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HomeMy WebLinkAboutFND-028-19Clarington 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: General Government Committee Date of Meeting: October 15, 2019 Report Number: FND-028-19 Submitted By: Trevor Pinn, Director of Finance/Treasurer Reviewed By: Andrew C. Allison, CAO Resolution#: GG-479-19, C-367-20, GG-414-20 File Number: By-law Number: Report Subject: Prudent Investor Standard for Municipal Investments — Update and Options Analysis Recommendations: 1. That Report FND-028-19 be received; 2. That Staff continue to work with ONE Investment to bring information back to Council related to a new Investment Policy Statement (IPS) and agreements associated with establishing a new Joint Investment Board (JIB) and implementing the Prudent Investor (PI) regime; and 3. That all interested parties listed in Report FND-028-19 and any delegations be advised of Council's decision. Municipality of Clarington Report FND-028-19 Report Overview Page 2 This report outlines the benefits of investing under the Prudent Investor regime as well as options for implementing a change in investment regime. This report is a second step and update to Council on the process to move to the Prudent Investor standard for investing. 1. Background Initial Direction to Explore Prudent Investor Standard 1.1. Investing under the Municipal Act, 2001 and O. Reg. 438/97 (the "Regulation") is divided into the prescribed list of securities (the "legal list") and the recently added Prudent Investor regime ("PI"). 1.2. The new PI regime removes restrictions on municipal investments but also includes a legislated governance model. Control and management of money not required immediately under the new PI regime is to be given to a municipal service board referred to as an Investment Board ("IB") or a Joint Investment Board ("JIB") for investment on behalf of the municipality. 1.3. Report FND-014-19 provided Council with additional information on the recent changes to municipal legislation allowing for municipalities to move to the PI standard. The report also detailed the differences between the current "Legal List" approach and the new "Prudent Investor" approach. 1.4. At the GGC meeting of May 6, 2019 Council approved option A which included direction to Staff to develop an agreement to establish ONE Joint Investment Board ("ONE JIB"), together will all related matters such as codes, policies and appointments and to adopt the prudent investor regime when these items are in place. 1.5. It was initially expected that the establishment of the ONE JIB would be completed by December 2019; however, at a recent meeting of potential founding members it was determined that an establishment date of April 2020 was more realistic and preferable. 1.6. At the time of Report FND-014-19, the only municipality with the Prudent Investor Standard adopted was the City of Toronto under the City of Toronto Act. As at the date of this report, there are no municipalities in Ontario which have adopted the Prudent Investor Act under the Regulations. Municipality of Clarington Report FND-028-19 Benefits of Prudent Investor (PI) Regime Page 3 1.7. The PI regime expands municipal investment opportunities which may enable better risk -adjusted returns meaning that risk can be carefully balanced with returns. 1.8. The restrictions placed on legal list investments can create concentration risk into the investment portfolio. The legal list currently restricts investments to deposit instruments at Canadian chartered banks, certain Canadian corporate bonds rated A or better (ie. banks), municipalities and senior levels of government. The impact is that realistically a municipality's investments are heavily concentrated in Canadian banks which does not allow for appropriate diversification. 1.9. The diversification of available investment products and the removal of geographical limitations which are only available under the PI regime may mitigate concentration risk. 2. Risks, Returns and Diversification Risk Adjusted Returns 2.1. In general, for municipalities as stewards of public funds, preservation of capital is a key priority that needs to be balanced with the need for returns. Municipal budgets are under tremendous pressure to maximize revenues while minimizing the need for property tax increases. As municipalities seek to diversify revenues to put less pressure on property taxes, investment revenue becomes more important as an underused alternative revenue stream. Figure 1 below demonstrates the effect of "safe investments" on return potential. It shows the percentage returns on a rolling 1-year basis for Canadian stocks (red), Canadian Fixed Income (green) and short-term treasury bills (blue). When a municipality puts a heavy priority on capital preservation, it will often invest in short-term treasury bills, guaranteed investment certificates (GIC), term deposits, or High Interest Savings Accounts (HISA), which ensures little to no losses due to the lack of volatility. However, you will note from Figure 1 below the low returns on short-term investments which over the 10-year time -period did not even keep up with inflation. Average annual inflation from 2008-2018 was 1.97% using the Consumer Price Index (2.55% using the Non -Residential Building Construction Price Index.) Municipality of Clarington Page 4 Report FND-028-19 Figure 1: Rolling 1-Year Returns Across Asset Classes 50 40 30 20 10 -10 -20 -30 -40 % Rolling 1-Year Returns September 2008 to February 2019 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 FTSE TMX Canada 91-Day T-Bill Index FTSE TMX Canada Universe Bond Index S&P/TSX Canadian Composite Index Sources: S&P, FTSE Diversification 2.2. By removing investment restrictions, the PI regime allows the municipality to better diversify its investments. Concentration risk arises when investments are made in closely related securities; this can be by asset class, geographic location, or sector. Where a portfolio has many securities of the same type, the whole portfolio can be exposed to a single risk event. Research shows that when investing over longer time frames diversification allows investors to better manage portfolio risk.' By investing funds in multiple different markets, sectors and products a municipality can better protect itself from losses incurred in one of its investments. 1 Asness, Clifford S., Isrealov, Ron, and John M. Liew. (2011). "International Diversification Works (Eventually)" Financial Analysts Journal Volume 67, Number 3. Municipality of Clarington Page 5 Report FND-028-19 Diversification by Asset Class 2.3. The PI regime will enable the Municipality of Clarington to invest in a broader array of investment products facilitating the building of a more diversified investment portfolio. This concept of diversification is one of the basic principles used to reduce overall portfolio risk. Figure 2 shows the risk -mitigating effect of diversification by asset class or product type. The figure looks only at periods when Canadian stock returns fell below negative 5%. Between 2008 and 2018, the Canadian stock markets (red bars) experienced six periods where values declined by greater than 5%; however, in each of those periods fixed income products (green bars) experienced positive returns. If an investor held both Canadian stocks and fixed income during these periods the total decline in stocks would have been partially or potentially fully offset by a positive return on fixed income Figure 2: Offsetting effect of portfolio diversification by asset class Periods When Rolling 1-Year Equity Returns < -5% 10 L NN� 0 L cu a) -10 0 m -20 Q -30 Feb 01 - Jun 02 - Oct 08 - Dec 11 - Aug 15 - Dec 18 Jan 02 May 03 Aug 09 Jul 12 Apr 16 ■ Canadian Equities ■ Canadian Fixed Income Geographical Diversification 2.4. The PI regime allows the Municipality to invest in the Global markets. Securities prices in equities and fixed income markets outside of Canada will be influenced by a different set of factors than apply to Canadian securities. Typically, different economic fundamentals and political circumstances drive returns from investments outside of Canada. For this reason, the pattern of returns from Global stocks and fixed income will be differentiated in comparison to returns for Canadian securities, which provides a basis of diversification benefits, which in turn tend to reduce overall portfolio risk. Under the current legal list, the Municipality can only buy Canadian equities (which are only Municipality of Clarington Report FND-028-19 Page 6 available through ONE Investment) which exposes municipalities to the risk of a downturn in the Canadian market. The Canadian economy is highly exposed to global demand for, and the prices of, certain primary commodities (e.g. oil & gas, metals, agriculture). It is also dependent on exports and trade, particularly with the United States.2 Canadian equity markets represented less than 3% of global equity markets at the end of 2018.3 2.5. In looking at historical data (10, 20, and 40-year time periods) using different levels of geographic diversification, investors would have experienced less volatility if they held an asset mix that included both Global and Canadian stocks. Volatility is a common way to measure risk in investments — it represents swings in market value — so the higher the number the less stable the investment4. Figure 3 below shows the volatility of five different levels of geographic mix. The 100% Canadian stock mix was the most volatile, or risky, investment in all three time periods. The least volatile geographic mixes were those that had a combination of Canadian and Global stocks in most instances (See Appendix 2 for more detail on this analysis). z Source: See remarks of Stephen S. Poloz, Governor, Bank of Canada "Opening Statement", January 9, 2019 and Bank of Canada Monetary Policy Report July 2019, "Key inputs to the base -case projection." 