Loading...
HomeMy WebLinkAboutFSD-014-24Staff Report If this information is required in an alternate accessible format, please contact the Accessibility Coordinator at 905-623-3379 ext. 2131. Report To: General Government Committee Date of Meeting: April 8, 2024 Report Number: FSD-014-24 Submitted By: Reviewed By: Authored by: Trevor Pinn, Deputy CAO/Treasurer, Finance and Technology Mary- Anne Dempster, CAO Resolution#: GG-057-24 Trevor Pinn File Number: By-law Number: Report Subject: 2023 Investments Annual Report Recommendations: 1.That Report FSD-014-24, and any related delegations or communication items, be received; and 2.That all interested parties listed in Report FSD-014-24, and any delegations be advised of Council’s decision. Municipality of Clarington Page 2 Report FSD-014-24 Report Overview The following report is the annual reporting requirement under the Municipality of Clarington's Investment Policy. Regulations under the Municipal Act, 2001 require that the Treasurer report certain information to Council on an annual basis and certify compliance with the Municipality's adopted Investment Policy. This report fulfills the annual reporting requirement under the Municipal Act, 2001 and the Municipality's Investment Policy. At December 31, 2023, the Municipality was in compliance with the Province of Ontario’s eligible investment regulations and the Municipality’s approved Investment Policy. Investment Income for the Municipality was approximately $7.7 million, which is slightly higher than the $7.5 million in 2022. During the year, investable funds decreased from $213.3 million to $201.5 million, which in part was due to the increased level of capital expenditures in 2023. Overall, the return on investment was 2.51% which is a reasonable return given interest rates during 2023 and the Municipality’s reliance on fixed-income securities. 1. Background 1.1 In June 2018, through report FND-011-18, the Municipality of Clarington reviewed and revised its Investment Policy. This policy requires the Treasurer of the Municipality to report the state of the Municipality's investments to Council on an annual basis. 1.2 The policy was further reviewed in June 2021 and revised through Report FSD-035-21 to adjust the limits on certain investments to provide additional flexibility to the Treasurer. These adjustments included a higher limit for financial institutions from 60 to 80 percent, a higher per-institution limit from 20 to 25 percent, an exception in municipal debt limits for the Region of Durham, and a change to an annual review of the investment policy rather than once per term. 1.3 In 2023, the Report FSD-025-23 provided the annual update at which time the Policy was migrated to the new policy format and updated to include reference to Environment, Social and Governance (ESG) investment considerations. 1.4 Section 8 of the Municipality’s Investment Policy requires the Treasurer to report on an annual basis to Council on the performance of the investments, the balance of the investment portfolio, and the Municipality’s compliance with the investment policy and goals. Municipality of Clarington Page 3 Report FSD-014-24 1.5 A snapshot summary of key information pertaining to the portfolio follows: Fund Opening Balance, January 2022 Closing Balance, December 2022 Investment Income Return on Average Balance General Fund $65,412,278 $39,324,462 $4,812,802 9.19% Development Charges Reserve Fund 59,523,378 57,582,467 1,695,019 2.89% Non-DC Reserve Fund 77,142,302 94,953,787 1,600,751 1.86% Strategic Capital Reserve Fund 11,043,124 9,641,508 (402,115) (3.89%) $213,121,082 $201,502,224 $7,706,457 2.51% Investment Environment in 2023 and 2024 1.6 The last two years have seen interest rate hikes that have are not typical for Canada. The reliance on fixed income investments by the Municipality benefited from these rate increases. 1.7 In January 2022, the bank rate was 0.50 percent, this increased seven times throughout the year ending at 4.50 percent in December 2022. The average rate for the year was 2.42 percent. 1.8 Similarly, in 2023, the bank rate had four rate hikes throughout the year starting the year at 4.50 percent in January and raising to a high of 5.25 percent in July. The rate has remained at 5.25 percent since July 2023. The average rate for the year was 5.0 2 percent which is double the average rate from 2022. 1.9 Economists are expecting to see a decrease in interest rates in 2024. The timing and degree of interest rate cuts have changed from 2023 expectations. TD Economics (published March 20, 2024) is currently forecasting a return to target inflation in the medium term. It is being forecasted that the overnight target rate will decrease from 5.00 Municipality of Clarington Page 4 Report FSD-014-24 percent at the end of 2023 to 4.00 percent by the end of 2024 before stabilizing at 2.25 percent by the end of 2025. 1.10 However, some banks are forecasting a slower return to lower rates. Scotiabank on March 18, 2024 was forecasting interest rates to decrease to 4.25 percent by the end of 2024 and 3.00 percent by the end of 2025. 