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HomeMy WebLinkAboutOrdinance No. 2326-2008Suggested by: Administration/Council CITY OF KENAI ORDINANCE NO. 2326-2008 AN ORDINANCE OF THE COUNCIL OF THE CITY OF KENAI, ALASKA, AMENDING KMC 7.22.010 AND ENACTING A NEW SECTION OF THE KENAI MUNICIPAL CODE (KMC 7.30.020) TO ESTABLISH A NEW INVESTMENT POLICY FOR THE AIRPORT LAND SALE PERMANENT FUND. WHEREAS, KMC 7.30.010 (Airport Land Sale Permanent Fund) sets forth the requirements for handling the proceeds from the sale of Airport Land; and, WHEREAS, the Airport Land. Sale Permanent Fund is essentially an endowment, the investment proceeds of which are to be used for Airport Fund operations and capital needs; and, WHEREAS, endowments are typically invested with a longer term investment horizon than other municipal funds; and, WHEREAS, longer term investments such as equity investments and bond investments with maturity dates longer than five years carry higher risk and greater volatility than short term bond investments; and, WHEREAS, these types of investments generally have higher average returns than short term bond investments when considered over the long term; and, WHEREAS, it is in the best interest of the City of Kenai to permit the use of equity securities and longer term bond securities for the Airport Land Sale Permanent Fund because such investments are expected to generate higher returns over time and thus better meet the financial needs of the Airport Fund; and, WHEREAS, using a percent of market value approach for distributing Airport Land Sale Permanent Fund assets will provide for a relatively consistent stream of income to the Airport Fund. NOW, THEREFORE, BE IT ORDAINED BY THE COUNCIL OF THE CITY OF KENAI, ALASKA, 1) KMC 7.22.010 is amended as set forth in Section I below; and, 2) that the City of Kenai Code of Ordinances is hereby amended by adding a new section to be numbered 7.30.020 which shall read as set forth in Section II below. SECTION I 7.22.010 Scope and objectives. Ordinance No. 2326-2008 Page 2 of 4 (a) This Chapter applies to the investment of all City monies held in all City funds, except for pension and retirement monies, [AND] deferred compensation accounts[1 and the Airport 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 obiectives, which are listed in order of relative importance:. [1] Safety of Principal; [2] Maintaining sufficient liquidity to meet the City's cash flow requirements, and [3] Achieving a reasonable market average rate of return. SECTION II e 30 D020 Investments. (a) The permanent fund shall be managed by the finance director, with the following conditions: (1) The administration will contract out the management of the Airport Land Sale Permanent Fund investments with one or more professional investment managers with experience handling institutional endowment investments subiect to council approval. (2) The fund shall be invested in such types of income producing investments limited by section (b) Authorized Investments below and as shall be specifically designated by resolution annually, usually during the budget process, in the form of an asset allocation plan. The asset allocation plan will have specific categories of investments with percentage targets that allow for reasonable fluctuations above and below the target percentage. The plan will establish benchmarks for evaluating 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 the Airport Permanent Fund, including interest income, realized wins and undistributed earnings shall be included in the corpus of the Fund and be invested in accordance with section (bl Authorized Investments. (4) Appropriations from the permanent fund rnav be made as follows: In any fiscal year, an amount not to exceed five (5) percent of the five (5) year average of the fund's calendar year end market value may be appropriated for Airport operations and capital needs. For the first five years the calendar year end market values following the effective date of this ordinance will be avera eg d to calculate the average fund market value. (S) For.the first year, FY 2009, the appropriation from the fund shall not exceed the lesser of al or b) below: a) 5% of the market value of the fund at the effective date of this ordinance Ordinance No. 2326-2008 Page 3 of 4 b) the increase in the market value of the fund from the effective date of this ordinance to May 31, 2009. (6) For the second year FY 2010 the appropriation from the fund shall not exceed the lesser of a) and b) below: a) 5°/v of the market value of the fund at December 31, 2008 b) the increase in the market value of the fund from the effective date of this ordinance to May 31 2010 less the amount appropriated for FY 2009. (b) Authorized Investments for the Airport Permanent Fund (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 they shall be sold in an orderly manner within ninety days of downgrading. (3) Domestic Equities, which taken as a whole, attempt to mirror the characteristics or replicate the Standard & Poor's 500 Index, including both mutual funds and exchange traded funds (ETF'sj_ (4) Domestic Equities which taken as a whole, attempt to replicate the Standard 8v Poor's 400 Mid-Cap Index, including both mutual funds and exchange traded funds fETF's). (5) Domestic Equities, which taken as a whole, attempt to replicate the Standard & Poor's 600 Small-Cap Index, including both mutual funds and exchange traded funds (ETF'sL (6) International Eguites, which taken as a whole, attempt to replicate the Morgan Stanley Europe, Australasia, Far East (EAFE) Index, including both mutual funds and exchange traded funds (ETF's). (7) Equities, which taken as a whole, attempt to replicate the universe of domestic real-estate investment trusts as represented by the Standard 8v Poor's REIT composite index, including both mutual funds and exchange traded funds ETF's . (8) Emerging Market Equities, which taken as a whole, attempt to replicate the Morgan Stanley Emerging Market Index including both mutual funds and exchange traded funds (ETF'sl. cl Officers and emnlovees involved in the investment process shall refrain from personal business activity that could conflict with proper execution of the investment program, or which could impair their ability to make impartial investment decisions. Such employees and investment officials shall disclose confidentially to the City Manager any material financial interests in financial institutions that conduct business with the City. Employees and officers shall subordinate their personal investment transactions to