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HomeMy WebLinkAboutFSD-035-21Clarington Staff Report If this information is required in an alternate accessible format, please contact the Accessibility Coordinator at 905-623-3379 ext. 2131. Report To: Audit and Accountability Committee Date of Meeting: June 29, 2021 Report Number: FSD-035-21 Submitted By: Trevor Pinn, Director of Financial Services/Treasurer Reviewed By: Andrew C. Allison, CAO Resolution#: File Number: [If applicable, enter File Number] By-law Number: Report Subject: Update to Municipal Investment Policy Recommendations: 1. That Report FSD-035-21 be received; and 2. That the proposed updated Investment Policy, as attachment #1, be approved. Municipality of Clarington Report FSD-035-21 Report Overview Page 2 Council must have an adopted Investment Policy under the Municipal Act, 2001. The existing policy was drafted in 2018 and allowed the Municipality to invest in any prescribed investment instrument; however, it also added several internally imposed restrictions in an effort to increase diversity and reduce risk. Since 2018, the economic climate has changed in such a way that the current restriction on financial institutions to 60 per cent is problematic and does not provide the flexibility to obtain reasonable rates of return. Previously a significant amount of cash was held in a high - interest savings account and was not included in the calculation of "financial institutions"; the recent drop in bank account rates makes this investment no longer feasible and the Municipality is looking for alternatives. Therefore, staff propose to increase the financial institution limit to 80 per cent and the individual institution restriction from 20 per cent to 25 per cent. 1. Background 1.1 The Municipality of Clarington is required, under the Municipal Act, 2001 to have an investment policy adopted and approved by Council. This policy was last reviewed in 2018 and before that in November 2013. 1.2 The existing policy, and a discussion on recent changes to the legislation surrounding investing for municipalities, were the subject of Report FND-011-18 on June 18, 2018. 1.3 The Municipality utilizes the legal list of investments as allowed under O.Reg 438/97, which prescribes what investments a municipality may make. 1.4 Staff have provided several reports on investment options to General Government Committee and Council, most recently Report FND-038-20, which was received for information with direction for an information session to be delivered (this was at the GGC meeting of January 25, 2021) to educate members of Council on investments. 1.5 This report has been prepared to update the Municipality's Investment Policy to consider economic changes that have occurred since 2018, and provide increased flexibility within the legal list framework that we continue to operate in. While staff are still of the opinion that adopting the Prudent Investor Standard is the best course of action for the Municipality, any change in investment regime would take time (currently, there is no direction to move towards this regime) and during that period, we continue to need to invest. Municipality of Clarington Report FSD-035-21 Current Economic Conditions and Investments Page 3 1.6 Since the early part of 2020, there has been a reduction in fixed -income return rates on eligible investments for the Municipality. The reduced interest rates became worse as a result of the COVID-19 pandemic. 1.7 As central banks have reduced interest rates to support the economy, the rate of returns on fixed -income instruments has remained extremely low. As most of our investments are in fixed incomes, this has had a significant impact on the Municipality. 1.8 Interest rates have also affected bank accounts. The High -Interest Savings Account offered by ONE Investment went from 0.915 per cent from March 2020 (2.415 per cent in January 2020 high) to 0.165 per cent on January 1, 2021. Similarly, our interest rate with TD Bank has gone from 0.78 per cent from March 31, 2020 (the last time Prime was changed) to 0.61 per cent effective June 15, 2021 (there was an incremental decrease March 1, 2021). The reduced interest rates increase the importance of active investing and diversifying from fixed -income investments. The decrease in rate is effectively $1,700 per year per $1,000,000 balance in lost revenue to the Municipality. 1.9 At the same time, equity instruments had a short-term reduction in March 2020 but have rebounded and recovered their value. As noted in Report FSD-014-21 the adjusted annual return in the equity portfolio is approximately 3.9 per cent since 2005. 1.10 As noted in the memo to Committee on May 5, 2021 from the Internal Audit Manager, the Municipality of Clarington is outside of its approved investment policy. This is the result of investments in financial institutions being 62.8 per cent rather than the approved 60 per cent. 1.11 There are several remedies for this situation. The first step is looking at the investment policy to determine if there is an appetite to increase the limit that the Municipality may invest in financial institutions. Increasing this limit could potentially result in a higher concentration of investments in one sector which increases concentration risk; however, the financial services industry in Canada is highly regulated and considered a low -risk industry. Given the limitations of the legal list, this is an area that most municipalities have to invest in. 1.12 The second option, as investments mature, is to remove them from our current investment advisor (RBC Dominion Securities) and invest in ONE Investment Pools in their equity or bond portfolios. In past conversations, there appears to be a reluctance of members of Council to invest in equities. Equities are a form of long-term investments that allow for diversification in a portfolio. 