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HomeMy WebLinkAboutTR-29-86 TOWN OF NEWCASTLE J r - REPORT File # /0 - io,; , Res. # By-Law #` MEETING: General Purpose and Administration Committee DATE: APRIL 21 , 1986 REPORT #: TR-29-86 FILE #: SUB,JECT: REVIEW OF TOWN'S INVESTMENT POLICY RECOMMENDATIONS: It is respectfully recommended that the General Purpose and Administra- tive Committee recommend to Council the following: 1 . That report TR-29-86 be received; and 2. That Committee endorse the Town's present Investment Policy; or 3. That Committee adopt Report TR-12-85 and rescind the previous policy. BACKGROUND & COMMENT: The General Purpose and Administrative Committee requested staff to prepare a report on the Town's current Investment Policy and in this connection, staff have reviewed the existing policy which was adopted by Council in November of 1984. This policy reads as follows: Resolution #GPA-1023-84 Moved by Councillor Hobbs, seconded by Councillor Taylor That all short term investments of the Municipality be invested at a rate that is of the greatest advantage to the Town. "CARRIED" Based on this resolution Staff have invested excess funds with the financial . . .2 General Purpose & Administration Committee Meeting Page 2 TR-29-86 institution that pays the highest rate of return ( interest), which in this case has been with the Continental Bank of Canada. During 1985, interest income earned on Current Fund investments was approximately $305,000 versus a budget projection of $230,000 and Reserve Funds investments generated $256,000 in additional income. Following adoption of the above resolution, Senior Staff prepared Report No. TR-12-85 (copy attached) which was a Policy for Short Term Investments. This Policy evolved from the Investment Policy Report presented by the Urban Finance Officers Association in 1983. The purpose of the Associations report was to identify some of the important components which should be considered when compiling an investment policy for an urban municipality. The report recognized that different municipalities have different portfolio requirements and that the policies presented are only guidelines, recognizing that there can be no guarantees but that the risks can be minimized by a sound investment policy. This policy was received for information only per Resolution #GPA-176-85. Staff note that the recent policy does establish certain limits within which investments may be placed with certain Financial Institutions and considering market uncertainty and at times confusion in the Financial Community, there may be times when a lesser investment rate must be accepted to stay within the limitation set in the policy. However, this could prove to be beneficial to the Town in that our risk would be spread among other financail institutions and Staff recommend that Report # TR-12-85 be reconsidered at this time. Respectfully submitted, J.R. Blanchard, Treasurer ATTACHMENT: r � A CORPORATION OF THE TOWN OF NEWCASTLE TREASURY DEPARTMENT K. CAMPBELL, C.A.,TREASURER 40 TEMPERANCE STREET TEL.(416)623-3378 BOWMANVILLE, ONTARIO L 1 C 3A6 REPORT TO THE GENERAL PURPOSE AND ADMINISTRATION COMMITTEE MEETING OF MARCH 18, 1985 REPORT NO. : TR-12-85 SUBJECT: POLICY FOR SHORT TERM INVESTMENTS RECOMMENDATION: It is respectfully recommended that the General Purpose and Administration Committee recommend to Council : r 1. That this report be received, and 2. That the Policy for Short Term Investments be approved. BACKGROUND AND COMMENT In the past, it has been the practice for the Town to place its money in the short term market with institutions having a business office within the Town of Newcastle, That practice limited our placements to the Royal Bank, the C.I.B.C. , the Bank of Montreal , the Toronto Dominion Bank and Victoria and Grey Trust Co. Although our returns on those investments were satisfactory, Council indicated by resolution that it wished the short term investments made at the most favourable rate without any preference for institutions located within the Town of Newcastle. Staff have assumed that implicit in that resolution is the continuation of our practice to be prudent in the institutions chosen for the placement of investments. We would propose that the investments placed be F ( �t 2 - TR-12-85 within the limits set in the policy. The institutions, which fall into the applicable rating categories, be canvassed on a rotating basis when investments are to be placed. In sel ecti ng an institution, consideration would be given to the effect any a additional charges might have on the return. If the Town is to consider placements with institutions not generally known to us, then it would be appropriate to consider the the purchase of information through a financial rating service. i This would ensure that investments were placed only with institu- tions which meet the policy guidelines. The ratings provided by Dominion Bond Rating Service Limited , a Toronto based company, for j Commercial Paper is $900 per annum. The ratings provided by 4 Canadian Bond Rating Service, a Montreal based firm, for the Finance E and Real Estate Manual cost $650 per annum. A schedule of the ratings of the Schedule "A" and Schedule "B" Banks, and Trust f Companies as of January 25th 1985 is provided for your information. In addition, there may be times when it is more desirable to make placements through in investment broker. The costs associated with those transactions vary based on the size of the transaction and the instrument purchased. As an example the charge for a $200,000 placement is $25 and $1 million is 1/10 of a percent. The use of a broker would necessitate the entering into an agreement with the investment brokerage, but would then free staff from searching the market to the extend we do now. Both of the above noted costs would reduce the overall return received on our investments. Currently, no overhead costs are t i� r. i �f 1 - 3 - TR-12-85 associated with the activity undertaken. Each placement made involves approximately 2-3 hours of staff time to determine the amount and term to be placed, seek the bids, have the bids confirmed and evaluated, and then make the placement. In addition, if the policy as presented is approved, then there may be times when a lesser investment rate must be accepted to stay within the limitations set in the policy ie: current investments with the Continential Bank total $3,250,000, this exceeds the proposed limits in the policy by $250,000. The limitations do however, spread our risk among the financial institutions and therefore this is beneficial . Respectfully submitted, • '1�'.Ct'v'A, .cz".