Wall Street turmoil will affect state investments

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(Host) The financial turmoil on Wall Street is reverberating across Vermont’s state retirement funds.

State Treasurer Jeb Spaulding says the market slump has caused a decline in the investment portfolios overseen by his office.

But Spaulding says the downturn has not affected the benefits paid out to retirees.

VPR’s John Dillon reports:

(Dillon) On a day when the Dow Jones industrial average dropped by more than 500 points, Treasurer Spaulding was taking the long view.

(Spaulding) "And you know we’ve had these kinds of swings before. I looked at the calendar year 2002 just because I could find it quickly this morning, and the 12 month returns then were negative 7.5 percent. And then we went through a period of years on the upside where we had sometimes 15-17 percent returns on an annual basis.

(Dillon) Spaulding says the $3 billion dollars held in pension funds are heavily invested in the stock market. The funds are down about 7 or 8 percent for the last 12 months.

(Spaulding) So there is an impact on the state of Vermont investments, primarily in the pension funds. The most important message I like to get out to people, though, is that as far as the security of the benefits for those people who have earned them – whether they’re state employees, teachers, or municipal employees – those benefits are secure.

(Dillon) Spaulding said that more than a year ago the funds became more diversified. Fund managers were also given the flexibility to switch to other investments such as bonds and fixed income securities.

(Spaulding) It’s certainly a surprise when you see what were gold-plated names going the way of dinosaurs but the fact that we’re in turmoil and still trying to deal with the housing bubble and combine that with things like energy costs is not a surprise to us. What we try to do is make sure we have a great deal of diversification in our investments, keep a close eye on our investment managers, and don’t panic.

(Dillon) One of those gold-plated names is American International Group, a global insurance company whose shares have tumbled because of bad investments.

AIG owns the Stowe Mountain Resort, a ski area that’s undergoing a multi-million dollar expansion.

Economist Tom Kavet consults for the legislature. He says AIG’s problems could reverberate in Vermont.

(Kavet) When there’s a lot of swapping going around and they’re needing to raise a lot of capital, anything could be for sale. So it could be part of some broader set of assets that gets transferred or sold. It’s just that everything on the table so there could be some potential dislocation, certainly something that bears watching.

(Dillon) The stock market decline may also affect state revenues, since Vermont collects taxes on capital gains from stock sales.

But there may be a small silver lining in the economic upheaval – at least for the state of Vermont. Interest rates are very low, and Treasurer Spaulding says that when the state borrows money later this fall it should get very favorable terms.

For VPR News, I’m John Dillon in Montpelier.

Photo: The Lehman Brothers headquarters in New York is photographed, Tuesday, Sept. 16, 2008.  (AP Photo/Mary Altaffer)

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