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
"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
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."
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