1.11 Regardless of the timing, the decrease in interest rates is expected to be slower than the rapid increase that was seen in 2022 and 2023. This will keep fixed income investment rates higher than they were in 2020 and 2021, and for several years prior to the pandemic. 2. Performance of the Investment Portfolio 2.1 The Municipality's portfolio consists of several funds, including general funds, trust funds, reserve funds, and other investments. General Fund 2.2 The General Fund is the primary operating fund for the Municipality. This fund has the least number of active investments. The majority of the investments in this fund are in the HISA accounts provided by the investment advisors to the Municipality (ONE Investment, CIBC Woodgundy, BMO Nesbitt Burns and Scotiabank). The HISA accounts offer favourable interest rates for a highly liquid investment. 2.3 The ONE Investment Inc. HISA was established in September 2016 and held low balances throughout 2017. In 2018, the Municipality began being more active with its investments and moved funds from the lower interest-earning bank accounts to the higher HISA account. At December 31, 2023, the ONE Investment HISA had approximately $0.2 Million (2022 - $0.2 million). Funds held in the HISA are available within 24 hours. 2.4 Similarly, the investment accounts at CIBC Woodgu ndy, BMO Nesbitt Burns and RBC Dominion Securities include a HISA portion. These funds are typically available within 3 business days. The balance in these accounts typically result from maturing investments being pooled until a purchase can be made. At December 31, 2023 the balance in the HISA products with our investment advisors was approximately $23.0 million, funds which have been subsequently invested in other products. 2.5 The Scotiabank HISA requires 30-days notice for withdrawals. The Municipality has approximately $1.4 million in this account which earns a premium on other HISA products but is less liquid. Municipality of Clarington Page 5 Report FSD-014-24 Non-Development Charges Reserve Funds 2.6 The Municipality operates a Non-Development Charges Reserve Fund investment portfolio for all reserve funds not established under the Development Charges Act, 1997. There is one exception: the Strategic Capital Reserve Fund, a separate fund. 2.7 The total book value of investments is approximately $95.0 million (2022 - $77.1 million), including approximately $37.5 million (2022 - $24.1 million) in bank balances. At December 31, 2023, the portfolio was comprised of $7.9 million (2022 - $8.4 million) in GICs with maturities in each of 2024 through 2028 and $27.5 million (2022 - $23.5 million) in bonds with maturities from 2024 to 2033. An equity pool with ONE Investment of $5.8 million is also held. The portfolio includes $16.1 million (2022 - $21.1) in principle-protected notes; these are banknotes which are linked to an index but are issued by a chartered bank. For purposes of this report, the TD Bank Reserve Fund bank account is included in this portfolio. 2.8 The Municipality has adopted a five-year laddering strategy for these investments, with roughly equal distribution each year. This ensures that assets will be cas hable in any given year and can be withdrawn from the reserve fund. Development Charges Reserve Funds 2.9 The Development Charges Reserve Fund portfolio meets the obligations of the Municipality under the relevant legislation for Development Charges. 2.10 The Municipality has two accounts with the ONE Investment Program related to this fund: a Bond account and an Equity account. 2.11 Clarington opened its ONE Investment bond account in 2000. The investment pool was transferred to its current custodian in 2005 with a boo k value of $2.6 million. As at December 31, 2023, the book value, as a result of reinvested income, was $4.6 million (2022 - $4.5 million). At December 31, 2023, the market value was below book value $4.1 million); however, the adjusted return is still positive overall since inception of this product. 2.12 The ONE Investment equity account was established in 2007 with an initial investment of $500,000 and a $2.0 million investment in 2020. At December 31, 2023, the book value of the investment is $3.2 million (2022 - $3.0 million), resulting from reinvested income and capital gains. The portfolio had a market value of $4.5 million. Strategic Capital Reserve Funds 2.13 The Municipality established the Strategic Capital Reserve Fund portfolio to hold investments for the Strategic Capital Reserve Fund specifically. This reserve fund was Municipality of Clarington Page 6 Report FSD-014-24 created to provide a funding source for economic development activities. The intent was to keep the $10.0 million capital as a source of internal borrowing for economic development capital investments. Interest earned on the investments is transferred to the general fund to offset the tax levy. 2.14 This fund invests $2.8 million (2022 - $3.8 million) in GICs with maturities in 2027. Interest rates vary from 2.97 percent to 5.0 percent. Bonds worth $4.8 million (2022 - $7.3 million) with maturities from June 2024 to January 2032 are also held with an interest rate of 1.4 to 3.1 percent. There is also $2.1 million in HISA balances as a result of timing at year end and pending investments. 