1.13 The third option is to instruct our investment advisor to look at Provincial and Municipal Debt, we have recently purchased some Province of Alberta bonds to add to our portfolio. This again increases our diversification; however provincial and federal debt tends to be low interest (it is also low risk). Municipality of Clarington Page 4 Report FSD-035-21 1.14 My recommendation is all three options should be utilized to most effectively manage our investments. By increasing the allowable limits for financial institutions, the Municipality is no longer in breach of its investment policy and immediate liquidation is not required. In moving some funds, as they become available, to the ONE Investment equity pools the Municipality will be able to diversify from fixed income and reduce risk through the use of a pooled investment vehicle. Finally, looking at government debt provides a liquid, low risk investment tool that provides better interest than bank accounts but still preserves our investment capital. 2. Changes to Investment Policy 2.1 The proposed draft policy, attachment #1, has been placed in a new format to be consistent with recent policies adopted by the Municipality. These formatting changes do not impact the investment parameters for the Municipality. 2.2 The proposed draft increases the portfolio limit for investments in financial institutions from 60 per cent to 80 per cent. This provides more flexibility to invest in low -risk bank bonds, GICs and other notes which, during the COVID-19 pandemic, are the predominant legal available investment. 2.3 Similarly, the draft proposes a change in the per financial institution limit from 20 per cent to 25 per cent. This again provides a little more flexibility, currently we approximate 18 per cent for two of our institutions. 2.4 The policy proposes an exception to the 10 per cent restriction to invest in Municipal Debt that is issued by the Region of Durham. It is possible that the Municipality may wish to invest in its own debt issued through the Region of Debt. All other municipalities would be restricted to ten per cent. Currently, the Municipality has investments in debt from the City of Toronto. 2.5 Finally, the required review frequency of at least once per term of Council has been updated to annually. Given the pace of economic changes, and the importance of investment income as a non -tax revenue source, annual reviews are recommended. If the Municipality were to eventually move to the Prudent Investor regime, annual investment policy reviews are mandated. 3. Concurrence Not Applicable. Municipality of Clarington Page 5 Report FSD-035-21 4. Conclusion It is respectfully recommended that the attached Municipal Investment Policy be approved. Staff Contact: Trevor Pinn, CPA, CA, Director of Financial Services/Treasurer, 905-623-3379 ext.2602 or tpinn@clarington.net. Attachments: Attachment 1 — Draft Municipal Investment Policy G09 Interested Parties: There are no interested parties to be notified of Council's decision. Corporate Policy Attachment 1 to FSD-035-21 ciffboon If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 POLICY TYPE: Financial SUBSECTION: POLICY TITLE: Investments POLICY #: G09 POLICY APPROVED BY: Council EFFECTIVE DATE: July 3, 2018 (last revision) REVISED: July 6, 2021 APPLICABLE TO: All Employees 1. Purpose 1.1 The Municipality of Clarington strives for the optimum utilization of its cash resources within statutory limitations and the basic need to protect and preserve capital, while maintaining solvency and liquidity to meet ongoing financial requirements. 2. Scope 2.1 This policy includes all funds that are managed by the Municipality of Clarington except for the Municipality's investment in Elexicon Group. 3. Definitions 3.1 Asset Backed Securities — Fixed income securities (other than a government security) issued by a Special Purpose Entity, substantially all of the assets of which consist of Qualifying Assets. 3.2 Basis Point — A unit that is equal to 1/100th of 1 %, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed -income security. 3.3 CHUMS Financing Corporation (CHUMS) —A subsidiary of the Municipal Finance Officers Association of Ontario (MFOA) which in conjunction with the Local Authority Services Limited (LAS) operates the ONE Investment Program. G09 — Investment Policy Page 1 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciffboon If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 3.4 Credit Risk — The risk to an investor that an issuer will default in the payment of interest and/or principal of a security. 3.5 Discount — The amount by which the par value of a security exceeds the price paid for the security. 3.6 Diversification — A process of investing assets among a range of security types by class, sector, maturity and quality rating. 3.7 Duration — A measure of the timing of the cash flows, such as the interest payments and the principal repayment, to be received from a given fixed -income security. This calculation is based on three variables: term to maturity, coupon rate, and yield to maturity. The duration of a security is a useful indicator of its price volatility for given changes in interest rates. 