HomeMy WebLinkAboutFSD-035-21Clarington
Staff Report
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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
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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.
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Corporate Policy
Attachment 1 to FSD-035-21
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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).
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Corporate Policy
Attachment 1 to FSD-035-21
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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.
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Corporate Policy
Attachment 1 to FSD-035-21
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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
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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
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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
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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
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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;
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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
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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
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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;
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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
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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:
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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.
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