2.15 In 2023, in consultation with the investment advisor, the holdings in this investment account were “reset”. A number of investments were purchased prior to December 2022 and were long-term based on available rates at the time; however, given the rapid change in rates it was beneficial to take a temporary loss and reinvest those funds in higher interest earning investments. It is anticipated, that over the length of the “reset” that the Municipality will earning more funds as a result. Overall Performance 2.16 The total income for the past five years, excluding trust funds and Elexicon, by fund are summarized below: Fund 2023 Income 2022 Income 2021 Income 2020 Income 2019 Income General Fund $4,812,802 $3,808,056 $1,060,573 $1,046,664 $1,129,639 Development Charges Reserve Fund 1,695,019 1,694,340 624,705 923,855 1,339,291 Non-DC Reserve Funds 1,582,907 1,600,751 1,123,800 1,343,802 336,824 Strategic Capital Fund (402,115) 372,817 612,865 45,342 493,389 Total Investment $7,688,614 $7,475,964 $3,421,943 $3,359,663 $3,299,143 Municipality of Clarington Page 7 Report FSD-014-24 3. Compliance with Investment Policy 3.1 The Municipality of invests based on the legal list of investments outlined in O.Reg. 438/97 as amended. The legal list is very prescribed and limits the ability of the Municipality to diversify its investments fully; however, it is relatively secure. Investment Accounts 3.2 The Municipality of Clarington holds its investments through investmen t accounts with several financial organizations. In determining whether the Municipality is meeting its investment policies, the underlying asset is considered, not the custodian of the investment. 3.3 No new investment accounts were opened in 2023. 3.4 The Municipality held the following accounts throughout 2023: Institution Accounts Held TD Bank  General Fund bank  Several small bank accounts  Reserve Fund bank account  Guaranteed Investment Certificates (GICs) RBC Dominion Securities  Reserve Fund investment account  DC Reserve Fund investment account  Strategic Capital Fund investment account ONE Investment Inc.  Hight Interest Savings Account (HISA)  Equity portfolio investment account  Bonds portfolio investment account Municipality of Clarington Page 8 Report FSD-014-24 Institution Accounts Held BMO Nesbitt Burns  General fund investment  Reserve Fund investment account CIBC Woodgundy  DC Reserve Fund investment account ScotiaBank  High Interest Savings Account (HISA) 3.5 The investment accounts with RBC Dominion Securities, BMO Nesbitt Burns, and CIBC Woodgundy hold a variety of investment instruments which could include GICs, government bonds, and bank deposit notes. Diversification Risk 3.6 The Municipality holds investments of several different types. It is essential to diversify the types of investments with an extensive portfolio to reduce the risk to the overall portfolio from variations in any one market. The following table shows the December 31, 2023, investments by type as well as the minimum and maximum percentage allowed per the Investment Policy: Investment Type Book Value at December 31, 2023 Percentage of Holdings Minimum Range Maximum Range High Interest Savings Account $45,694,671 22.7% 0% 100% Federal Debt 14,312,176 7.1% 0% 100% Provincial Debt 19,349,513 9.6% 0% 80% Municipal Debt 4,338,215 2.2% 0% 35% Municipality of Clarington Page 9 Report FSD-014-24 Investment Type Book Value at December 31, 2023 Percentage of Holdings Minimum Range Maximum Range Financial Institutions 105,975,805 52.6% 0% 80% Corporate Debt (non- financial) 4,099,594 2.0% 0% 10% ONE Investment Pools 7,732,249 3.8% 0% 25% Total $201,502,223 3.7 The policy guideline for financial institutions is zero percent to 80 percent of the investment portfolio. At December 31, 2023, the Municipality was within this limit. While within the policy limits, the above indicates that the Municipality is concentrated in Canadian financial institutions. Liquidity Risk 3.8 The Municipality attempts to balance cash flows through the timing of the maturity of investments. Staggered maturity dates ensure that cash is readily available to meet the needs of the Municipality and reduces interest rate risk. At December 31, 2023, the maturity dates, and allowable ranges, of investments held by the Municipality were as follows: Timeframe Book Value at December 31, 2023 Percentage of Portfolio Minimum Range Maximum Range Up to 90 Days $55,492,519 27.5% 20.0% 100.0% 90 Days to 1 Year 8,183,390 4.1% 30.0% 100.0% Municipality of Clarington Page 10 Report FSD-014-24 Timeframe Book Value at December 31, 2023 Percentage of Portfolio Minimum Range Maximum Range 1 to 5 Years 43,189,037 21.4% 0.0% 85.0% 5 to 10 Years 94,637,277 47.0% 0.0% 50.0% 10 to 20 Years 0 0.0% 0.0% 30.0% $201,502,223 3.9 The Municipality's Investment Policy indicates the target range for less than 90 days is 20% to 100%, and less than one year is 30% to 100%. The amount shown above that is 90 days to 1 year should be added to the amount held less than 90 days to determine compliance with the requirement. Total amounts maturing less than one year is $63,834,610, which is 31.7% of the investment portfolio. 