Recession cuts deep into state and university investment earnings

With revenues in the tank and demands for state services increasing rapidly, the last thing state and university officials need is more bad news.

But they got it this past week, like it or not, as their money managers told them the same economic problems that have hammered the stock market also are cutting into state investment revenues.

Treasurer Brian Krolicki, legally bound to use only the most conservative investments, told the state Finance Board Nevada's portfolio made just $37.2 million in interest during fiscal 2002.

While that sounds like a lot of money, it's $24.3 million less than the $61.5 million the state's general portfolio earned in fiscal 2001.

The largest accounts in the general portfolio are the highway fund at more than $200 million, the intergovernmental transfer account, which handles Medicaid money at $60 million, and other dedicated accounts such as the permanent school fund, Millennium Scholarship account, school improvements, wildlife administration and University System capital projects.

Altogether, the portfolio totals just more than $1 billion. Because of low revenues and rising demand, it is $250 million less than last year.

The state's budget shortfall lies in the general fund, where the primary sources of revenue are gaming and sales taxes -- the two hardest hit by the economic recession and the effects of Sept. 11.

Rising demand for services and less revenue made for a far lower daily average balance to invest. Along with dramatically lower interest rates, general fund interest earnings fell to half the $25. 3 million earned in fiscal 2001.

Fortunately, Krolicki and the Economic Forum, which forecasts revenues for the state, anticipated most of the decrease, projecting a 36.4 percent drop because of the economy.

Krolicki said, however, no one anticipated the Federal Reserve would drop interest rates to 1.75 percent. At the close of fiscal 2002, the state's general-fund interest earnings were $3.5 million less than even the pessimistic forum projection -- totaling just $12.6 million, a 50 percent decline.

The general fund, which is the tax and fee revenue that supports core governmental functions, generates only a small part of the total interest earnings.

Far more comes from the general portfolio, which earned just under 3 percent on its investments in fiscal 2002.

"A lot of money managers would love to say they made that return last year," he said.

Like the state itself, the University System was hit hard by falling interest earnings. Between its operating accounts and its endowment funds, the university system has nearly $450 million invested at any time.

University Finance Vice Chancellor Dan Miles said the endowment accounts -- gifts and grants dedicated to specific programs, faculty chairs and the like -- are in no danger because they have some padding after nearly a decade of a booming investment market. The endowment reserves totaled $222.7 million as of July 1.

According to the system's investment experts, Cambridge Associates, the operating account investments suffered this past year. Between low-interest earnings and the amounts paid out, the university system's operating reserves were down $15.25 million -- more than 9 percent -- as of July 1.

Analyst Lindsay Van Voorhis said that is better than most institutions. "I don't think you can find a public institution with positive performance over the last two years."

But regents said they want to keep a close watch on the losses. They voted to call an emergency meeting immediately if the drop reaches $20 million.

"The $15 million is starting to get to my limit of what is tolerable," said Regent Steve Sisolak.

System officials agreed that, with a balance of $164.5 million, the operating reserves appear healthy. But they said unless the economy improves and interest earnings start to climb, they could be forced to reduce what the fund pays out below 3.5 percent.

Chancellor Jane Nichols said that would hurt the system's administration, much of which is funded from operating reserves.