Soldotna’s current investment returns are just a drop in the bucket compared to their potential.
At a workshop on Wednesday, members of the Soldotna City Council met with representatives of Alaska Permanent Capital Management to discuss new investment strategies. Due to Soldotna’s conservative investment approach, the city is not making as much money as it could.
At the meeting, members of APCM made recommendations that could potentially help earn the city more money.
As of December 31, 2014, the market value of Soldotna’s investments total $23.5 million, according to documents provided by APCM. Of that money, $20.5 is invested by APCM in a U.S. Treasuries and Agency portfolio, while $3 million sits in the Alaska Municipal League Investment Pool, also known as AMLIP.
Both portfolios are earning very little. The APCM portfolio characteristics show that it current yields 0.58%. The AMLIP portfolio yields 0.01%.
“We’re leaving a lot of money on the table now,” said council member Pete Sprague.
Bertram Wagnon, APCM’s senior vice president of investments, said that compared to other cities that use their service, such as Kenai, Soldotna has invested conservatively.
Last year, Kenai had an income of $678,442 from investments in a variety of entities such as Microsoft. Soldotna’s annual income from investments was a $171,934.
“[Soldotna’s] investment policy is very conservative, and treasury and agencies only,” Wagnon said.
Wagnon offered a longer-term investment plan to the city that would diversify the city’s money by placing it into three categories called “buckets.” Each bucket would have different investment timelines and purpose.
“What alternatives are available for higher return? We think the concept of time horizon and matching liquidity needs, of a city, to a time horizon – lends itself to a more efficient investment program,” Wagnon said.
The first bucket, called “A”, would be a short-term, high-quality government portfolio and money market account. This account would be a low risk, low return account that would allow for high liquidity.
The second bucket, “B,” would have bonds and securities with a maturity range of 1-5 years.
The third bucket, “C,” would be for investments longer than five years. According to documents provided by APCM, bucket C would have the highest risk to reward ratio of the three buckets. It would consist of equities and bonds.
While money from all three buckets could be accessed in a couple of business days, the longer-term investments are intended to be left alone.
“If you believe that you don’t think you’re going to spend in 5-7 years, I think you’re making a mistake holding it all short in a 1-3 year [bucket],” Wagnon said.
Based on computer simulations provided by APCM, a seven-year investment portfolio of $5 million that consisted of 55% equities would be expected to increase to $7.2 million in that time frame, with a best-case scenario of $10.9 million and worst-case scenario of $4.9 million.
Soldotna Mayor Nels Anderson joked that the worst-case scenario of losing $100,000 isn’t far off from the city’s current situation.
“[It] is not much different than what we’re doing with our current interest rates,” he said.
Anderson said the city should have explored new investment methods earlier.
“We didn’t push it hard enough, and we should have,” he said. “That’s the bottom line.”
Soldotna City Manager Mark Dixson said that he would like the council to have a resolution on April 22 to allocate money to the different buckets. Each year, the city would review the accounts and check benchmarks that will be set in a resolution. In the future, the city has the ability to move money from one bucket to another via council action.
Dixson said the types of entities in which the city would invest are not overtly risky. He said any major financial calamity would be a result of widespread economic disaster.
“These are big corporations that aren’t going to go belly up,” he said. “If we are losing our shirts on the corporate [investments], the national economy is in the toilet.”
At the meeting, city officials discussed how to divide the city’s money into the three buckets. A common proposal heard was $8 million each in buckets B and C, with the remaining money going to the short term bucket A.
Council member Meggean Bos said that she liked the idea of investing money in different ways.
“I think diversity is good, because you don’t want to put all your eggs in one basket,” she said. “You just don’t know [what could happen]. ”
Reach Ian Foley at Ian.email@example.com