ECON 919 - The borough's own permanent fund

May 24, 2019


This week: the borough’s land trust fund. It was a bit of a political football last year. Sitting with around $7.5 million, there was some interest in using that account to fund education or balance the borough budget or both. Those efforts from borough administration failed to get past the assembly.



Instead, it was thought the fund would be better put to use by coming up with a long term plan for its investment, rather than sort of puttering along at basically the same rate as a savings account. The assembly did that this week when it adopted a resolution establishing the land trust investment fund which, at its core is meant to get the maximum value of lands that have been given to the borough to sell. Marcus Mueller is the borough’s land manager.

“We have the opportunity to go beyond that and to have good financial health, where our land program is sustainable and on top of that, provide additional benefits back to the general fund," says borough land manager Marcus Mueller. "


"A lot of this model is based off what the city of Kenai is doing, where you manage your financial assets well and you use some of that to support your operations and you keep those long term assets around so that they’re available to be managed in the long term. The borough is going to be here for a long time, it’s going to need a lands program for a long time and this is our attempt to make sure that we’re sustainable and forward-thinking.”

The borough brought in an investment advisor, Alaska Permanent Capital Management to help put an investment strategy together. That group’s Blake Phillips outlined the details in a recent finance committee meeting, talking about striking the balance between risk and return.

“You want to have higher return levels, but you want those to be risk-adjusted returns. Currently, with what our outlook is, once you get up to 75, 80 percent, we don’t think you’re getting paid enough for how much additional risk you’re taking. You want to be in a position where you’re getting more return than additional risk...So based on that and also the dynamics of sustainable distribution rate and also just the volatility within the portfolio given all the various moving parts between LTIF and LTF, we’re recommending a 55 percent stock allocation with 45 percent bonds. This can reasonably support a 5.7 percent distribution rate while also making sure that we inflation protect principal.”

Phillips says they’re projections show a slow down in both stock and bond markets, but on the stock side, they expect a long term annual return of about six percent. The models were based on an initial investment in the fund of $5.6 million and over the next decade, that’s expected to more than double to a little more than $11 million. And in a way, it will sort of act like the state’s permanent fund. After three years, the borough would benefit from the earnings coming off the fund. The borough’s chief of staff, James Baisden, says they’re happy with the plan.

“It’s a balanced portfolio. There is risk involved but they’ve reduced the risk by putting it in a balanced portfolio. (We’re) looking for between a four and six percent return (that’s) kind of right on the mark and I think I would basically look at this as being kind of our little permanent fund. And they reduced the risk also by not buying individual stocks. They’re buying indexed. I think they’ve done a pretty good job.”

The resolution includes a number of benchmarks against which to gauge the performance of the different assets in the fund and based on the projections, over ten years even in the worst case scenario, there will still be growth totaling about two million dollars.

This week’s number: 347,919 - that’s how many million cubic feet of gas were pumped from the Kitchen Lights Unit of Cook Inlet last month. That unit is served by the Julius R platform, where a jack up rig is doing the work. Furie Operating runs the whole deal and this is news because it’s taken several months for the company to rebound production after issues with hydrate freezing over the winter. In March, the company produced less than 70 million cubic feet and last November, before the cold hit, production was at more than 800 million cubic feet.