the Arkansas highway transfer fund, Hardin said.

The state highway department fund receives monthly distributions of interest earnings based on fund balances under Arkansas Code 27-70-204, he said.

The Budget Stabilization Trust Fund receives $5 million, plus the reimbursement of transfers during the fiscal year for the Division of Correction farm fund, the Department of Military fund account, the disaster assistance fund, the miscellaneous revolving fund, the state Central Services fund, and the state Board of Election Commissioners under Arkansas Code 19-5-905(a)(9) and (11), Hardin said.

In August 2022, Milligan reported that the state treasury earned $69.9 million on its investment portfolio in fiscal 2022 with the help of rising interest rates and that nearly doubled the fiscal 2021 interest earnings of $35.4 million.

The treasury's interest earnings had peaked at $116.9 million in fiscal 2019 before dropping to $80.7 million in fiscal 2020 and to $35.4 million in fiscal 2021 amid declining interest rates.

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