3.8 Holding Period Classification — Classification of investments based on the intended period the Municipality would hold the asset, as follows: Cash Equivalent: short-term highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. Short-term: securities with a holding period of one year or less. iii. Long-term: securities with a holding period of greater than one year. 3.9 Liquidity — A measure of an assets' convertibility to cash 3.10 Local Authorities Service Limited (LAS) — A subsidiary of the Association of Municipalities of Ontario (AMO) which in conjunction with CHUMS are members of the ONE Investment Inc. 3.11 ONE Investment Inc. — An incorporated not -for -profit organization which includes investment portfolios available for Ontario municipalities. Formerly was the ONE Investment Program which is a professionally managed group of pooled investments that meet eligibility criteria as defined by regulations under the Municipal Act. Also includes the High Interest Savings Account (HISA). G09 — Investment Policy Page 2 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciffboon If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 3.12 Market Risk — The risk that the value of a security will rise or decline as a result of changes in market conditions. 3.13 Market Value — The current market price of a security. 3.14 Maturity — The date on which payment of a financial obligation is due. The final stated maturity is the date on which the issuer must retire a bond and pay the face value to the bondholder. 3.15 Par — The face value or principal value of a bond. 3.16 Premium — The amount by which the price paid for a security exceeds the security's par value. 3.17 Principal — The face or par value of a debt instrument or the amount of capital investment in a given security. 3.18 Rate of Return — The yield obtainable on a security based on its purchase price or its current market price. Yield reflects coupon, term, liquidity and credit quality. 3.19 Schedule I Banks — Schedule I banks are domestic banks and are authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canadian Deposit Insurance Corporation. 3.20 Schedule II Banks — Schedule II banks are foreign bank subsidiaries authorized under the Bank Act to accept deposits, which may be eligible for deposit insurance provided by the Canada Deposit Insurance Corporation. Foreign bank subsidiaries are controlled by eligible foreign institutions. 3.21 Sinking Fund — Money accumulated on a regular basis, through regular contributions and interest earnings, in a separate custodial account that is used to redeem debt securities by a specified date. 3.22 Weighted Average Maturity (WAM) — The average maturity of all the securities that comprise a portfolio. G09 — Investment Policy Page 3 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciff;w4on If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 3.23 Yield to Maturity (YTM) — The annual return on a bond held to maturity when interest payments and price appreciation (if priced below par) or depreciation (if priced above par) are considered. 4. Objectives 4.1 The primary objectives of the investment program, in order of priority, shall be: a. Adherence to statutory requirements; b. Preservation of principal; c. Ensuring availability of cash to meet disbursements and other obligations; d. Maintaining liquidity; e. Diversification of the investment portfolio, commensurate with constraints above; f. Earning a competitive rate of return, commensurate with constraints above; g. Regular review of the effectiveness of the policy in meeting the above objectives; and h. Periodic audit of the investment program to ensure adherence to the policy. 4.2 Adherence to Statutory Requirements 4.2.1 All investment activities must be made in accordance with Section 418 (1) of the Municipal Act, 2001, as amended which states that a municipality may invest money it does not need immediately in securities, in accordance with prescribed rules and regulations. 4.2.2 The prescribed securities that municipalities may invest in as well as the rules for making investments, entering into related financial agreements and reporting on activities is set out under Ontario Regulation 438/97, as G09 — Investment Policy Page 4 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciff;WOOR If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 amended. Any Provincial Statutes or Regulations will supersede and take precedence over this policy. 4.2.3 Investments, unless limited further by Council, will be those deemed eligible under O.Reg 438/97 as amended. 4.3 Preservation of Capital 4.3.1 Safety of principal is an important objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. 4.3.2 Staff shall mitigate credit risk through the following: Limiting investments to safer types of securities; Diversifying the investment portfolio so that potential losses on individual securities will be minimized. 4.3.3 Staff shall mitigate interest risk through the following: Structuring the investment portfolio so that securities mature to meet ongoing cash flow requirements, thereby reducing the need to sell securities on the open market prior to maturity; Investing operating funds primarily in shorter -term securities or approved investment pools; and iii. Diversifying longer -term holdings to match term exposures to requirements of underlying reserve funds and to mitigate effects of interest rate volatility. 4.4 Maintaining Liquidity 4.4.1 The investment portfolio shall remain sufficiently liquid to meet all operating or cash flow requirements and limit temporary borrowing requirements. This G09 — Investment Policy Page 5 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciff;WOOR If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 shall be done where possible by structuring the portfolio such that securities mature concurrent with anticipated cash demands. 4.4.2 The portfolio shall consist largely of securities with active secondary or resale markets to ensure liquidity. A portion of the portfolio may be placed in local government investment pools which offer liquidity for short-term funds. 4.5 Competitive Rate of Return 4.5.1 Notwithstanding the other objectives of this policy, the Municipality shall maximize the rate of return earned on its investment portfolio by implementing a dynamic strategy as part of the investment program. 