HomeMy WebLinkAboutOrdinance No. 2670-2013i ' \
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KENAI, ALASKA
Suggested by: Administration
AN ORDINANCE OF THE COUNCIL OF THE CITY OF KENAI, ALASKA, AMENDING
KENAI MUNICIPAL CODE SECTION 7.30.020, "INVESTMENTS," TO UPDATE THE
PRESCRIBED BENCHMARKS OF THE INVESTMENT CLASSES.
WHEREAS, KMC 7.301.020 defines the allowable investments of the City's Land Sale
Permanent Funds; and,
WHEREAS, KMC 7.30.020 also defines the benchmark each investment class will be
evaluated against in determining investment performance; and,
WHEREAS, investment class benchmarks are reviewed annually and periodically
change requiring an update to the KMC; and,
WHEREAS, the process of updating investment class benchmarks would be more
efficiently accomplished via Resolution in conjunction with the annual establishment
of the Land Sale Permanent Ftinds Asset Allocation Plan.
NOW, THEREFORE, BE IT ORDAINED BY THE COUNCIL OF THE CITY OF KENAI,
ALASKA, as follows:
Section 1. Form: This is a Code ordinance.
Section 2. Amendment of Section 7.30.020 of the Kenai Municipal Code: The Kenai
Municipal Code, Section 7.30.020, 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:
(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 have specific categories
of investments for the funds with percentage targets that allow for reasonable
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Ordinance No. 2670 -2013
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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 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 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 (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.
(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 effective date of the ordinance codified in this section to May 31, 2009.
(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 earnings for the fund or five percent
(5 %) of the fund's fair market value as of December 31 of each year.
(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
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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).
(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 annual 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
[MORGAN STANLEY EUROPE, AUSTRALASIA, FAR EAST (EAFE) INDEX] Financial
Times Stock Exchange Developed ex North America 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).
(7) Equities, which taken as a whole, attempt to replicate the universe of domestic
real estate investment trusts as represented by the Standard & Poor's REIT 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
[MORGAN STANLEY EMERGING MARKET INDEX] 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).
(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 institutions that conduct business with the City and such
information shall be kept confidential to the 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 entity is a financial interest of any kind, which, in
view of all the circumstances, is substantial enough that it would, or reasonably could,
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affect the employee's or officer's judgment with respect to transactions 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 investment securities, or
their related collateral securities, shall be either held by the City or by a custodial
agent for the City.
Section 3. Severability: If any part or provision of this ordinance or application
thereof to any person or circumstances is adjudged invalid by any court of competent
jurisdiction, such judgment shall be confined in its operation to the part, provision, or
application 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 persons or circumstances. The City Council hereby
declares that it would have enacted the remainder of this ordinance even without such
part, provision, or application.
Section 4. Effective Date: Pursuant to KMC 1..15.070(f), this ordinance shall take
effect one month after adoption.
PASSED BY THE COUNCIL OF THE CITY OF KENAI, ALASKA, this 16st day of
January, 2013.
PAT PORTER, MAYOR
ATTEST:
Sandr di g1h, City Clerk
Introduced: January 2, 2013
Adopted: January 16, 2013
Effective: February 16, 2013
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M
To: Rick Koch, City Manager
From: Terry Eubank, Finance Director
Date: December 26, 2012
Re: Ordinance 2670 -2013
The purpose of the memo is to provide additional information in support of Ordinance 2670-
2013. If adopted, Ordinance 2670 -2013 will accomplish two things. First, the City's investment
plan for its Land Sale Permanent Funds includes equities. Rather than picking individual stocks
to meet the equity component of the plan, mutual funds who invest in hundreds of different
stocks are being used. These mutual funds provide diversification within each asset class,
reducing the City's risk through diversification.
The City's Investment Manager, Alaska Permanent Capital Management, has selected Vanguard
mutual funds because of their low operating costs and proven record of mimicking the City's
stated benchmark indexes. Vanguard has changed the benchmark index it will manage its
mutual funds to requiring a change to KMC 7.30.020. Ordinance 2670 -2013 will update KMC
7.30.020 to the new indexes being used by Vanguard and allow for future changes to be made by
Resolution when establishing the annual Land Sale Permanent Funds Investment Plan. KMC
7.30.020 (a) (2) already provided for this feature but the specific naming of each index in KMC
7.30 -020 (b) (3 -8) created a conflict which this Ordinance eliminates.
Alaska Permanent Capital's other recommendations regarding changes to Land Sale Permanent
Funds Investment Plan will be discussed at the January 16, 2013 Council work session.
November 16, 2012
Mr. Terry Eubank
Finance Director
City of Kenai
210 Fidalgo Avenue
Kenai, AK. 94611
Dear Terry;
sent via email
A couple of items have come up regarding the Permanent Fund that requires some attention.
First, the Vanguard Group recently announced that beginning in 2013 they will no longer be
using the Morgan Stanley indices and instead will convert to the FTSE indices. Second, we
believe that making some minor changes to the target weightings and ranges within the
allocation plan is worthy of consideration.
As you are aware, APCM purchases index funds to provide exposure to the various equity asset
classes. Recently, Vanguard announced that they would no longer be using the Morgan Stanley
Europe, Australasia, Far East (SAFE) Index or the Morgan Stanley Emerging Market Index
(MSCI). Instead, they are changing to the FTSE Developed ex North America Index and the USE
Emerging Index in order to "keep long -term expenses low ". This change will begin in January of
2013.
This index change does not materially alter exposure to the respective asset classes themselves.
The primary difference between the two is placement of Korea which Morgan Stanley has as
emerging and USE as developed. The change does create a problem with the Fund's
investment policy which explicitly enumerates the particular indices that Vanguard will no
longer be using (7.30.020 (b) 6 & 8).
As both Vanguard funds are low cost vehicles that provide exposure to the respective asset
classes and meet our investment criteria, we recommend you consider amending the code to
allow use of the USE Developed ex North America Index for the International Equities
allocation and the FTSE Emerging Index for the Emerging Market allocation. Conforming
changes would need to occur to Resolution N. 2008 -42 for performance measuring purposes.
Since inception the Fund has been managed under the asset allocation plan set forth in
Resolution No. 2008 -42. This allocation has an overall 45% Fixed income and 55% equity
distribution. to our opinion the asset allocation plan is the most significant factor in risk
management and return and accordingly it may be appropriate to review the current
allocations. Specifically we would recommend a reduction in the target allocation for fixed
income from 45% to 40% and a new allocation created for Cash in the amount of 5 %.
Additionally the Range for fixed income would be changed from 40 -65 percent to 35 -65 percent
and a new Cash range created from 0 -10 percent. Our rational for these recommendations is
that the lower limit of the fixed - income range allows only a maximum of 5% underweight of
fixed - income and the new cash component would accommodate cash flows as well provide a
temporary holding bin when over and underweighting other asset classes.
If you would like us to pursue the above let me know. It would probably make good sense to
prepare an asset allocation presentation the looks at the current plan and alternatives
incorporating risk and return. I will be out of the office the week of the 19`h, but back in the
office on the 26th.
Sorry about the index change being in code as opposed to resolution.
Sincerely,
Bert Wagnon
Senior Vice - President
Brandy Niclai, CFA
VP, Portfolio Manager