The city of Kenai voted to rearrange some of its investment strategies last week in an effort to smooth out the flow of income into the city’s coffers. The changes will come to the city’s General Land Sale and Airport Land Sale permanent funds.
They’re operated much like the state’s Permanent Fund, investing an un-touchable core balance of money and withdrawing some of the earnings it generates each year to fund city operations.
City Finance Director Terry Eubank explained that the Airport Lands Fund will actually return less in coming years, but it’s for a good reason.
“I believe my estimate at this time is around just south of a million dollars. It's about a $200,000 hit," he said. "From what has been coming out of that fund, again was that's mostly focusing on sustainability of those draws without, you know, reducing the buying power of the fund.”
He said that in consultation with the city’s permanent fund investment firm, the changes were designed to act as a cushion against lower returns in the future.
“Over the last the last 10 year period, we achieved eight percent. And that was achieved through, you know, extraordinary returns in the equity markets, but muted returns in the fixed income markets. And the outlook going forward is that, you know, the equity markets can't continue to perform at that same level and our fixed income or the bond markets are still muted in comparison to what historic rates of return are," Eubank said. "So that's a really fancy and technical way of saying we don't expect we're going to earn eight percent in the future, the current projections for the next 10 year cycle you know, a six-point-two percent return or six percent geometric return.”
And that growth, Eubank says, is two percent lower than what the city projected 10 years ago. He said the funds could be protected with the smaller draw.
“Taking a five percent draw with only a six percent return will result in degradation to the funds. You know, inflation adjusted balance. So we won't have the same buying power 10 years from now, that we do today, because we've taken too much money out," he said. "So our focus and our recommendation is based on making this fund sustainable for the next 10 years and for the next citizens of Kenai to benefit from.”
The ordinance passed unanimously.