By: Mark Glennon*
Illinois Treasurer Michael Frerichs said last week on CNBC that his office does a staggering $1 trillion per year of investment activity. Why? That’s an astonishing amount of churn for a portfolio with a consistent balance of $11.5 to $14 billion.
To illustrate, let’s take five zeros off everything.
Suppose you have an investment account, the balance of which is always $115,000 to $140,000. It fluctuates between those numbers as you deposit new money and pay bills, but always stays within that range. When you get the annual statement it shows that your financial manager for the account executed $10 million dollars of transactions for the year. Wouldn’t you be stupefied and ask why that’s necessary? What are the transaction costs associated with that much churn? What about the shorter duration that kind of churn necessitates, which lowers yield?
That’s what the Illinois Treasurer’s office is doing as manager of of taxpayer money it holds, with five zeros added. Its current balance is $12.5 billion. It’s effectively turning over the entire balance on hand every three to four days.
It’s important to remember that little of the balance goes in and out rapidly enough to require that much investment and reinvestment. As we explained in detail in an earlier article, the balance has ranged from $11.5 to $14 billion as far back as the records on the Treasurer’s site go. It’s not seasonal. It’s not because of the budget impasse. It predates the administrations of both the current Treasurer and Governor Rauner.
In fact, why the Illinois Treasurer should be keeping such a large balance of very short term investment is also a huge question, which is what we asked in that earlier article. That’s especially questionable now since Illinois has an unpaid bill backlog of about $8 billion, much of which bears penalty interest of 9% to 12%per year, while the Treasurer’s portfolio is earning just 0.6%. Interest accrued on the state’s unpaid healthcare bills alone is now $176 million, according to the State Journal-Register.
I can find nobody who would try to explain why $1 trillion of churn makes sense. That includes the Treasurer’s office, which did not respond to my questions. That’s just as well because they gave me a false answer when I wrote that original article asking why the balance stays so large.
There’s probably a partial explanation — but not a justification — in the 750 “funds” the Treasurer is required to keep for distinct purposes. Some of those funds may have balances that go up and down very rapidly, requiring short term investments and lots of churn. But that doesn’t explain why the portfolio, in the aggregate, is managed the way it is. Most of the special purposes that restrict those funds could easily be changed by statute. Unless the state expects to be raiding the bulk of the portfolio very, very soon (and no such proposal has surfaced) there’s no reason apparent to me why a trillion dollars per year of churn is necessary.
“It’s time for a comprehensive review of spending priorities and accumulated funds” in the Treasurer’s office, Rep. Jeanne Ives told me when I initially spoke with her about Treasurer balances. That’s certainly an understatement. If there’s any rationale behind how much the Illinois Treasurer holds and how it’s invested, it’s sure not apparent to me or to anybody I can find.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.