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Indiana ponders investment options

Toll Road windfall to double state portfolio.

by Martin DeAgostino
Publication: South Bend Tribune

July 1, 2006

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INDIANAPOLIS — The state’s investment portfolio will essentially double with proceeds from last week’s $3.8 billion lease of the Indiana Toll Road, according to state Treasurer Tim Berry, who has advertised for investment services from funds managers.

Responses were due Friday, but Berry has set no schedule to complete his review of the offers received, nor to act on them.

But he said he will invest the money in short-term instruments as soon as the Indiana Finance Authority transfers net proceeds from the lease to the state treasury.

Short-term instruments available to the state include bank certificates of deposit and U.S.

Treasury notes and other federally backed securities. Indiana law prohibits any equity (stock) holdings.

“We will have the money invested (from) day one, working for the taxpayers of Indiana immediately,” Berry said. “And longer term decisions will be made after we’ve reviewed the (investment fund) responses.”

Indiana is already earning significant interest on the lease proceeds, according to the Indiana Finance Authority, which reported one-day earnings of $518,000 on an IFA account at the Indianapolis branch of JP Morgan Chase/Bank One.

Ryan Kitchell, state public finance director, said the account should earn similar amounts — depending on interest rates that vary daily — until the IFA transfers all account money to Berry’s authority on Wednesday.

“We got all our bills paid and are ready to go (with the transfer),” Kitchell said Friday.

The IFA’s bills included $198 million to retire outstanding Toll Road bonds and $24 million in broker and legal fees.

According to Berry’s published requests for investment management services, the state will seek four investment “styles” for the remaining lease proceeds of about $3.6 billion. The styles involve a range of investment objectives, from core fixed income to high yield fixed income.

Asset allocation among the styles has not been determined, according to the published requests for proposals. But Berry said the final mix will involve instruments of longer maturity than is typical with state investments, and a greater variety of instruments.

“That's why I can’t say (the investments) will mimic what we currently have,” Berry said.

State law prohibits any investment horizons longer than two years, except for a five-year limit on 25 percent of the state’s portfolio.

But those laws will not apply to the lease proceeds, which are supposed to pay for a 10-year highway construction schedule and a trust fund meant to generate interest income for decades.

Jerry G. Langley, who teaches applied investment management at the University of Notre Dame, predicted a portfolio that is long on U.S. Treasury notes and commercial paper — bonds — with maturities tied to construction schedules.

“They want the money to be there when they need it,” he said.

Langley also said that Indiana banks should be well qualified to handle the portfolio, based on his assumption of a relatively conservative investment strategy.

“It’s straightforward money management,” he said. “I’m sure the banks and financial institutions in the state can handle it.”

The state’s requests for proposals do not indicate what fee arrangements the state will consider from funds managers. But Langley said typical fees involve a percentage of the portfolio, and often range from 0.25 percent to 1.5 percent.

“It all depends on how they set it up,” he said. 

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