those of the City. particularly with regard to the timing of urchases and sales (d) The Finance Director shall submit to the City Council a quarterly investment report that summarizes recent and anticipated market conditions, and describes the City's Ordinance No. 2326-2008 Page 4 of 4 investment portfolio in terms of transactions during the quarter, maturities, risk characteristics, and investment return compared with budgetary expectations The Finance Director shall submit to the City Council a quarterly investment report that summarizes recent and anticipated market conditions, and describes the City's investment portfolio in terms of transactions during the quarter, maturities, risk characteristics, and investment return compared with Bench Mark Performance Returns. U The Finance Director shall establish custody and safekeeping procedures with regard to all investments authorized by this section. All such investment securities, or their related collateral securities, shall be either held by the City or by a custodial agent for the City. PASSED BY THE COUNCIL OF THE CITY OF KENAI, ALASKA, this 16th day of July, 2008. PAT PORTER, MAYOR ATTEST: Cyr /~ ~ ~j rl'-a~-l~ Carol L. Freas, City Cierk Introduced: July 2, 2008 Adopted: July 16, 2008 Effective: August 16, 2008 Approved by Finance: (06/24/2008) hl ~~~{, SSE ,, k , theee~af KENA1~~~ AKA "l/illa~'e rvit~t a Aast, Gity rvit~r a ~utr~Ye" 210 Fidalgo Avenue, Kenai, Alaska 99611-7794 Telephone:907-283-7535/FAX:907-283-3014 t'I~'i 7992 MEMO: TO: City Council FROM: Rick Koch DATE: June 26, 2008 SUBJECT: Ordinance No. 2326-2008 The Administration recommends approval of the above referenced ordinance amending the Kenai Mm~icipal Code (KMC) to establish a new investment policy for the airport land sale permanent fund. While the investment strategies that will be allowed by this amendment carry additional risk, these investment strategies generally generate higher average returns over the long term. This investment strategy is appropriate for a fund such as this that is basically an endowment. While this strategy is designed to produce a stable return offive-percent for appropriation to airport operations, for the first two years the appropriation from the permanent will be limited to the funds earnings, capped at five-percent per year. This will provide a safeguard against a market downturn during the initial two-years of implementation of this investment policy. If you have any questions, please contact me at your conveneince. ~~_ EGrec~~af KENAI~ SKA "Vclla~ge rvitlt a Past, Gi~ with a Futr~re" 210 Fidalgo Avenue, Kenai, Alaska 99611-7794 ~ Il p' Telephone: 907-283-7535 /FAX: 907-283-3014 1997 MEMO: TO: City Council FROM: Rick Koch DATE: June 26, 2008 SUBJECT: Ordinance No. 2326-2008 The Administration recommends approval of the above referenced ordinance amending the Kenai Municipal Code (KMC) to establish a new investment policy for the airport land sale permanent fund. While the investment strategies that will be allowed by this amendment carry additional risk, these inveshnent strategies generally generate higher average returns over the long term. This investment strategy is appropriate for a fund such as this that is basicaIIy an endowment. While this strategy is designed to produce a stable return offive-percent for appropriation to airport operations, for the first two years the appropriation from the permanent will be limited to the funds earnings, capped at five-percent per year. This will provide a safeguard against a market downturn during the initial two-years of implementation of this investment policy. If you have any questions, please contact me at your conveneince. MEMORANDUM Ta: Riclc Koch, City Manager From: Larry Semmens, Finance Directo Date: 3une 24, 2008 Subject: Airport Land. Sale Permanent Fund Investment Ordinance Ordinance 2236-2008 provides for investment of the Airport Land Sale Permanent Fund in equity instruments and longer-term bonds including corporate bonds. The expectation is that over a long time horizon accepting the increased volatility and risk associated with these investment classes will enhance returns. The ordinance also provides the mechanism by which money can be taken out of the Fund, and stipulates that such appropriations may only be used to support Airport operations or capital needs. The mechanism is known as `percent. of market value' and is a common method to utilize endowment fund earnings. The percent to be used is 5% of market value except in the first two years, which could be less if earnings are less than 5%. This will protect the corpus of the fund for two years. Specifically, the ordinance allows investment in stocks via mutual funds or exchange traded funds (ETF's) in six categories: Large capitalization stocks intended to duplicate the S&P 500 index Mid-capitalization stocks intended to duplicate the S&P 400 index Shall capitalization stocks intended to duplicate the S&P 600 index Real estate trust stocks intended to duplicate the S&P REI T Composite index Intel°national stocks intended to duplicate the Morgan Stanley SAFE index Emerging Market stocks intended to duplicate the Morgan Stanley Emerging Market index Bond investments will include investment grade corporate bonds as well as longer term government bonds. The actual target allocation of the investments will be done amlually by resolution. A draft copy of the resolution is attached. It sets out target ranges of the above inveshnent classes and provides benchmarks against which the managers and the portfolio will be measured. The recommended asset allocation is exactly as was presented by Bert Wagnon of Alaska Permanent Capital. It is 55% equity and 45% fixed income with. a projected return of 7.48% and a standard deviation of 11.34%. Equities are divided into all of the above asset classes with 5% to small cap, real estate and emerging markets, i0% to iriid cap and international and 20% to large cap. The allocation provides good diversification and should outperform the investments currently allowed over the long term. However, it should be stressed that the standard deviation of 1134% indicates that returns can be expected to range between almost 19% and negative 4% in any given year. The council will receive quarCerly investment results with comparison to benchmark performance. I recommend that Council adopt the ordinance and the resolution setting the asset allocation. Over the long term with this approach the Airport Land Sale Permanent Fund should produce more cash, as well as a more consistent annual amount, to fund the Airport.