3 Source: The World Bank. Canadian equity markets had total market capitalization of USD $1.938 Trillion, vs total world market cap of USD $68.654 Trillion. a The measure of volatility used throughout this document is standard deviation. Municipality of Clarington Report FND-028-19 Figure 3: Volatility and Geographic Diversification IMPACTS OF GEOGRAPHIC DIVERSIFICATION ON RISK (VOLATILITY) OVER THREE DIFFERENT TIME PERIODS Page 7 ■ 100% Canadian ■ 100% Global ■ 75% Canadian/25% Global ■ 50% Canadian/50% Global ■ 25% Canadian/75% Global Ln m M Ln 00 1O m n W c q Ln M W N In m c-I iy N W O O `~ o �0 m 00 a of � 10-YEAR VOLATILITY 20-YEAR VOLATILITY 40-YEAR VOLATILITY Higher -yield Securities 2.6. If a municipality can better manage risk through diversification it can use that tool to pursue greater returns by tolerating a greater level of risk over a small portion of its investments. Over a longer period, small differences in returns can have significant impacts. For example, while the difference of a 0.5% return may not sound like a lot, over long periods of time the financial impact in dollars can be substantial. Table 1 shows how 0.5% in returns compounds into dollars over ten years, depending on the starting value. The compounding effect of a 0.5% return over a 10-year period for $5 million would contribute $256,000 in additional revenue. For a $100 million investment that additional 0.5 % would contribute $5,114,000 to the municipality. Municipality of Clarington Report FND-028-19 Page 8 Table 1: Compounded Value of 0.5% (50 bps) over 10 Years Starting Investment Value Incremental Return $5 million $256,000 $20 million $1,023,000 $50 million $2,557,000 $100 million $5,114,000 $250 million $12,785,000 $500 million $25,571,000 $1 billion $51,140,000 2.7. Increasing returns by an amount as small as 0.5% over a 10-year period can have major impacts on a municipality's budget. 2.8. There are two ways to attain higher returns: Identify inefficiencies in the market (i.e., identify mispriced investment opportunities); and 2. Accept a higher level of risk. 2.9. Portfolio managers often try to identify inefficiencies in the market. They conduct research and analysis to identify investments they believe are incorrectly valued or identify themes that are not correctly reflected in securities prices. They then position their investments accordingly. 2.10. Changing investment allocations typically is done with the intent to achieve higher returns, but any change in investment allocations also changes the level of risk in the portfolios. It is for this reason that evaluating investments based on return potential alone is not prudent. Investment managers should always keep overall portfolio risk in mind. Often, they will focus on risk -adjusted returns in their analysis. The risk -adjusted return refers to the ratio of percentage returns to the percentage risk (volatility). This measure will help identify whether the amount of additional return that they expect by purchasing a security is worth the incremental risk involved. 2.11. Figure 4 — Risk Adjusted Returns Over a 10-Year Period compares the different levels of geographic diversification over a 10-year time frame. A 100% holding in Global stocks would have produced the highest return (13.42%); however, except for the 100% Canadian holding, it had the highest level of volatility during the period. The three diverse mixes have lower levels of volatility. The increased returns come at a cost of increased risk. If investors consider only the risk, they may miss out on potential returns. If investors consider only returns, they could expose themselves to significant risk. If we Municipality of Clarington Report FND-028-19 Page 9 look at the two together (risk -adjusted returns) we get a more complete picture of which is the better investment, or how much the returns cost in terms of risk. Of the levels of geographic diversification, an investor would have achieved a better risk -adjusted return (1.37%) during this time period by using the 25% Canadian: 75% Global stock mix — while it would have achieved slightly lower returns, it would have done so at a lower risk exposure. The goal here is to maximize the upside while minimizing the downside. Figure 4: Risk Adjusted Returns Over a 10-Year Period RISK AND RETURN OF DIFFERENT EQUITY MIXES OVER A 10-YEAR PERIOD ■ 100% Canadian ■ 100% Global 75% Canadian/25% Global ■ 50% Canadian/50% Global ■ 25% Canadian/75% Global N M c-I � N O1 ci rl c-I rl n O 00 O � O O c-1 c-I L RETURN ID M W 01 c-I N Ol � VOLATILITY rn M -1 n ti 0 ■ r r RISK -ADJUSTED RETURN 2.12. Many of the risks outlined above can be managed or mitigated depending on the mechanism or avenue through which the municipality chooses to implement the PI regime. These mechanisms and avenues will be examined in the options analysis below. Comparing Legal List vs Prudent Investor under ONE 2.13. ONE Investment's PI offerings will be a mix of its current Legal List options and two new funds that will only be available to PI investors — a Global Equity fund and a Global Bond fund. The sample allocation provided is a relatively conservative mix of 80% bonds (fixed income) and 20% stocks (equities). Modelling data provided by ONE Municipality of Clarington Report FND-028-19 Page 10 Investment and conducted by AON Hewitt show that under these asset allocations at the same risk level (-5.0% worst case annual return), the expected annual return for PI is 1.3% higher than under legal list: 4.3% vs 3.2% respectively (Table 2). Table 2: Modelling expected returns of ONE Offerings5 Money Market Portfolio 45% Bond Portfolio 15% 20% Unconstrained Global Bonds 60% Universe Corporate Bond Portfolio 20% Total Fixed Income 80% 80% 5 Modelling conducted by AON Hewitt and data provided by ONE Investment Municipality of Clarington Report FND-028-19 Page 11 (Canadian) Equity Portfolio 1 20% 1 5% Global Equity 1 15% Total Equity 1 20% 20% Expected return before value add 2.90% 3.80% Expected value added by managers 0.30% 0.50% Expected return 3.20% 4.30% Expected worst case annual return --5.0% --5.0% 2.14. Because the two new PI offerings have an existing client base and track record, it is possible to compare the actual past performance of a PI asset allocation to a comparable legal list asset allocation. Comparing past performance of the funds (figure 5), over a five-year period from 2014 to 2018 the PI option would have outperformed the legal list option in four of the five years. In 2015, the PI option would have outperformed legal list by almost 7%. The average annual difference over the five years would have been a 2.69% in favour of the PI option. However, it should be noted that in 2018 the legal list option would have outperformed PI by 0.12%. This demonstrates that moving to PI does not guarantee better returns year over year and that past performance is not always a reliable indicator of future performance. Municipality of Clarington Page 12 Report FND-028-19 Figure 5: Historical Rates of Return for ONE Investment Offerings (2014 - 2018) 6 2018 2017 2016 2015 2014 1.65% 1.95% 1.60% -1.90` -0.50% 5.70% 0.97% 0.95% 0.94% 0.32% 2.62`;6 10.76% 4.60% 19.10% 3.10% 6.23% 0.70% 1.17`r5 2.24% 15.29`r6 5.40% 0.90% 4.00% 4.37% 0.94% 2.29% 3.70 cA 0.29% 7.70% 23.10% 1.56% B.S5% 1.11% 3.45% 9.35% 20.24% 9.90% 15.90% 6.94% 10.03% Mvestment Allocations PI 1 120.00%15.00%160.00%115.00% LL 145.00%1 15.00%1 20.00%1 20.00` 2.15. Staff believes that when taking the projected future modelling results in conjunction with the past performance comparisons, that the PI option offers greater opportunity for increased returns while more effectively managing concentration risk. 3. PI Governance Options 3.1. Municipalities that decide to adopt the PI regime must transfer control and management of their investments to an IB or JIB. There are three available options: • Establish an independent investment board (IB); Establish a joint investment board (JIB) with one or more municipalities with ONE Investment; or • Join an existing IB or JIB.' 6 Historical data provided by ONE Investment This option is not currently available as to date the City of Toronto is the only municipality that has established an IB and it is not currently prepared to have its 113 invest for other municipalities. Municipality of Clarington Page 13 Report FND-028-19 Establish a Municipality of Clarington Investment Board 3.2. Under the Act a municipality can create its own IB if it has, in the opinion of the treasurer, at least $100M in money and investments that it does not require immediately, or $50M in net financial assets. 