4.5.2 Diversification, as well as ensuring safety of principal by limiting exposure to credit, sector or term risk, provides opportunities to enhance the investment return on the Municipality's portfolio. 5. Standards of Care 5.1 Prudence 5.1.1 Investments shall be made in accordance with the policy, under the prevailing circumstances. Consideration of the probable safety of the principal as well as income to be derived should be of primary concern. 5.1.2 Staff acting in accordance with procedure and this investment policy and having exercised due diligence, shall be relieved of personal responsibility for any individual security's credit risks or market price changes, provided deviations from expectations are reported in a timely fashion and the liquidation or sale of securities are carried out in accordance with the terms of this policy. 5.2 Ethics and Conflict of Interest 5.2.1 Employees involved in the investment process shall refrain from personal business activity that could conflict with the proper execution and G09 — Investment Policy Page 6 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciffboon If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 management of the investment program, or that could impair ability to make impartial decisions. 5.2.2 Employees involved in investment procedures shall disclose all material interests in financial institutions with which they conduct business. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. 5.2.3 Employees and officers shall not undertake personal investment transactions with the same individual with whom business is conducted on behalf of the Municipality. 5.2.4 If a staff member of the Finance Department or any elected or appointed member of the Municipality is party to, or has a direct or indirect beneficial interest in an investment transaction of the Municipality, he or she must provide full disclosure of that interest to the Director of Finance/Treasurer (or designate). The Director of Finance (or designate) will determine whether the Municipality's investment is to continue to be retained or sold forthwith. 5.3 Safekeeping and Custody 5.3.1 All securities shall be held for safekeeping by a financial institution approved by the Municipality. Individual accounts shall be maintained for each portfolio. All securities shall be held in the name of the Municipality. 5.3.2 The depository shall issue a safekeeping receipt to the Municipality listing the specific instrument, rate, maturity and other pertinent information. On a periodic basis (preferably monthly), the depository will also provide reports, which lists all securities held by the Municipality, the book value of holdings and the market value as of month -end. 6. Delegation of Authority 6.1 The Director of Finance/Treasurer has overall responsibility of the investment portfolio. The Director of Finance/Treasurer shall be responsible for all transactions undertaken, and shall establish a system of controls to regulate the activities of subordinate officials and shall exercise control over that staff. The G09 — Investment Policy Page 7 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciffboon If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 Director of Finance/Treasurer or designate have the authority to make investment decisions for the Municipality 6.2 The Director of Finance/Treasurer or designate shall be authorized to enter into arrangements with banks, investment dealers and brokers, and other financial institutions for the purchase, sale, redemption, issuance, transfer and safekeeping of securities in a manner that conforms to the Municipal Act, 2001 and the Municipality's policies. 7. Approval Requirements 7.1 All investment transactions must be approved by two of the following: CAO ii. Director of Financial Services/Treasurer iii. Manager of Accounting Service/Deputy Treasurer 7.2 Signing authority for transactions from the Municipality's bank account to an investment account would follow the signing authorities outlined in the Banking Signing Authorities Policy. 8. Council Reporting 8.1 The Director of Finance/Treasurer shall provide an annual investment report to Council which shall contain at a minimum: A statement about the performance of the portfolio of investments during the period covered by the Report; ii. The balance of the current outstanding investment portfolio; iii. A statement as to whether or not all investments were in accordance with the investment policies and goals of the Municipality; G09 — Investment Policy Page 8 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciffftwn If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 iv. If applicable, a description of the estimated proportion of investments that are invested in the Municipality's own long-term and short-term securities and a description of the change, if any, in the estimated proportion since the previous report; V. If applicable, a record of the date of each transaction in or disposal of its own securities, including a statement of the purchase and sale price of each security; and vi. Contains such other information that the Council may require or that, in the opinion of the Treasurer or designate, should be included. 