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Revenue Commissioner Responds to CBR Investment Controversy


April 08, 2009

Tuesday Department of Revenue Commissioner Pat Galvin responded to press reports regarding investment decisions the department has made regarding the Constitutional Budget Reserve (CBR) Fund. The controversy arises from the desire of the Legislature and the Department of Revenue to see greater investment returns on the portion of the CBR that is not expected to be needed for five years. This more aggressively invested account is called the "CBR sub-account".

With regard to the process of how investment decisions transpired for the CBR, Commissioner Galvin stated that such decisions are made with direction from the legislature, and no decision was made without prior notice to the legislature

Last year the legislature included intent language in the budget directing DOR to invest the $2.6 billion of new CBR funds in a manner maximizing long-term earnings. In other words, between the two CBR accounts, the legislature wanted DOR to put the funds into the sub-account. Subsequently, the department went to the legislature seeking an increase in the appropriation from the CBR to cover the fees needed to manage both CBR accounts. In the explanation for the budget amendment, the department disclosed that it intended to transfer a total of $4.1 billion into the sub-account.

"Contrary to the press reports, I don't believe any legislator is questioning my authority to make the transfer of funds from the main account into the sub-account." Galvin said. "Some are merely trying to avoid responsibility for that decision. That is a critical distinction. An unauthorized transfer would be extremely serious. This, however, is merely an exercise in political blame-shifting."

Commissioner Galvin also noted the investment strategy for the sub-account has not changed significantly since 2001. The money was directed into the sub-account to expose it to the equity market, and the asset allocation of the sub-account was not altered. Although some press reports implied the investment strategy of the sub-account was made even more risky after the transfer, this is not accurate.

"Although the moneys in the CBR sub-account are not expected to be needed for over five years, all the investments in the sub-account are liquid and are accessible immediately," said Commissioner Galvin. "The question is not access to the funds, it is exposure to market risk. If you expect to need the funds within five years, then you wouldn't ordinarily expose them to the fluctuations of the equity market because if you pull them early, you may have to realize losses."

Finally, with regard to the CBR losses, Commissioner Galvin said, "The sub-account has experienced a significant loss in market value, and that is very disappointing. But with the recent rebound in the equity market, there has been a recovery of well over $200 million in value. If the stock market continues to recover, by the end of the five-year investment window, we will be back to where we would have been if the transfer had not been made, or even better. That is the nature of investment."



Source of News:

Alaska Department of Revenue


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Ketchikan, Alaska