3.3. As the Municipality of Clarington, does not currently meet either of these requirements, this option will only be briefly described. 3.4. An IB is a municipal service board as defined by the Act and is governed by the procedural requirements of the Act (sections 194 to 202). All the required services provided to a municipal service board would need to be provided to the IB (e.g. committee secretary, closed meeting support). 3.5. As municipalities are required to delegate their investment powers to the IB, a high priority must be placed on appointing qualified experts, which will come at a cost. Additionally, as staff does not possess the in-house expertise required, it would be necessary to acquire that expertise either on a full-time basis from an employee of the municipality or seek expert advice externally. These cost factors are explored below, along with the option of founding a JIB. 3.6. To date, the City of Toronto is the only municipality to establish its own IB. Toronto has invested under the PI regime under the City of Toronto Act, 2006, for a full year before the option of investing under the PI regime was extended to other municipalities that are subject to the Municipal Act, 2001. The City has yet to transition all its investments to its IB. Municipality of Clarington Report FND-028-19 Establish a Joint Investment Board Page 14 3.7. As noted in the previous report to Council ONE Investment is the only organization which is actively working to establish a JIB. While the establishment of another JIB may be available in the future, this option does not exist today and hasn't been included in the options analysis. Staff have been working with ONE Investment staff and seven other municipalities, listed below, to become founding municipalities of a JIB. Municipality of Clarington Town of Whitby County of Essex Town of Bracebridge District of Muskoka Town of Innisfil Town of Huntsville Town of Aurora City of Kenora City of Thunder Bay 3.8. There are several factors to consider when evaluating the two available options which are outlined in Appendix 3 — Detailed Comparison of Prudent Investor Options. This analysis will focus on the cost structure. Establishing an IB or JIB can be costly both in terms of the initial set-up and ongoing costs both direct and indirect. Costs include legal fees, (J)IB member remuneration, fund manager research, consultants for investment expertise and other investment services (e.g. asset allocation studies), committee secretary, closed meeting support. 3.9. Table 3 shows the costs incurred by both the City of Toronto and ONE Investment to date. ONE Investment has not yet established its JIB but expects to do so by April 2020. The City of Toronto spent over $1.1 M setting up its IB and is still incurring set up costs. ONE Investment has spent approximately $1.9M to date setting up its JIB — this higher number is due to the coordination and legal complexity of dealing with many municipalities; however, once it is set up the ongoing maintenance costs are expected to be lower and will be shared among all municipalities that invest under the PI regime through ONE JIB. Municipality of Clarington Page 15 Report FND-028-19 3.10. Expert advice would also be required to guide staff and Council on appropriate investment strategies. Additionally, the staff and Council would require expert investment advice and potentially legal advice when developing an investment policy. These items would add to the set-up costs of an IB. ONE Investment has received an exemption from the Ontario Securities Commission (OSC) that allows them to provide s Costs provided by Director, Capital Markets - City of Toronto Municipality of Clarington Page 16 Report FND-028-19 that expert advice. ONE Investment has also hired a Chartered Financial Analyst with over 25-years of experience in institutional investing. 3.11. ONE Investment has prepared a report (Appendix 4) detailing the process for establishing ONE JIB, the roles of the municipality and ONE JIB, and the benefits and risks of being a founding municipality. The document notes that many of the risks are mitigated through processes and procedures developed for ONE JIB. Joining an Existing IB or JIB 3.12. At present this option is presented for information purposes only because there are no existing IBs or JIBs through which a municipality can invest. 9 Risks and Potential Drawbacks of the Prudent Investor Regime 3.13. The new governance structure for the PI regime has some associated risks. A municipality that passes a by-law to adopt the PI regime cannot revoke that by-law. This means that municipalities who adopt the PI regime cannot go back to investing money that is not required immediately in accordance with the legal list unless a regulation authorizing the municipality to do so is made by the Lieutenant Governor in Council. 3.14. Additionally, a municipality must delegate its powers to investment money not required immediately to an IB or JIB. As per the Regulation, Councillors and municipal staff cannot be appointed as members of the IB or JIB, except for treasurer(s) provided that the treasurer(s), does/do not make up more than 25% of the members of the IB or JIB. 3.15. These control risks, however, are mitigated by the investment policy statement (IPS), which allows Council to define its "objectives for return on investment and risk tolerance" and its "need for liquidity." Council must review and, if necessary, amend the IPS at least once per year. Through the IPS, Council maintains strategic control over its investments. 3.16. If Council decides to proceed with the PI regime, staff will need to determine what constitutes "money that it does not require immediately" and control and management of that money must be given to the IB or JIB for the purposes of investing. Any money that remains with the municipality will remain under the control and management of the ' The City of Toronto is not currently prepared to have its 113 invest for other municipalities. Municipality of Clarington Report FND-028-19 Page 17 municipality. The City of Toronto, in its investment policy, established a time -based threshold of 18 months to determine the money that it does not require immediately.10 3.17. There is no guarantee of better returns as a result of investing under the PI regime. A broader array of investments exposes the investor to a broader array of risk and past performance is not indicative of future results. Moreover, there is no assurance that better performance will offset the initial cost of transitioning to the PI regime and any ongoing costs after a municipality adopts the PI regime. 3.18. Under the PI regime the municipality gives up management and control investing money not required immediately. The municipality is relying on the expertise, experience, good faith and diligence of ONE JIB and ONE Investment staff. Municipal staff believe that these individuals have the requisite experience and expertise, and such individuals are required to act in good faith and in the best interests of the municipality. 3.19. Staff believe, based on the available evidence, that moving to the PI regime is the preferred course of action. 4. Steps to Adopt the PI Regime as a Founding Municipality via ONE Joint Investment Board (ONE JIB) 4.1. The Municipality of Clarington is one of several municipalities which are working on forming a joint investment board ("JIB") in order to mutually enter into adopt the Prudent Investor Standard. It is not financially feasible for the Municipality to establish its own investment board nor are there any other JIBs being contemplated. 4.2. The combined balances from the above municipalities would meet the $100 million threshold for establishing the ONE JIB. Once established other municipalities may, subject to the JIB agreement, join the ONE JIB. 10 Statement of Investment Policy and Procedures for the City of Toronto Investment Funds. https://www.toronto.ca/legdocs/mmis/2018/ex/bgrd/backgrou ndfile-116242.pdf Municipality of Clarington Report FND-028-19 Page 18 4.3. The Municipality of Clarington will pass an authorizing by-law ("Authorizing By -Law"), the passage of which will be co-ordinated with the passage of an Authorizing By -Law by the other founding municipalities. 4.4. The Authorizing By -Law will authorize: (i) the entering into of an initial formation agreement establishing ONE JIB; (ii) the completion of the Municipality of Clarington's Municipal Client Questionnaire; (iii) the adoption of the Municipality of Clarington's Investment Policy Statement; and (iv)the entering into of an agreement with ONE JIB and the other founding municipalities under which ONE JIB will invest the money and investments of the founding municipalities under the PI regime and of other municipalities that may subsequently agree to invest through ONE JIB (the "ONE JIB Agreement"). 