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HomeMy WebLinkAboutOrdinance No. 3058-2019thecityef, KENAI, ALASKA ~ CITY O F KENAI ORDINANCE NO. 3058-2019 Sponsored by: Administration AN ORDINANCE OF THE COUNCIL OF THE CITY OF KENAI , ALASKA, AMENDING PROVISIONS IN KENAI MUNICIPAL CODE TITLE 7 -FINANCE, TAXATION , AND BUSINESS AFFAIRS OF THE CITY, INCLUDING INVESTMENT OF MONIES -SCOPE AND OBJECTIVES 7.22.010; LAND SALE PERMANENT FUNDS -GENERAL FUND LAND SALE PERMANENT FUND 7.30 .005 ; INVESTMENTS 7.30 .020; FOR UPDATES TO MANAGEMENT PRACTICES FOR THE CITY'S GENERAL LAND SALE AND AIRPORT LAND SALE PERMANENT FUNDS . WHEREAS, 2019 represents the tenth year of the current policy of investing the City General Land Sale and Airport Land Sale Permanent Funds ; and, WHEREAS, the proposed amendments will change the investment methodology and distribution methodology of the City 's permanent funds to better ensure their long-term viability and ability to consistently contribute to the annual operations and capital needs of the City's General and Airport Special Revenue Funds; and , WHEREAS, in consultation with the City's Permanent Fund investment advisor the administration is proposing changes to the City's authorized investments in KMC 7.30 .020(b), to incorporate a new asset class to provide improved diversification and enhance the return of the portfolio; and, WHEREAS , the proposed amendments provide other general housekeeping amendments. NOW, THEREFORE , BE IT ORDAINED BY THE COUNCIL OF THE CITY OF KENAI , ALASKA, as follows: Section 1. Amendment of Section 7.22.010 of the Kenai Municipal Code : That Kenai Municipal Code, Section 7 .22 .010-Investment of Monies -Scope and objectives , is hereby amended as follows : 7.22.010 Scope and objectives. (a) This chapter applies to the investment of all City mon ies held in all City funds, e xcept for pension and retirement monies , deferred compensation accounts and the Airport Land Sale Pe rmanent Fund and General Fund Land Sale Permanent Fund which shall be governed by KMC 7.30 . (b) The City's investment portfolio shall be managed so that the portfolio, as a whole , meets the objectives set forth below. All persons selecting investments for City monies shall adhere to these objectives, which are listed in order of relative importance : (1) Safety of principal; New Text Underlined; [DELETED TEXT BRACKETED] Ordinance No. 3058-2019 Page 2 of 6 (2) Maintaining sufficient liquidity to meet the City 's cash flow requirements ; and (3) Achieving a reasonable market-average rate of return. Section 2. Amendment of Section 7.30.005 of the Kenai Municipal Code: That Kenai Municipal Code, Section 7.30.005-Land Sale Permanent Funds -General Fund Land Sale Permanent Fund, is hereby amended as follows: 7.30.005 General Fund Land Sale Permanent Fund. (a) A separate fund of the City of Kenai is hereby established as the General Fund Land Sale Permanent Fund . The purpose of the fund is to account for the principal proceeds of the sale of City-owned non-trust lands that are not subject to deed or other conveyance restrictions that require the funds be used for specific other uses or benefits (General Fund Lands). (b) The General Fund Land Sale Permanent Fund shall be a restricted fund. City Charter prescribes the establishment of a separate City account for the principal proceeds from sales of City-owned, non-trust lands ; however, the establishment of the investment guidelines for that account is within the discretion of the Kenai City Council. (c) The net proceeds received by the City on closing sale of non-trust lands shall be deposited in the General Fund Land Sale Permanent Fund. Where notes are taken in payment for General Fund Lands, all principal payments on said notes shall be deposited in the General Fund Land Sale Permanent Fund. Interest on notes taken in payment for General Fund Lands shall be recorded as investment earnings in the General Fund Land Sale Permanent Fund. (d) (Money placed in the General Fund Land Sale Permanent Fund shall not be available for use by the City for any purpose other than for investments in accordance with City Charter and ordinances. (e) Interest or income earned by the General Fund Land Sale Permanent Fund shall be recorded as investment earnings in the General Fund Land Sale Permanent Fund and [THEN] can be deposited in the General Fund or held in reserve in the fund. The City Council may, by ordinance, transfer funds from the General Fund to the General Fund Land Sale Permanent Fund . After such a transfer, the money will become a part of the General Fund Land Sale Permanent Fund to be used only for the investment purposes for which the fund is established. Section 3. Amendment of Section 7.30 .20 of the Kenai Municipal Code: That Kenai Municipal Code, Section 7.30.020-Land Sale Permanent Funds -Investments, is hereby amended as follows: 7 .30.020 Investments. (a) The Land