Memorandum 15-190 Recommendations for Permanent Fund Committee

Memorandum 15-190

TO:                       MAYOR WYTHE AND HOMER CITY COUNCIL

FROM:                 PERMANENT FUND COMMITTEE

THRU:                 JO JOHNSON, MMC, CITY CLERK

DATE:                  NOVEMBER 17, 2015

SUBJECT:         PLACING THE PERMANENT FUND IN A SELF-MANAGED BROKERAGE AND DISBANDING THE PERMANENT FUND COMMITTEE.

The Permanent Fund was established in 2006 with the intent of the City receiving a $10M  Exxon Valdez settlement. Other “wind-fall” monies that the City might receive were to be deposited in the Permanent Fund. The Fund was to be invested in such a manner as to provide annual appropriation to non-profit organizations from the interest, dividends, or coupon discounts derived from the investments of the fund.

Contrary to expectations, the City instead received a $1.1M Exxon Valdez  settlement in 2010. A Request for Proposals was issued to solicit a qualified firm to invest the Permanent Fund in accordance with the investment procedures defined by ordinance. U.S. Bank was selected to actively manage the investment portfolio and has done so since 2010.

Returns on the Permanent Fund have been minimal due to a slow-down in the U.S. economy, an incredibly strong dollar, and a fall in energy prices with little inflation. This has affected corporate earnings, subduing markets in most of North America. Overseas there is an acceleration of growth in Japan and throughout Europe. They are buying their own safe investments making everyone else buy riskier investments. This results in inflated markets and recovering economies since corporate earnings are improving. The biggest concern for long term global growth is a lack of inflation; there is 2% inflation throughout the world.

An overview of the City’s Permanent Fund:

Fixed Income is 92% of the account; 8% is cash. Period ending March 31, 2015 the fund was up .64%. One year at 1.42% gross; three years at 1.67% gross. The fund is currently invested with principal protection first and foremost. There are no risks taken and not a lot being returned.

Growth Income is 88% of the account; 4% is cash; 4% is real estate; 4% is commodities.  Period ending March 31, 2015 the total portfolio net of fees is 10.75%; for the last three years the average is 9.60% per year. For the last three years total equity is at 12.10%; domestic equity is 15.49%. The S&P 500 was up 16.11%.

For the period ending March 31, 2015 returns on the Permanent Fund were below the S&P 500.

The Permanent Fund Committee discussed the possibility of issuing another RFP for investment services, but realized bank fees are standard for the services offered.  Bank fees in comparison to returns are high and the investment policies are so stringent that no broker could make money on the small quantity of money we have to invest.

The Permanent Fund Committee recommends rescinding the investment language and bringing the money home to manage. The Permanent Fund would be retained by the City and the Finance Department would arrange for management of the money as other like funds are managed. Bank fees would be significantly reduced. Additionally, the committee recommends that the Permanent Fund Committee be disbanded.

Recommendation: Introduce Ordinance 15-43 to repeal HCC 3.12, Permanent Fund, and place the funds in a self-managed brokerage and disband the Permanent Fund Committee.