4.5. After all the founding municipalities have passed an Authorizing By -Law and signed and completed the various documents authorized by such by-law, ONE JIB will hold a meeting and sign the ONE JIB Agreement. Thereafter, each founding municipality can pass its prudent investor enabling by-law (the "Prudent Investor Enabling By -Law") to officially opt into the PI regime as at the effective date set out in its Prudent Investor Enabling By -Law. 4.6. It is anticipated that an Authorizing By -Law will be passed by all the founding municipalities before the initial ONE JIB meeting in mid -March 2020. After the ONE JIB meeting, Council can pass its Prudent Investor Enabling By -Law in May 2020. 5. Concurrence Not Applicable. 6. Conclusion 6.1. It is respectfully recommended that given the opportunity for risk reduction and greater returns, the PI regime is an opportunity that the Municipality should pursue. ONE Investment is in the process of establishing ONE JIB, so the costs of set-up to the Municipality are greatly minimized. Municipality of Clarington Report FND-028-19 Page 19 6.2. The Municipality of Clarington, through cost sharing with other municipal investors, would have access to the necessary expert investment and municipal finance advice. Additionally, the ongoing maintenance costs would be shared with all municipal investors making it an affordable option. 6.3. Being a founding municipality would give the Municipality access to benefits that it would not get if it waits to adopt the PI regime until after ONE JIB is established. There is a trade off as the Municipality would be an early adopter and would not have the benefit of other municipalities' experiences with the adoption process. Staff Contact: Trevor Pinn, CPA, CA, Director of Finance / Treasurer, 905-623-3379 x.2601 or tpinn@clarington.net. Attachments: Attachment 1 — Impacts of Diversification on Risk Attachment 2 — Detailed Comparison of Prudent Investor Options Attachment 3 — ONE Investment Detailed Update Interested Parties: The following interested parties will be notified of Council's decision: 6.4. Municipal Finance Officers Association of Ontario (MFOA) 6.5. Association of Ontario Municipalities (AMO) 6.6. ONE Investment Appendix 1 — Impacts of Diversification on Risk The following analysis, using data up to February 2019, demonstrates the potential benefits of a diversified approach in the stock markets. The analysis uses the S&P/TSX composite index as a proxy for the performance of the Canadian stock markets and the MSCI World index as a proxy for the performance of the Global stock markets in developed countries. The analysis assumes four different asset mixes (100% Canadian; 100% Global; a 75:25 Canadian to Global ratio; a 50:50 ratio; and a 25:75 Canadian to Global ratio) over three different time periods (10, 20, and 40 years). For each asset mix and time period, the analysis calculates total returns as an annualized percentage, and volatility' (a common risk measure) as an annualized percentage. The 10-year time frame In the 10-year time frame, the 100% Canadian mix (S&P/TSX) experienced the lowest returns at the highest levels of risk. The 100% Global mix (MSCI World) experienced the highest returns and the second highest levels of risk. As expected, the three diversified asset mixes experienced returns somewhere between the two with greater returns showing for those with a heavier weighting of the Global index. However, all three diversified asset mixes experienced less volatility (risk) during the time -period with the 50:50 asset mix showing the least volatility. The 25:75 Canadian to Global mix yield the highest risk -adjusted return (return divided by risk) at 1.37. For the purposes of comparing to other time -periods, it should be noted that during this 10-year time frame the market did not experience any extreme economic events. Table 1: Risk and return of different equity mixes over a 10-year period (Annualized 100% 100% 75% 50% 25% percentages) Canadian Global Canadian / Canadian / Canadian / 25% Global 50% Global 75% Global Return 10.21 13.42 11.10 11.94 12.71 Volatility 10.77 10.08 9.66 9.13 9.28 Risk -adjusted 0.95 1.33 1.15 1.31 1.37 return The 20-year time frame In the 20-year time frame, the 100% Canadian mix experienced both the highest level of returns and the highest level of risk. The 100% Global mix experienced the lowest returns and was in the middle of the asset mixes in terms of risk. In terms of the diversified mixes those that favoured Canadian stocks offered greater returns but also greater levels of risk, whereas those that favoured Global stocks produced lower returns at a lower risk. During this period, the asset mixes that favoured Canadian stocks offered the greatest risk adjusted returns with the 75:25 Canadian to Global mix offering Volatility is measured by standard deviation throughout this document - 1 - a slightly higher risk adjusted return (0.541) than the 100% Canadian mix (0.538). It should be noted that this period covers the 2008 financial crisis, one of the most significant market collapses since the Great Depression. Additionally, the Global index incorporates US stocks, which were heavily impacted by the 2008 financial crisis. Table 2: Risk and return of different equity mixes over a 20-year period (Annualized 100% 100% 75% 50% 25% percentages) Canadian Global Canadian / Canadian / Canadian / 25% Global 50% Global 75% Global Return 7.37 4.25 6.70 5.96 5.14 Volatility 13.69 11.85 12.37 11.57 11.38 Risk -adjusted 0.54 0.36 0.54 0.52 0.45 return The 40-year time frame In the 40-year time frame, the 100% Canadian mix experienced the lowest returns and the highest levels of risk. The 100% Global mix experienced the second -highest level of returns and was in the middle of the asset mixes in terms of risk. Of the three diversified mixes the 25:75 Canadian to Global mix offered both the greatest returns and the lowest level of risk. The mixes that leaned more heavily on Global stocks offered greater returns and lower levels of risk. The diversified mixes that were weighted equally or more heavily toward Global stocks yielded greatest risk adjusted returns. In addition to the financial crisis in 2008, this period also encompasses the dot-com bubble of the mid 1990s to early 2000s, and the high interest rates in the 1980s and volatile oil prices of the 1970s and 80s. Table 3: Risk and return of different equity mixes over a 40-year period (Annualized 100% 100% 75% 50% 25% percentages) Canadian Global Canadian / Canadian / Canadian / 25% Global 50% Global 75% Global Return 9.38 9.80 9.64 9.79 9.85 Volatility 15.35 12.83 13.78 12.76 12.43 Risk -adjusted 0.61 0.76 0.70 0.77 0.79 return What we can see from this analysis is that, through each time period, Global diversification generally offered a lower level of risk than relying on Canadian stocks alone. Apart from the 20-year time period, Global diversification also delivered greater rates of return and risk -adjusted returns. The 20-year time period demonstrates that significant economic events in a market can have a noticeable impact on returns but that the level of diversification still offers a lower overall exposure to volatility. -2- Performance by Asset Class (percent, CAD basis) 14 AL MSCI World 13 AL 25% TSX1T5% MSCI World 1 j 50% TSX150% MSCI World 11 AL 75% TSX125% MSCI World 1 AL &PrrSX 9 Last 40 }ears ■ Last 20 Years A Last 10 Years 25% TSXf75% MSCI World MSCI World 75% TSXl2596 MSCI 451orld 50% T-SMO MSCI World &PITS o &PjSX 75% TSXl25% MSCI World 6 50% TSX150% MSCI World 5 25% TS7{175% MSCI World 4 MSCI World 9 10 11 12 13 14 Volatility (annualized %) Source: Bloomberg, Guardian Capital -3- 15 1 Appendix 2 — Detailed Comparison of PI Options Control ove investments • • High level of control over narrow range of investments Limited ability to set own risk tolerance, otherwise dictated by Province • • • Strategic control through investment policy Full control over short- term investments through definition of money not required immediately Ability to set own risk tolerance • • • • Strategic control through investment policy Partial control over governance through rotating term for treasurer on ONE JIB and committees Full control over short-term investments Ability to set own risk tolerance Cost • Status quo • Costs of establishing • Maintenance costs shared are high. Toronto's among all members through budget during their set- ONE fees. up year was —$560K. • Average fees are slightly • Ongoing maintenance higher than legal list as of the Toronto IB is manager fees for PI products estimated at $1 M are higher due to complexity annually. of offering. • Fees are likely to be • Fees are charged to slightly higher than legal investment funds so there list due to greater are no direct budget product complexity and implications. required level of active management. • Establishing an IB and ongoing maintenance would have a direct budget impact. Risks • Lower • No alternative IB / JIB • JIB agreements can make it potential at present if IB fails or slightly more difficult to return on proves too costly to switch to other IB or JIB investment justify over long-term option in future; though ONE • Concentration has developed clear risk procedures for founding municipalities to exit the JIB • No alternative IB / JIB at Opportunities • N/A • Potential for improved • Potential for risk -adjusted risk -adjusted returns returns • Fee rebates for founding municipalities • Expert advice of an CFA charterholder is a part of the turnkey solution • ONE has developed IPS templates and investment plan templates that are in full compliance with the Municipal Act. • Set up costs have already been absorbed by ONE Investment. Feasibility • High • Moderate / Low • High APPENDIX 3 N V E S T M E N T Update on ONE Investment's Turnkey Solution of Prudent Investor 13422209.2 Contents The ONE Investment Turnkey PI Solution.................................................................................. 