8.2 If an investment made by the Municipality is, in the Treasurer or designate's opinion, not consistent with the investment policies and goals adopted by the Municipality, the Treasurer shall report the inconsistency to Council within 30 days after becoming aware of it. 9. Eligible Investments and Statutory Requirements 9.1 Investment Funds 9.1.1 The Municipality maintains the following funds: General Fund Non -Development Charges Reserve Fund To provide a source of funding for operating and non -DC supported capital expenditures. To provide a source of funding for reserve funds which are not funded by The investment horizon for this fund is typically within 24 months. However longer -term investments may be made to recognize increased returns. The investment horizon for these funds is typically 5 years. There will be G09 — Investment Policy Page 9 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciffboon If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 Development Charges Reserve Fund Strategic Capital Fund Typically requirements relate to the Municipality's capital plan. To provide a source of funding for growth -related activities funded through development charges. Long-term asset management strategic financing tool; Investment in debt financing opportunities through internal debenture issuance; investment in servicing of non-residential areas as a front -ending tool deposits annually from budgeted contributions as well as withdrawals to support the annual budget requirements. The DC study has a horizon of 5 years, within this fund there will be withdrawals and deposits annually. The key investment driver is to ensure liquidity in the portfolio that can be used to finance approved growth -related expenditures. This fund has an investment horizon of over 5 years. The key investment driver is to earn a return which can be used to fund other activities while preserving capital. This fund does not see significant levels of transactions annually and is more focused on specific projects which qualify G09 — Investment Policy Page 10 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciffboon If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 under the establishing by- law. Trust Funds May include funds held for This fund has an the perpetual care of investment horizon of 5 cemeteries under the years. control of the Municipality. As these funds are held in Trusts may also include trust for other parties, the bequests made to the key investment driver is Municipality. These maintain the capital while bequests may be restricted earning a reasonable in use, which varies based return. on the individual. 9.1.2 The above categories are funds which manage similar accounts. For example the Development Charge Reserve Fund invests for all individual DC Reserve Funds, individual accounts are not required to be established. An individual investment security may be made utilizing funds from different sources (i.e. a GIC in the DC Reserve Fund may relate to general government, parks and road DC reserve funds). 9.2 Eligible Securities 9.2.1 Eligible securities are prescribed under O.Reg 438/97, as amended. 9.2.2 Investments shall be diversified by: Limiting investments to avoid over -concentration in securities from a specific issuer or sector (excluding Government of Canada securities); Limiting investment in securities to those that have higher credit ratings; G09 — Investment Policy Page 11 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciffboon If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 iii. Investing in securities with varying maturity dates; iv. Investing primarily in liquid, marketable securities which have an active secondary market, to ensure appropriate liquidity. 9.3 Investment Limitations 9.3.1 To promote diversification, the following percentage weightings for each type of investment within the portfolio shall be established and maintained: PortfolioInvestment Type . Federal Debt 100% Provincial Debt 1 80% 20% per province Municipal Debt 35% 10% per municipality (except the Region of Durham) Municipal Corporation Equity 50% 50% per municipal corporation Financial Institutions 80% 25% per financial institution Corporate Debt (non -financial) 10% 5% per corporation ONE Investment Pools 25% 15% per portfolio G09 — Investment Policy Page 12 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciffftwn If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 9.3.2 To promote diversification and ensure liquidity, the following percentage weightings for the investment portfolio shall be established and maintained: Less than 1 year From 1 year up to, but not including, 5 years From 5 years up to, but not including 10 years From 10 years up to 20 years 30% to 100% 0% to 85% 0% to 50% 0% to 30% 9.3.3 Unless matched to a specific cash flow, the Municipality will not directly invest in securities maturing more than 10 years from the date of purchase. Reserve funds and other funds with longer -term investment horizons may be invested in securities exceeding ten (10) years, provided they match as practicably as possible to the expected use of funds. 9.3.4 Portfolio size limitations listed above will be applicable based on the allowable percentage of the portfolio on the day the investment is made. Limitations relate to the total investment portfolio and are to be applied to the Municipalities' separate funds that it manages. 9.3.5 When determining the portfolio limitation: G09 — Investment Policy Page 13 of 14 Corporate Policy Attachment 1 to FSD-035-21 ciff;WOOR If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 The total portfolio (denominator) shall include all cash, cash equivalents, short-term investments and long-term investments (excluding investment in Elexicon Group Inc.) Funds held within general or high interest savings accounts shall not be used to determine the maximum category or sector limitations (numerator). For further clarification, funds held in a bank account do not count towards the 25 per cent limit for the institution. 9.3.6 The Municipality may invest in US denominated funds, as allowed by regulation, provided that the purpose of the investment relates to a pending or anticipated purchase which is to be denominated in US funds and it is prudent to mitigate from foreign exchange risk. 10. Policy Review 10.1 This policy shall be reviewed annually and updated as necessary. G09 — Investment Policy Page 14 of 14