newsminer.com

FAIRBANKS — On the eve of election day, members of the Fairbanks City Council warned council candidates that next year’s budget process is going to be grueling.

In light of the recent historic drop in the nation’s stock market, the city’s permanent fund has endured almost a 12 percent reduction this year, which will account for about a $90,000 drop in next year’s budget.

The fund works as a savings account for future residents of the city. It is organized to generate about 7 percent profit each year to keep up with inflation.

The city uses about 4.5 percent of that profit (averaged over a five-year period) to supplement the budget each year, so when a drop this big in the stock market happens, city officials pay attention.

The council met with its permanent fund manager, Burt Wagnon, who is senior vice president of Alaska Permanent Capital Management, to discuss how the permanent fund was doing after a $10 million loss in assets so far this year.

Wagnon acknowledged the ugliness of the current economy, calling it a “big financial crisis,” but stuck with his position that the city should maintain its investments as they currently stand.

“We think these are definitely scary times, but we don’t recommend a change,” Wagnon told the council. “We’re not being hopelessly optimistic here, but the U.S. has encountered lots of problems over many years and when the problem gets big enough, people work to solve the problem.”

Wagnon acknowledged a long road to recovery lies ahead for the U.S. market and U.S. taxpayers could have to pay a price for the financial disruption, but he remained confident in how the city has invested tax payers money.

Currently, the city has a fairly conservative investment portfolio with almost half of its investments in fixed-return devices like bonds and Treasury bills.

According to Jeff Johnson, a formal advisor from the city finance committee, bonds like those owned by the city are historically sound.

The remainder of the portfolio is divided among companies of large and small sizes, international companies and real estate.

But the city has lost 10.76 percent of its investment during the last nine months, according to a graph recording account performance and handed out by Wagnon.

“We’ve seen almost a 12 percent drop in a one-year period, which means there will be less coming from the permanent fund to support next year’s budget,” Councilman Chad Roberts said in his closing comments at Monday’s council meeting.

In addition, commercial real estate sales are down and property taxes are fairly static, which also will impact the city’s economic state, according to Roberts.

“Things are going to get very scary here,” he said.

Roberts wished the council candidates good luck but warned them next year is going to be tough for the city council.

Other council members remained optimistic and fairly calm about the bad news.

Councilman John Eberhart was one of them.

“This next year will be a challenging time, but I’m optimistic,” he said. “One of the smartest decisions we made was to take a five-year average of earnings so even though the fund lost about $10 million dollars in the current time, when we take the average, it works out to about a $2 million loss, so we’re actually only looking at $90,000 less, and that’s a relatively small amount of money to lose for the city,” he said.

Eberhart agreed with the advice of Wagnon to focus on long-term investment goals.

“It’s not like an individual investor focusing on retirement,” Eberhart noted. “This is a fund that will be here for decades, maybe even hundreds of years.”

The permanent fund advisory committee will hold its quarterly meeting on Nov. 6 to update the city on any changes in the market in the coming weeks.