3 EstablishingONE JIB................................................................................................................. 3 Roles and Responsibilities...................................................................................................... 4 Council................................................................................................................................ 4 MunicipalStaff.................................................................................................................... 5 ONEInvestment.................................................................................................................. 5 ManagingInvestments............................................................................................................... 6 Roles and Responsibilities...................................................................................................... 6 Council................................................................................................................................ 6 ONEJIB.............................................................................................................................. 7 ONEInvestment.................................................................................................................. 8 MunicipalStaff...................................................................................................................10 Figure 1:Typical Roles and Responsibility of ONE's Turnkey PI Solution* .............................12 Benefits and Risks of a Founding Municipality..........................................................................13 Benefits of Founding Municipality Status...............................................................................13 Risks of Founding Municipality Status...................................................................................13 Appendix A - Investment Advisory Committee Biographies.......................................................15 Appendix B - STEPS TO ESTABLISH ONE JOINT INVESTMENT BOARD (ONE JIB) ............18 [Publish Date] 2 13422209.2 The ONE Investment Turnkey PI Solution ONE Investment is a non-profit corporation founded by LAS (a corporation of the Association of Municipalities of Ontario) and CHUMS Financing Corporation (a subsidiary of the Municipal Finance Officers' Association of Ontario). Its purposes are to: • "facilitate investment by municipalities and public sector bodies in investment products and vehicles • to make available, and lower the cost of, such products and services in a manner consistent with the investment objectives of such municipalities and public sector bodies." ONE Investment has long offered investment options for municipalities that are compliant with "legal list" requirements. ONE Investment has more than 25 years experience serving the municipal sector. Two challenges noted by the Institute for Municipal Finance and Governance in its report on Ontario's prudent investor (PI) standard are that it: (1) is costly, requiring outside expertise and additional institutional layers for management and monitoring, and, (2) requires expertise on the part of public officials and a more "hands on" approach to investing. It is ONE Investment's goal to meet its purposes for municipalities who wish to partake in the PI regime, to reduce costs by pooling funds and to facilitate investing in a manner that is consistent with the municipality's objectives. To do so, it is in the process of developing standardized templates and working through the complex legal issues and governance structures to develop processes that will be simple, understandable and flexible for municipalities while also meeting the requirements of the legislation. The following sections of the document will detail the planned processes, roles and responsibilities for: (1) establishing the ONE Joint Investment Board (ONE JIB) (2) ongoing management of investments with ONE JIB Establishing ONE JIB In order to take advantage of the potential opportunity afforded by the PI regime, municipalities that meet the financial thresholds set out in O. Reg. 438/97 (Regulation) can establish an authorized investment board, like ONE JIB, through which they can invest their money that they do not require immediately. After ONE JIB is established by the founding municipalities (Founding Municipalities) and after they fulfill other requirements which include adopting an investment policy statement (IPS) and entering into an agreement with ONE JIB and all of the Founding Municipalities pursuant to which ONE JIB agrees to invest on their behalf under the PI regime, Founding Municipalities can pass a by-law to opt into the PI regime under section 418.1 of the Municipal Act, 2001 (Act). The PI regime will apply to each Founding Municipality as of the effective date set out in its by-law. This by-law is irrevocable: once a municipality passes the by-law, it will not have the ability to opt out of the PI regime and go back to the Legal List (LL) for the investment of its money that it does not require immediately without a regulation by the Lieutenant Governor in Council approving the transition. Once the effective date has passed and Founding Municipalities are subject to the PI regime, any future investment of monies not required immediately will be made through ONE JIB. ONE Investment cannot establish an investment board (IB) or a joint investment board (JIB) on its own, as the Regulation only permits municipalities meeting the prescribed financial thresholds to establish an IB or JIB. To establish ONE JIB, ONE Investment is actively recruiting Founding Municipalities who will jointly establish a JIB that will act as the cornerstone for offering all municipalities in Ontario an affordable cost -shared PI solution. Under the Act, all municipalities whether or not they meet the prescribed financial [Publish Date] 13422209.2 thresholds are eligible to delegate their investment powers to previously established IBs or JIBs allowing them to opt into the PI regime. The following section details how municipalities can become Founding Municipalities and help establish ONE JIB. It is organized by roles and responsibilities. See appendix B for the steps to establish ONE JIB, organized chronologically. Roles and Responsibilities Council Council in this instance refers to a municipal council considering jointly establishing ONE JIB as a Founding Municipality. Council's role in establishing ONE JIB as a Founding Municipality is important because the Founding Municipalities are the decision -makers with the authority to provide input in respect of the terms and conditions of the agreement establishing ONE JIB and the agreement allowing ONE JIB to invest under the PI regime on behalf of the Founding Municipalities and of other municipalities that may subsequently agree to invest through ONE JIB (ONE JIB Agreement). Council's primary role in the process created by ONE Investment is to formally establish ONE JIB. Role Responsibility • Enter an Initial Formation Agreement Pass the "Authorizing By-law" which establishing ONE JIB authorizes: (i) the entering into of the • Complete the Municipal Client Initial Formation Agreement; (ii) the Questionnaire completion of the Municipal Client • Adopt an Investment Policy Statement Questionnaire; (iii) the adoption of an IPS; (IPS) (iv) the approval of a draft investment • Approve a draft investment plan plan; and (v) the entering into of the ONE • Enter into the ONE JIB Agreement JIB Agreement • Formally opt into the PI regime Pass the Prudent Investor Enabling By- law Passing the Authorizing By-law and the Prudent Investor Enabling By-law Municipalities will be able to enter into the Initial Formation Agreement establishing ONE JIB, adopt their