3.10 The Municipality's HISA and TD Reserve Fund bank accounts are considered to have a maturity of less than 90 days, as they are available to the Municipality within 24 hours. 3.11 The Municipality is allowed in certain circumstances to invest in terms greater than ten years, at December 31, 2023, there was $0.0 million (2022 - $1.5 million) invested with a maturity greater than ten years. The decrease in this amount explains the increase in the five-to-ten-year range, as the greater than ten-year investments come closer to maturity. These investments are bonds held in the three reserve fund investment portfolios and are traded on an active market. Concentration Risk 3.12 The Municipality attempts to diversify its investment portfolio by restricting the percentage of investments any single institution may have. Diversification mitigates the risk to the Municipality if an investment becomes insolvent. Note that the Cana dian Deposit Insurance Corporation (CDIC) only guarantees investments up to $100,000 per institution, therefore, most of the Municipality's investments are not insured through CDIC. 3.13 At December 31, 2023 the Municipality's investments by institution were as follows: Municipality of Clarington Page 11 Report FSD-014-24 Institution Book Value at December 31, 2023 Percentage of Portfolio Maximum Allowed TD Bank - Savings $31,517,631 15.6% 100.0% ONE – HISA 214,242 0.1% 100.0% ONE – Equity 3,178,866 1.6% 15.0% ONE – Bond 4,553,383 2.3% 15.0% Scotiabank HISA 1,392,719 0.7% 100.0% Royal Bank of Canada 8,333,269 4.1% 25.0% CIBC - HISA 926 0.0% 100.0% National Bank 4,023,420 2.0% 25.0% Bank of Nova Scotia 18,751,538 9.3% 25.0% Bank of Montreal 38,169,035 18.9% 25.0% CIBC 27,854,000 13.8% 25.0% TD Bank 6,778,944 3.4% 25.0% Province of Ontario 13,038,602 6.5% 20.0% Municipality of Clarington Page 12 Report FSD-014-24 Institution Book Value at December 31, 2023 Percentage of Portfolio Maximum Allowed Province of British Columbia 968,290 0.5% 20.0% Province of Manitoba 962,429 0.5% 20.0% Regional Municipality of Niagara 1,495,790 0.7% 10.0% Quebec Hydro 1,600,000 0.8% 5.0% City of Toronto 1,512,039 0.8% 10.0% Canada Housing Trust 3,977,189 2.0% 100.0% Canada Housing Trust No 1 3,058,623 1.5% 100.0% Government of Canada 7,276,364 3.6% 100.0% Municipal Finance Authority of BC 831,861 0.4% 25.0% Province of Alberta 1,451,608 0.7% 20.0% Province of Quebec 2,928,585 1.5% 20.0% Ontario Hydro 2,499,594 1.2% 5.0% Regional Municipality of York 498,525 0.2% 10.0% Municipality of Clarington Page 13 Report FSD-014-24 Institution Book Value at December 31, 2023 Percentage of Portfolio Maximum Allowed $201,502,223 3.14 At December 31, 2023, the Municipality was in compliance with restrictions on per institution investments. Throughout 2023, Staff worked to increase diversification for a better overall investment portfolio and risk mitigation. 4. Review of Investment Policy Background 4.1 The Municipality of Clarington is required, under the Municipal Act, 2001 to have an investment policy adopted and approved by Council. 4.2 The Municipality utilizes the legal list of investments as allowed under O.Reg 438/97, which prescribes what investments a municipality may make. 4.3 Staff have been directed to work with the Region of Durham and ONE Investment on the adoption of the Prudent Investor Standard. Report FSD-015-24 provides specific details on the adoption of the Prudent Investor Standard and the execution of agreements with ONE JIB to become a member. The Report will also recommend a name change to the existing Investment Policy which will, if the Prudent Standard is adopted, become the applicable policy for short-term money invested internally. 5. Financial Considerations 5.1 At this time, there are no expected financial considerations as a result of th is annual report. 5.2 The Municipality is limited in its allowable investments by following the eligible investment rules rather than utilizing the prudent investor standard. 5.3 Historical investment results do not predict future results; however, a diversified portfolio is a key tool for mitigating risk. Municipality of Clarington Page 14 Report FSD-014-24 6. Strategic Plan 6.1 The active approach to investing supports L2: Finances and operations are efficiently and responsibly managed. Investments are one tool within financial planning to finance operations and investments in capital. Investment income will be used a s part of the funding strategy for the Municipality’s Asset Management Plan. 7. Concurrence Not Applicable. 8. Conclusion It is respectfully recommended that Council receive this report. Staff Contact: Trevor Pinn, CPA,CA, Deputy CAO, Finance and Technology/Treasurer, 905- 623-3379 ext. 2602 or tpinn@clarington.net. Attachments: Not Applicable Interested Parties: There are no interested parties to be notified of Council's decision.