Memorandum 17-071 Permanent Fund Investment Policy

Memorandum 17-071

TO:                        Mayor Zak and Homer City Council  

FROM:                 Katie Koester, City Manager

DATE:                   May 3, 2017

SUBJECT:          Follow up on Resolution 17-044 Re-establishing Permanent Fund Investment Policy

A number of questions were generated at the April 24th Council meeting and afterwards regarding the Permanent Fund and alternative options for allocation of those funds. The purpose of this memo is to answer those questions.

What is the fiscal impact of dissolving the Permanent Fund and allocating the funds between pending projects and paying off debt?

$500,000 to pay back the General Fund for remodel to the Fire Hall

The most recent version of the Fire Hall renovation project came it at $850,000 after eliminating the building expansion and adding a few items to preserve the life and functionality of the existing facility. This is $350,000 less than the original appropriation. If council allocated $500,000 of this project from the permanent fund instead of general fund, the project would draw down our ‘savings’ (General Fund Balance) by only $350,000.

$1 million to the Police Station building construction

Allocating $1 million to the construction of the police station will reduce the amount the City will have to borrow to fund the project. The last conversation with the Alaska Bond Bank estimated a 30 year bond at between 3.35% and 3.85% interest. Rates have undoubtedly gone up since then, but under those circumstances, borrowing $1 million less results in approximately $700,000- $800,000 in avoided interest over 30 years.

Remainder ($730,000) to pay off the USDA library loan

The City is currently carrying a $1.2 million note at 4% interest with USDA for construction of the library 10 years ago. This payment represents almost $100,000 in the Library’s operating budget. Paying a little over half of this off early results in $556,427 in avoided interest payments over the next 20 years.

City Council options for Permanent Fund

Satus Quo: Approve Resolution 17-044 readopting the investment policies of the Permanent Fund.

Revise Investment Policies: The Permanent Fund is unique as it consists of ‘windfall’ monies such as the EVOS settlement funds and property tax revenue from the Jack up rig Endeavour. As such, it can be more aggressively invested than any other City fund. Nevertheless, the code governing investments in the Permanent Fund is still relatively cautious allowing only 40% to be invested in equities. Council could revise the City Code regulating investment of the fund by ordinance. While this could provide greater returns, it also has more risk and could result in the loss of funds.

Dissolve the Permanent Fund: Council could, by ordinance, dissolve the Permanent Fund and allocate the assets between different City accounts as they see fit.