Sale Permanent Funds shall be managed by the Finance Director, with the following conditions: New Tex t Underlined ; [DELETED TEXT BRACKETED] Ordinance No. 3058-2019 Page 2 of 6 ( 1) The City will contract for the management of the investments for each Land Sale Permanent Fund with one (1) or more professional investment managers with experience handling institutional endowment investments subject to Council approval. (2) The Land Sale Permanent Funds shall be invested in such types of income producing investments as limited by subsection (b ), Authorized Investments for the Land Sale Permanent Funds. The investments for each Land Sale Permanent Fund shall be approved by resolution annually, usually during the City budget process, in the form of an asset allocation plan , with each Land Sale Permanent Fund following the same asset allocation plan. The asset allocation plan shall ha ve specific categories of investments for the funds with percentage targets that allow for reasonable fluctuations above and below the target percentage. The plan will establish benchmarks for evaluating the performance of each investment manager and asset classification. Investments shall be managed such that the target ranges of the asset allocation plan are adhered to . (3) All income derived from investment of each Land Sale Permanent Fund , including interest income, realized gains, and undistributed earnings [SHALL BE INCLUDED IN THE CORPUS OF EACH] can be distributed or reinvested into the respective Land Sale Permanent Fund and shall be invested in accordance with subsection (b), Authorized Investments for the Land Sale Permanent Funds. (4) Appropriations from the Airport Land Sale Permanent Fund may be made as follows: (A) In any fiscal year, [AN AMOUNT NOT TO EXCEED FIVE PERCENT {5%) OF] the amount available for appropriation for airport operations and capital needs will be based upon the five (5) year average of the f und 's calendar year end market value [MAY BE APPROPRIATED FOR AIRPORT OPERATIONS AND CAPITAL NEEDS. FOR THE FIRST FIVE (5) YEARS THE CALENDAR YEAR END MARKET VALUES FOLLOWING THE EFFECTIVE DATE OF THE ORDINANCE CODIFIED IN THIS SECTION WILL BE AVERAGED TO CALCULATE THE AVERAGE FUND MARKET VALUE.] An amount not to exceed 3.8% of the 5 year average market valu e may be distributed if the average market value is less than the fund's inflation adjusted principal balance. An amount not to exceed 4.2% of the 5 year average market value may be distributed if the average market value is greater than the fund 's inflation adjusted principal balance . [(B ) FOR THE FIRST YEAR, FY 2009, THE APPROPRIATION FROM THE FUND SHALL NOT EXCEED THE LESSER OF EITHER FIVE PERCENT (5 %) OF THE MARKET VALUE OF THE FUND AT THE EFFECTIVE DATE OF THE ORDINANCE CODIFIED IN THIS SECTION OR THE INCREASE IN THE MARKET VALUE OF THE FUND FROM THE EFFECT IVE DATE OF THE ORDINANCE CODIFIED IN THIS SECTION TO MAY 31 , 2009. New Text Underlin ed ; [DELETED TEXT BRACKETED] Ord inance No . 3058-2019 Page 2 of 6 (C) FOR THE SECOND YEAR, FY 2010, THE APPROPRIATION FROM THE FUND SHALL NOT EXCEED THE LESSER OF EITHER FIVE PERCENT (5%) OF THE MARKET VALUE OF THE FUND AT DECEMBER 31, 2008 OR THE INCREASE IN THE MARKET VALUE OF THE FUND FROM THE EFFECTIVE DATE OF THE ORDINANCE CODIFIED IN THIS SECTION TO MAY 31 , 2010, LESS THE AMOUNT APPROPRIATED FOR FY 2009 .] (5 ) Appropriations from the General Fund Land Sale Permanent Fund shall be limited to the lesser of the [ACTUAL CALENDAR YEAR] cumulative earnings at calendar year end for the fund or [FIVE] four percent ([SH_%) of the fund 's fair market value as of December 31st of each year. Cumulative earnings is defined as the market value at calendar year end minus the fund 's inflat ion adjusted principal balance. (b) Authorized Investments for the Land Sale Permanent Funds . (1) Investments authorized by KMC 7 .22 .030 . (2) Corporate obligations of investment-grade quality as recognized by a nationally recognized rating organization. If, after purchase , these obligations are downgraded below investment grade, the obligations shall be sold in an orderly manner within ninety (90) days of downgrading. (3) Domestic equities, which taken as a whole, attempt to mirror the characteristics or replicate the Standard and Poor's 500 Index or another index of simi lar characteristics and approved by Resolution of the Council as a component of the annual Land Sale Permanent Funds Asset Allocation Plan , including both mutual funds and exchange traded funds (ETFs). (4) Domestic equities, which taken as a whole , attempt to replicate the Standard and Poor 's 400 Mid-Cap Index or another index of similar characteristics and approved by Resolution of the Council as a component of the annual Land Sale Permanent Funds Asset Allocation Plan , including both mutual funds and exchange traded funds (ETFs ). (5) Domestic equities, which taken as a whole , attempt