IPS, enter into the ONE JIB Agreement and fulfill other requirements through an Authorizing By-law. ONE Investment has been consulting with legal experts to draft a single Authorizing By-law document that is compliant with legislation. Once council and staff are comfortable with the guidelines and parameters they have set out in their IPS (see section below on Managing Investments for more details), council can pass the Authorizing By-law to establish ONE JIB. This, however, has one important caveat; the Authorizing By-law authorizes the entering into of an agreement with other Founding Municipalities to establish ONE JIB. The other Founding Municipalities must be prepared to enter into the agreement at that time as well and the total of all municipal money or investments not immediately required, in the opinion of the treasurers, at that time must be at least $100 million (collectively). Council are the ultimate decision - makers in becoming a Founding Municipality that establishes ONE JIB. Being a Founding Municipality for ONE JIB is a significant decision to lead the sector not only as an early mover on PI investing but in establishing a framework for the benefit of all municipalities in Ontario In order to opt into the PI regime council must pass a Prudent Enabling Investor By-law which provides that section 418.1 of the Act applies to the municipality. [Publish Date] 13422209.2 4 Municipal Staff Municipal staff will play an integral role in guiding council throughout the process of opting into the PI regime. Role Responsibility • Perform due diligence to ensure Council Ongoing updates and reports to council has the information it requires and recommendations that it can consider on: o the PI regime o the ONE Investment PI option • Prepare the Authorizing By-law based on Present the Authorizing By-law to Council the template provided by ONE Investment • Prepare the Prudent Investor Enabling Present the Prudent Investor Enabling By - By -law based on the template provided by law to Council ONE Investment While ONE Investment will provide regular updates on the progress towards establishing ONE JIB, municipal staff will need to conduct its own independent due diligence. Once a council directs staff to work with ONE Investment to become a Founding Municipality, ONE Investment will provide template copies of all necessary documentation to and work with staff to prepare an Authorizing By-law and a Prudent Investor Enabling By-law. During this period, municipal staff will also be working with ONE Investment to develop a draft IPS (further details in section on Managing Investments) which will be required before the Authorizing By-law can be passed. ONE Investment ONE Investment's PI turnkey services are designed to assume as much as possible of the municipality's workload. ONE Investment takes care of the administrative work while leveraging staff and council for their unique municipal insights for customization. All key decisions remain with the municipality ONE Investment's role through the process is to aid and provide information. ONE Investment began conducting its research and analysis of the PI regime when the legislation was first introduced in late 2016 and has developed a lot of knowledge and expertise in PI implementation during that period. Role Responsibility • To support staff and Council through the 0 Provide ongoing updates and reports to due diligence process staff on the progress of establishing and organizing ONE JIB. • To facilitate the Authorizing By-law 0 Develop and provide templates to staff process by providing a standardized, 0 Provide municipal staff advice in legislatively compliant template customizing templates • To facilitate the Prudent Investor Enabling 0 Ensure legal compliance of By-law process by providing a documentation standardized, legislatively compliant template ONE Investment's responsibilities will leverage the knowledge and expertise acquired over the last three years of performing its due diligence on PI - helping staff guide council through the process of establishing ONE JIB and opting into the PI regime. As such, ONE Investment is available to answer [Publish Date] 5 13422209.2 questions that may arise during the process whether they be related to due diligence or process and implementation expertise. ONE Investment with legal counsel has developed legislatively compliant by- laws and IPS templates. As part of its support for municipalities during this process, ONE Investment will consult with legal counsel to ensure that the documentation is customized to meet the needs of the municipality and is compliant with legislation before the documentation is submitted to council for approval. Managing Investments Once ONE JIB is established and the Founding Municipalities have passed the Prudent Investor Enabling By-law, responsibility for managing the day-to-day investments of the municipality will be the responsibility of ONE JIB with assistance from ONE Investment staff and municipal staff; however, council retains ultimate control over the strategic direction of its investments through the IPS. The following section will detail the roles and responsibilities of each party in the ongoing management of investments. Roles and Responsibilities Council Role Responsibility • To provide overall strategic direction on 0 To direct municipal staff to complete the investments Municipal Client Questionnaire • To adopt and maintain an IPS and to review it at least annually, and update it as necessary Council establishes and maintains control of the strategic direction of its investments through development of its IPS. The IPS is a requirement under section 18 of the Regulation. Subsection 18(2) of the Regulation details the requirements of the IPS which are: - The municipality's objectives for return on investment - The municipality's risk tolerance - The municipality's need for liquidity including, for greater certainty, the municipality's anticipated needs for funds for planned projects and the municipality's needs to have funds available for unanticipated contingencies In addition, subsection 18(3) allows municipalities to include "other requirements with respect to investment matters that council considers to be in the interests of the municipality." Subsection 18(4) requires that council review the IPS, and update it if necessary, at least annually. This ensures that the IPS remains aligned with council priorities and provides council with the flexibility to update it at any point should circumstances require. ONE Investment has prepared an IPS template and will provide detailed guidance on all decision points in a future update. As mentioned in the previous section, Establishing ONE JIB, a Founding Municipality's council will adopt its IPS by enacting the Authorizing By-law. [Publish Date] 13422209.2 The Investment Policy Statement (IPS) is a document required by legislation that ensures that a municipality's funds are invested to meet its specific needs at its accepted level of risk. It is through this policy that council retains ultimate control of its investments. 0 ONE JIB A Joint Investment Board is a "municipal service board that is established under section 202 of the Act by two or more municipalities for the purposes of enabling municipalities to invest in accordance with the PI regime'. ONE JIB is a Joint Investment Board that is established by the Founding Municipalities, in accordance ONE JIB will have a representative with Part II of the Regulation. municipal perspective through the ONE JIB will be primarily comprised of highly qualified independent investment professionals. As per the Regulation, no councillors are permitted to sit on ONE JIB. As stipulated in the Regulation, the only staff allowed to sit on an IB is the municipal treasurer or, in the case of a JIB, several treasurers provided they do not comprise more than 25% of the JIB. appointment of municipal treasurers. NOTE: As per the Regulation, no other members of municipal staff or councillors are permitted to sit on ONE JIB. See appendix A for a description of the inaugural ONE JIB and brief biographies of its proposed members. Role Responsibility • To exercise the municipality's investment Establishing and maintaining an powers in a manner that is compliant with investment plan that is informed by, and the relevant section (418.1) of the Act. in compliance with, the municipality's IPS (Investment Plan). This includes reviewing the Investment Plan to ensure alignment following a Council IPS review (at least once per year). • Providing an annual report to Council that is compliant with the Regulation • Making decisions regarding investment managers • Reporting any breaches to the municipality As per the Regulation, the Investment Plan deals with how ONE JIB will invest the municipality's money. Consistent with legislation, the municipality's Investment Plan will be developed with consideration for: (1) General economic conditions (2) The possible effect of inflation or deflation (3) The role that each investment or course of action plays within the municipality's portfolio of investments (4) The expected total return from income and the appreciation of capital (5) Needs for liquidity, regularity of income and preservation or appreciation of capital. (6) Any other criteria that are relevant to the circumstances See table 5 for an example of what an investment plan will include. 