Over the last several months, the KICA Finance Committee has worked to craft a new Investment Policy Statement to govern the manner in which the community’s reserve funds are invested. At last week’s meeting, the committee voted unanimously to send this draft to the KICA board for consideration. KICA’s standard procedure is to share policy drafts with the community for input prior to making a final decision. After reviewing the attached draft, if you wish to share any comments, please send them to firstname.lastname@example.org no later than 5 p.m. on Wednesday, May 2.
KICA funds major repair expenses (planned repair and replacement of roads, bridges, drainage, etc. – not unplanned major expenses such as storms) from three primary sources:
Contributions to Reserves (CTR’s): CTR’s are transfer fees on real estate sales, and represented 43% of reserve fund revenue in 2017.
The Reserve Assessment: Formally referred to as the Supplemental Annual Assessment, this assessment is billed to all members along with the Annual Assessment. It represented 39% of reserve fund revenue in 2017.
Commercial Access Fees: Commercial Access Fees are charged to contractors and other service providers who perform work on Kiawah Island. Beginning in 2017, a portion of these fees was allocated to the reserve fund for major repairs. They represented 14% of total reserve fund revenue.
The remaining revenue (4% of total in 2017) is provided by investment income.
In some years these revenue sources are sufficient to cover all reserve expenses. However, there are times when expenses exceed revenue, and reserve funds are needed to make up the difference. Having a healthy reserve is the best way to avoid special assessments, and KICA’s reserve stands at $7.5 million today.
KICA’s investments have historically been held primarily in cash and money market accounts, though in recent years the association has built a small ($3.8 million) laddered portfolio of high quality, “A” rated or better corporate bonds. This strategy has improved KICA’s investment returns, but not enough to keep pace with inflation. Continued losses in purchasing power could have a significant negative impact on KICA’s reserve funds over time.
The Finance Committee has drafted a new investment policy with the goal of keeping up with inflation. The committee believes this can be accomplished by investing approximately 70% of the funds in fixed income investments similar to what we have done in the past (individual investment grade bonds with maturity of 10 years or less) and 30% in equities (active and indexed mutual funds, no individual stocks or alternative investments). This balanced investing strategy has historically been very effective (it has never lost money over a 5-year period), although it would be subject to some moderate level of risk and volatility. More aggressive approaches weren’t deemed necessary to meet KICA’s objectives.
The management of the portfolio (within policy guidelines) will be the responsibility of Moneta Group. This firm has done an outstanding job managing KICA employees’ 401K funds, and was selected after an extensive review process by the Finance Committee and Board of Directors.
Thank you in advance for your input. Any decisions on this topic will be reported after the May Board meeting.