to replicate the Standard and Poor's 600 Small-Cap Index or another index of similar characteristics and approved by Resolution of the Council as a component of the annua l Land Sale Permanent Funds Asset Allocation Plan, including both mutual funds and exchange traded funds {ETFs). (6) International equities, which taken as a whole , attempt to replicate the Financial Times Stock Exchange Developed e x North America Index or anothe r index of similar characteristics and approved by Resolution of the Council as a componen t of the annual Land Sale Permanent Funds Asset Allocation Plan , including both mutual funds and exchange traded funds (ETFs). (7 ) Equi t ies, which taken as a whole, attempt to replicate the universe of domestic real estate investment trusts as represented by the Standard and Poor's REIT New Text Underl in ed ; [DELETED TEXT BRACKETED] Ordinance No . 3058-2019 Page 2 of 6 composite index or another index of similar characteristics and approved by Resolution of the Council as a component of the annual Land Sale Permanent Funds Asset Allocation Plan , including both mutual funds and exchange traded funds {ETFs ). (8) Emerging market equities , which taken as a whole, attempt to replicate the Financial Times Stock Exchange Emerging Index or another index of similar characteristics and approved by Resolution of the Council as a component of the annual Land Sale Permanent Funds Asset Allocation Plan, including both mutual funds and exchange traded funds (ETFs). (9) Global infrastructure equities. which taken as a whole, attempt to replicate the STOXX Global Broad Infrastructure Index. o r a substantially sim ilar inde x. including both mutual funds and exchange traded funds . (10) Domestic bonds . which taken as a whole attempt to mirror the characteristics or replicate the Bloomberg Barclays Aggregate bond index or another index of similar characte ristics and approved by Reso lution of the Council as a component of the annual Land Sale Permanent Funds Asset Allocation Plan. including individual securities. mutual funds and exchange traded funds (ETFs). (c) Officers and employees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or that could impair their ability to make impartial investment decisions. Such employees and officers shall disclose to the City Manager any material financial interests in financial institut ions tha t conduct business with the City and such information shall be kept confidential to t he extent otherwise allowed by law. Employees and officers shall subordinate their personal investment transactions to those of the City, particularly with regard to the timing of purchases and sales . A "material financial interest" in an enti ty is a financial interest of any kind , which , in view of all the circumstances, is substantial enough that it would , or reasonably could , affect the employee's or officer's judgment with respect to transact ions to which the entity is a party. (d) The Finance Director shall submit to the City Council a quarterly investment report that summarizes recent and anticipated market conditions and that describes the City 's investment portfolio in terms of transactions during the quarter, maturities, risk characteristics, and investment return compared with both bench mark performance returns and with the City 's budgetary expectations. ( e ) The Finance Director shall establish custody and safekeeping procedures with regard to all investments authorized by this chapter. All such in vestment securities , or their related collateral securities , shall be either held by the City or by a custodial agent for t he City. Secti on 4. Severabil ity : T hat if any part or provision of this ordinance o r application thereof to an y person o r circumstances is adjudged inval id by any court of competent jurisdiction , such judgment shall be confined in its operation to the part, provision , or app lication directly involved in all controversy in which this judgment shall have been rendered , and shall not affect or impair the validity of the remainder of this title or application thereof to other pe rsons or ci rcumstances . New Text Und erlined ; [DELETED TEXT BRACKETED] Ordinance No. 3058-2019 Page 2 of 6 The City Council hereby declares that it would have enacted the remainder of this ordinance even without such part, provision , or application . Section 5. Effective Date : That pursuant to KMC 1.15 .0?0(f), this o rdinance shall take effect 30 days after enactment. ENACTED BY THE COUNCIL OF THE CITY OF KENAI , ALASKA , this 3 rd day of April , 2019. ATTEST: New Text Und erlined; [DELETED TE XT BRACKETED] Introduced : March 20 , 2019 Enacted : April 3 , 2019 Effective : May 3 , 2019 'Viti~ «1/t/t, a PaJ'~ Ot'tf «1/t/t, a h.tal"e" 210 Fidalgo Ave, Kenai , Alaska 99611 -7794 Telephone: (907) 283-7535 I Fax: (907) 283-3014 www.kenai.city MEMORANDUM TO: THROUGH: FROM: DATE: SUBJECT: Mayor Brian Gabriel and Kenai City Council Paul Ostrander, City Manager Terry Eubank, Finance Director March 13, 2019 Ordinance No. 3058-2019 -Proposed Amendment to the Authorized Investments and Distribution Methodology for the City's Permanent Funds. The purpose of this memo is to recommend passage of ordinance 3058-2019. Ordinance 3058- 2019 will codify recommended changes to the allowable investments of the City 's General Fund Land Sale and Airport Land Sale Permanent Funds and the distribution methodology for each of these funds. A brief explanation of the recommended amendment for the applicable sections of the Kenai Municipal Code (KMC) has been provided for your consideration . 