10. Reg. 438/97 Section 13. [Publish Date] 7 13422209.2 Table 1: Proposed sections of the ONE JIB Investment Plan Section Description Purpose of the Investment Plan This section establishes how ONE JIB will invest the municipality's money that it does not require immediately (Long -Term Funds) Responsibility for the Investment This section will detail the actions in an Investment Plan and Plan provide detail for who will be responsible for execution Custodian This section will detail the financial institution(s) that hold the municipality's investments Portfolio Overview This section will detail the objectives, risk tolerance and liquidity, and time horizon for investments on an account -by -account basis. Investment Goals and Objectives This section will provide a more detailed account of how the IPS has shaped the decisions within the Investment Plan, including the account structure, asset allocations, and asset mixes Constraints This section will detail any additional constraints placed on investments and may authorize the consideration of Environment, Social, and Governance (ESG) factors and securities lending ONE Investment External This section will provide details of the chosen investment Investment Managers managers for assets the municipality will invest in Rebalancing Provisions This section will detail the processes and mechanisms for rebalancing the portfolio should interest, dividends paid, or a change in the value of securities alter the overall asset allocation from the Investment Plan. Additionally, ONE JIB is also responsible for providing an annual report to municipalities. This report will contain, at minimum: A statement about the performance of the municipality's portfolio of investments during the period covered by the report; A statement by the treasurer of the municipality as to whether or not, in the opinion of the treasurer, all investments are consistent with the municipality's IPS, and the Investment Plan. Such other information that the council may require or that, in the opinion of the treasurer, should be included. This will be in addition to the ongoing detailed performance reporting and communication provided by ONE Investment. ONE Investment ONE Investment is assisting in the establishment of ONE JIB to provide access to the PI regime for municipalities that do not qualify for the standard on their own or for municipalities that do not wish to incur the up front and ongoing maintenance costs associated with the prescribed investment governance model on their own. Role Responsibility • Hands-on Investment Advice & Support 0 Investment advice • Support ONE JIB, including providing secretary functions • Assist municipalities in writing their IPS • Support ONE JIB in creating municipal Investment Plans [Publish Date] 8 13422209.2 • Provide robust reporting to municipalities on investment performance • Investment Education and Training Provide advice on how to integrate the municipality's investment program with all facets of municipal finance • ONE Investment will build on education and training currently delivered through MFOA and LAS • Training has included courses on investment basics, the impact of interest rate changes on bond prices as well as municipal finance training on linking investment programs to capital budgets • ONE Investment will meet with municipal finance staff to discuss investment options ONE Investment is designed to augment municipal staff by pooling investor resources to make available the investment and municipal finance expertise municipalities require for decision making purposes. ONE Investment will accomplish this in two ways: (1) by relieving some of the burden of the technical workload from staff through hands-on investment advice and support, and (2) by ensuring municipalities understand the municipal finance implications of investment decisions through education and training. ONE Investment has received an exemption from the Ontario Securities Commission (OSC) to enable it to perform certain advisory and other functions without registration. This enables ONE Investment to provide expert advice to municipal investors, bridging the worlds of municipal finance and financial markets. As few municipalities have the resources to hire in-house expertise or contract an expert consultant, ONE Investment is developing a delivery model whereby a CFA charterholder and a municipal finance expert will be available to provide advice to municipal clients — a solution that is made affordable to all through pooled resources. It would usually be the case that support for a joint municipal service board would be the responsibility of the municipalities establishing the joint board. In the case of ONE JIB, significant and specialized advice will be required to support its activities. Support can range from arranging and running meetings, preparing reports, crafting Investment Plans, obtaining expertise to advise ONE JIB when needed, remunerating members and keeping participating municipalities fully informed of ONE JIB activities and decisions. It is assumed that municipalities considering investing under the PI regime would find it difficult to provide this level of support to ONE JIB. Consequently, ONE Investment fully expects to provide these various support functions to ONE JIB and will enter into agreements with participating municipalities to permit it to do so. Under ONE Investment's turnkey PI solution, ONE Investment will be the municipality's primary service provider in addition to providing all necessary support functions for ONE JIB. In its role as primary service provider for the municipality ONE Investment will design the composition of ONE JIB in accordance with the legislation. ONE Investment has already developed and initiated the recruitment process for the independent investment experts who will sit on ONE JIB and will also initiate the recruitment of treasurers from the Founding Municipalities who will also sit on the board. However, the Founding Municipalities will decide who are the members of ONE JIB. As part of the turnkey solution, ONE Investment will make recommendations for the initial members of the board of ONE JIB and will support future recruitment. As noted previously the Regulation limits the participation of treasurers on the board of ONE JIB to no more than 25% of the board composition. [Publish Date] 9 13422209.2 In its duty as primary service provider to municipal clients, ONE Investment will work with municipalities to develop drafts of their IPS. To do so, ONE Investment will work with municipal council and staff to complete a Municipal Client Questionnaire. ONE Investment will then use the responses provided in the questionnaire to pre -populate a draft of the IPS that is aligned with the municipality's goals and level of risk tolerance. ONE Investment will provide ongoing advice and support to municipal council and staff as they work through ensuring the draft IPS is truly reflective of the municipality's needs. Once the IPS is approved, ONE Investment will work with staff on developing a draft Investment Plan that is reflective of the municipality's IPS. As municipal investing authority is delegated to ONE JIB, it is ONE JIB who will make the final adjustment and have final approval of the municipality's Investment Plan. Once the plan is finalized, ONE Investment will fulfill the role of implementing the plan, as directed by ONE JIB. On an ongoing basis, ONE Investment will act as a primary point of contact for clients and ensure that any necessary communication with ONE JIB is established in a timely fashion. It will fulfill all monitoring and reporting requirements. This includes but is not limited to: • regular reporting to the municipality • reporting to the Ontario Securities Commission • regular reporting to ONE JIB on client holdings • monitoring the performance of the Investment Manager ONE Investment will also coordinate with municipal staff in preparation of the annual investment report to council. It will compile the information required for ONE JIB to provide appropriate commentary, and it will work with the municipality's treasurer to incorporate the treasurer's opinion into the annual investment report. See Figure 2 for a detailed flow -chart of the roles and responsibilities and how ONE Investment manages all the coordination work required under the PI regime. Municipal Staff As noted in the previous section, ONE Investment provides all the support functions for ONE JIB. The municipal staff's role in ONE's turnkey PI solution is to work with ONE Investment staff to provide council and ONE JIB with the information they require to make key decisions. Staff will also be required to report on investments to council. Role Responsibility • Ensure Council and ONE JIB have the 0 Work with Council to complete the information they need to perform their Municipal Client Questionnaire roles under the PI regime. 