-P &,Le- Kathryn A. Campbell , C.A. , B.Comm. , Treasurer. attachments *gf 4 _ TR-12-85 Rating Schedule As Of January 25th 1985 OWNERSHIP OF FINANCIAL INSTITUTIONS CANADIAN OWNERSHIP NON-CANADIAN OWNERSHIP R-1 (High) First Interstate Bank of Canada Morgan Bank of Cananda R-1 (Medium) C.I .B.C. Bank of American, Canada Continential Bank of Barclays Bank of Canada Canada Bank of Boston, Canada Bank of Montreal Credit Swiss Canada Bank of Montreal Mortgage The First National Bank of Corporation Chicago (Canada) Bank of Novia Scotia Fuji Bank, Canada Royal Bank of Canada Irving Bank, Canada Royal Bank Mortgage Corp. Midland Bank, Canada ' Toronto Dominion Bank Toronto Dominion Mortgage Corporation R-1 (Low) Montreal Trusts Limited National Bank of Canada National Trust Co. Limited Victoria Grey Trust Co. Ltd. R-2 (Medium) Bank of British Columbia Mercantile Bank of Canada Canada Permanent Mortgage Corporation i i i I i i I 5 - TR-12-85 Temporary Investment Policy 1. That the Town of Newcastle place temporary investments with Chartered Banks and Trust Companies in Canada, and with the Government of Ontario and Government of Canada. 2. That a rating , satisfactory to the Town of Newcastle be provided by a Bond Rating Service prior to any investment being placed. 3. That the Town be permitted to take advantage of investment through a qualified investment brokerage when practical . 4. That the following limitations be placed on investment with any one Chartered Bank or Trust Company, according to the rating ' supplied be the Dominion Bond Rating service: Canadian Owned Chartered Bank ,& Trust Companies r Rati n * Maximum Investment R-1 (High) $4.0 Million R-J (Medium) $3.0 Million R-1 (Low) $1 .0 Million R-2 (High) $0.5 Million R-2 (Medium) No Investment and lesser *Note: The rating scale in the policy is that used by the Dominion Bond Rating Service. - 6 - TR-12-85 TEMPORARY INVESTMENT POLICY - continued Foreign Owned Banks and Trust Companies (Chartered in Canada) Rating Maximum Investment R-1 (High) $1.0 Million R-1 (Medium) $0.5 Million R-1 (Low) No Investment and lesser A summary of the various classes of ratings provided by Dominion Bond Rating Service and the categories of those financial institutions which have been rated is as follows: RATING CLASSIFICATIONS R-1 R-2 R-3 U NR ' PRIME MEDIUM BELOW NOT OF NOT RATED CREDIT GRADE MEDIUM INVESTMENT CREDIT GRADE QUALITY R-1 A Comp4ny having an R-1 rating is a high grade prime credit. Its ability to repay its current liabilities as they fall due is very high. The strength of the various liquidity ratios is unquestioned, and altern- ative sources of funds to commercial paper such as i bank lines, ability to do long term financing and a strong parent exist. Futhermore, the outlook for future liquidity and the trend of these ratios should be favourable. The level of profitability has been reasonable and relatively stable with only modest fluctuations. No substantial qual i fyi ng negative factors exist, and the firm is of sufficient size to / - 7 - TR-12-85 TEMPORARY INVESTMENT POLICY - continued be a strong influence in its industry. We also indicate where within the rating classification the Company falls (upper, middle or lower) . By definition, it takes a very strong company to be classified as a middle or an upper R-1 . R-2 An R-2 rating indicates a medium grade credit with the upper, middle and lower designations indicated . The liquidity ratios of companies in this classification are not as strong as companies in the R-1 group, and the past and future trend may suggest some deterioration in the strength of these ratios. Not as many alternative sources of funds may be available, the size of the firm may be smaller, and its relative position in the industry is not as strong as an R-1. Profitability trends, past and future, may be less favourable, earnings not as stable, and there may be some negative qualifying factors present. R-3 An R-3 credit is a below medium grade, speculative credit. Its liquidity ratios wquld tend to be below average, and the future trend of the ratios is unclear. Alternative sources of funds may not exist or be greatly limited. Earnings could be very unstable, and the level of over-all profitability of the firm may be low. The qualifying factors may also be present. This rating category is also divided into middle, upper or lower designations. U With a U rating , a firm is no longer of investuent quality. Liquidity ratios and earnings, past, present and future, may be extremely weak. The firm may be small and certain qual i fyi ng factors may exist which makes its future highly uncertain. I I / - 8 - TR-12-85 TEMPORARY INVESTMENT POLICY - continued NR NR stands for "not rated" . Under certain circumstances we will include an editorial on a company without applying a rating. These include cases where a firm would have a wide range in rating , either R-1 R-2 or R-3 , because of a significant qualifying factor, although numerical and other items may be positive. Secondly, where major recent events change the strength of a company, but it is unclear what effect these important factors will have. Thirdly, where another firm is a key factor in the rating , and it is impossible to secure the financial statements of this fi rm. Fourthly, in cases where we rate an entirely new area, we may initially introduce the ratings as NR. i i