In her report to the Homer City Council at its Monday night meeting, City Manager Katie Koester made a big “mea culpa” and admitted providing the council with wrong information on the performance of the Homer Permanent Fund. Based on that information, on a recommendation from council member Shelly Erickson to rescind an earlier decision gutting the fund, the issue will come back to the council at its July 24 meeting.
Council member David Lewis also requested a draft ordinance on using part of the Permanent Fund to pay off the Homer Public Library loan.
“I hope you and the public walk away from this knowing that if we find mistakes like this we’re not going to brush it under the rug,” Koester said at the Committee of the Whole meeting.
“I’m glad we’re able to get this out so we can reevaluate our decision going forward,” said council member Tom Stroozas.
In a memo to the council accompanying her report, Koester said that after talking to the city’s broker, she found out she’d given the council incomplete information regarding the fund’s performance.
While it is true the fund received $25,087 in interest payments and dividends in 2016 — about 1 percent in earnings — the overall value of the fund increased significantly, Koester wrote in her memo. Sixty percent of the $2.3 million Permanent Fund, or about $1.3 million, was invested in a growth fund. Between March 9, 2016, and June 19, 2017, the Growth Sub-fund grew from about $1.27 million to about $1.6 million, or about $370,000, with a rate of return of 22.86 percent. That’s value realized only if cashed out, as council member Heath Smith noted.
The wealth of the fund came up when Koester talked to the broker about its value, and he questioned why one would want to cash out a fund that earned so well. She also found another error: the potential interest savings in paying off a 30-year U.S. Department of Agriculture loan on the Homer Public Library. Koester had said that by paying off the $1.1 million balance in the library loan, the city would save about $1 million in interest with the USDA loan rate of 4.125 percent.
After running the figures again, Koester wrote that the city would save $464,314.50. The USDA wouldn’t provide the city an amortization schedule because federal officials said its system does not do that, Koester said.
In passing an ordinance ending the Permanent Fund and using it to pay off the library loan, the council cited the low interest earned in dividends and the supposed savings in interest payments from paying off the loan early. The council also set aside the rest of the fund to use to build a new police station.
While the interest savings in paying off the library loan over the remaining 17 years is still substantial, that has to be balanced against the new information about the growth of the Permanent Fund, Koester said.
“It is important to compare those savings against the performance of the Fund to determine which option is in the city’s best financial interest,” she wrote in her memo. “If all market conditions remain the same, the city stands to benefit more financially from the growth in our investments held within the Permanent Fund than it would with paying off the library loan.”
Michael Armstrong can be reached at firstname.lastname@example.org.