7.22.010 Scope and objectives . The requested amendment to KMC 7.22.01 O(a) should be classified as a housekeeping amendment. The City's General Land Sale Permanent Fund has been invested in the same manner as the Airport Land Sale Permanent Fund since April of 2011 . This is a change that should have been made at that time but was overlooked. 7 .30.005 General Fund Land Sale Pe rmanent Fund. The requested amendment to KMC 7.30.005(e) provides the framework for establishment of an earnings reserve for the General Fund Land Sale Permanent Fund . Pursuant to Kenai Municipal Charter section 5-11 , there is a prohibition on the spending of the proceeds from City-owned , non - trust lands . The administration proposes establishing an earnings reserve, similar to the Alaska Permanent Fund Earnings Reserve, where investment earnings on the proceeds from City- owned, non-trust lands can accumulate and be distributed to the City's General Fund for use for any lawful purpose. Distributions from this earnings reserve may occur outside of the year in which investment earning occur. This is a fundamental change in the distribution methodology for the General Fund Land Sale Permanent Fund that is expected to provide more consistent distribution while complying with the requirement to never spend the princip le balance received from the sale of City-owned, non-trust lands. Page 2 of 2 Ordinance No . 3058-2019 -Proposed Amendment to the Authorized Investments and Distribution Methodology for the City's Permanent Funds. 7.30 .020 Investments. The requested amendment to KMC 7.30 .020(a)(3) codifies additional changes needed to implement the earnings reserve concept for the General Fund Land Sale Permanent Fund started with amendments to 7.30 .005(e). The requested amendment to KMC 7 .30 .020(a)( 4)(A) will codify the new distribution methodology for the Airport Land Sale Permanent Fund as recommended by the City's investment advisor. The new distribution methodology changes the annual distribution from five percent (5%) of the five (5) year average of the fund 's calendar year end market value to four point two percent ( 4.2%) if the five (5) year average market value is greater than inflation adjusted principal or three point eight percent (3.8%) if the five (5) year average market value is less than inflation adjusted principal. This new distribution methodology is needed to ensure t he sustainability of the Airport Land Sale Permanent Fund because the projections for future returns is less than the estimates of ten years ago but provides for increased distributions should investment returns exceed projections . The remain ing changes to KMC 7.30.020(a)(4) can be classified as a housekeeping amendment. The requested changes will el iminate language which was needed in 2008 for the original implementation of the new Airport Land Sale Permanent Fund investment and distribution methodology. These section can be eliminated as they are no longer needed or applicable. The requested changes to KMC 7.30 .020(a)(5) will codify the proposed distribution methodology for the General Fund Land Sale Permanent Fund where the lesser of four percent ( 4%) of the funds market va lue or the earnings reserve balance may be distributed in any one year. The requested amendment to KMC 7.30 .020(b) adds a new subsection nine (9) and ten (10) to expand the allowable investment to include a new asset class, infrastructure , and provide the benchmark by which the returns of this asset class will be measured. The City Investment advisors have recommended the addition of this new asset class to enhance the returns of the portfolio while increasing the overall risk of the portfolio by a minor amount. Adoption of these amendments is recommended and will codify the City's intent to provide for inflation proofing of its permanent funds , provide for new distribution methodologies for both the General Fund Land Sale and Airport Land Sale Permanent Funds that are both consistent and sustainable, will expand the allowable investments to incorporate a new asset class to enhance returns without significantly increase risk, and will provide house keeping amendments . Your support for Ordinance 3058-2019 is respectfully requested .