0 Work with ONE Investment to develop a draft IPS • Work with Council to modify the draft IPS so that Council can formally approve the IPS. • Work with ONE Investment on the draft Investment Plan to ensure that it is aligned with the IPS. • Reporting on investments to council 0 Provide treasurer's opinion for ONE JIB's annual report • Notify Council a soon as it learns of any investments or investment issues that, in the treasurer's opinion, fail to comply with the IPS. [Publish Date] 10 13422209.2 Role Responsibility Ensure Council and the ONE JIB hove the information they need to perform their roles under PI. The responsibilities entailed in this role include providing the information council requires to make decisions regarding its IPS and using its knowledge of the IPS and council's objectives to help develop the initial draft of the Investment Plan. This will entail working with council and ONE Investment to complete the Municipal Client Questionnaire annually. Once the questionnaire is complete, staff will work with ONE Investment on the development (or revision) of a draft IPS. Once the draft IPS is reflective of the Municipal Client Questionnaire, municipal staff will work with council to make any refinements necessary for council to approve the adoption of its IPS. Once the IPS is adopted and shared with ONE Investment and ONE JIB, municipal staff will work with ONE Investment to develop a draft Investment Plan. As outlined in the previous section, ONE Investment will carry out the majority of the activities in drafting the Investment Plan for ONE JIB, but municipal staff will provide support where necessary to ensure interpretive alignment with the municipality's IPS. ONE JIB will have ultimate responsibility for approval of municipal Investment Plan. Reporting on investments to council Additionally, municipal staff will play an ongoing role in reporting on investments to council. Outside of any council direction to report on investments, the treasurer has a legislative role in reporting on investments. In particular, the treasurer is required to provide an opinion for the annual investment report. This opinion will include a statement on whether the investments are consistent with the municipality's IPS and Investment Plan. This is similar to the treasurer's opinion required under the current legal list regime. [Publish Date] 11 13422209.2 Figure 1:Typical Roles and Responsibility of ONE's Turnkey PI Solution* Client Questionnaire Draft Investme Policy Investment < Policy Statement (IPS) Legend = Process = Document = Reporting <> = Advice ! Support Reporting to �eporting to 0 E JIB on Municipalifies Client Holdings on Breaches *Division of responsibilities between council and staff may vary by municipality Responsibilities 0 = Council 0 = Municipal Staff * = ONE JIB = ONE Investment [Publish Date] 12 13422209.2 Benefits and Risks of a Founding Municipality The PI standard for municipalities in Ontario is, other than in the case of the City of Toronto, untested. The legislation for establishing an IB or JIB to take advantage of PI is complex and requires a lot of upfront work with only the City of Toronto to learn from. Once a municipality puts in the effort to clear these obstacles (with ONE Investment's guidance and assistance), and passes a by-law opting into the PI regime, the municipality can take advantage of a much wider array of investments for the money that it does not require immediately, but the municipality also does not have the option to revoke the by-law to revert to the Legal List legislation in respect of such money. The Lieutenant Governor in Council does have the power to make a regulation to have the PI regime no longer apply to a municipality. ONE Investment firmly believes that all of Ontario's municipalities making investments will eventually opt into the PI regime. Those who lead the sector and opt in early are demonstrating their commitment to leading the sector by working to establish a governance structure that all other municipalities could use to maximize their risk -adjusted returns in the future. Benefits of Founding Municipality Status To reward Founding Municipalities for being first movers and taking a leadership role in the sector, ONE Investment is offering a few incentives. Fees reduction The first incentive involves a reduction in basis points in the fee charged by ONE Investment. The reduction of 2 basis points in the fee charged by ONE Investment on all prudent investor offerings for a period of at least 10 years. ONE JIB Representation Additionally, the two municipal treasurer representatives on ONE JIB will be selected from the Founding Municipalities; Founding Municipality treasurers will serve rotating two-year terms so each Founding Municipality will eventually have its treasurer as a member of ONE JIB. This role is particularly important in the formative years of ONE JIB and Founding Municipalities can shape how ONE JIB operates for years to come. Treasurers who sit on ONE JIB will also be eligible to sit on any of ONE JIB's committees. Table 2: Potential ONE JIB Committees Committee Purnnnp Nomination Advises on the membership & structure of ONE JIB, recommended IPS template, Investment Plan, among other things. Client service Advises on media and content for reporting, newsletters, seminars, education, complaints process, service standards, and relationship practices New Products Advises on investment strategies, features of current offerings and preferred new offerings. Audit and Risk Oversees strategies for monitoring financial management and reporting, risk management strategies, IT systems, internal controls, etc. Risks of Founding Municipality Status As noted previously, one of the most important considerations for municipalities conducting their due diligence on adopting the PI regime is the limitation around revoking the Prudent Investor Enabling [Publish Date] 13 13422209.2 By-law. Once a municipality adopts the PI regime, it cannot go back to the LL for the investment of its money that is not required immediately without a special regulation. This, however, applies to all municipalities adopting the PI regime. There are specific risks worth considering that would only apply to those who partner to establish ONE JIB. Table 3 below identifies many of these risks; ONE Investment has carefully considered each of these risks and, where there are no mitigating factors already built into the legislation, has developed plans to deal with these situations should they arise. Table 3: Risks to becoming a founding municipality and mitigating factors -—Mitigating Factor A Founding Municipality leaves Not an issue if remaining Founding Municipalities' investments remain >$100M; otherwise, new JIB must be struck Founding Municipalities holdings fall below $100M Disagreement among Founding Municipalities Political change of heart Not an issue unless they fall because a Founding Municipality leaves Dispute resolution process is included in the ONE JIB Agreement ONE Investment expects to invest substantially in municipal staff, Council education to manage this risk. Council provides direction to the ONE JIB via the IPS which can adapted to reflect updated risk tolerance Change in council policy regarding long-term I Council education is the first step, ONE will reserves Desire to exit ONE JIB ONE Investment business or its PI offerings fail Poor market: many members exit at once while returns are weak Cost escalation support municipal staff in communicating the trade-offs and impacts to the IPS. Any municipality leaving must have another IB/JIB to move to or must receive a provincial regulation allowing them to return to the Legal List, as per the Act and the Regulation ONE would work to settle clients with a new provider. Legislative governance was designed to minimize this risk by placing the control and management of the funds with an IB or JIB ONE Investment is a non-profit corporation founded by LAS (a corporation of AMO) and CHUMS (a subsidiary of MFOA). ONE Investment is committed to adjusting its fees on a regular basis and adjusting them to ensure fee revenues are closely aligned to budgeted projections [Publish Date] 14 13422209.2 Appendix A - Investment Advisory Committee Biographies The ONE JIB will be comprised of the six members of ONE's current Investment Advisory Committee (IAC) plus one additional member, as well as two Treasurers from ONE JIB's founding member municipalities. The IAC has been working with ONE since November 2016 to support the Legal List offering and to prepare for Prudent Investing. In summary: • This group of five institutional investment experts has developed an understanding of municipal finance through coaching by ONE staff and by its expert municipal finance member, Bill Hughes. • In total, they have 155 years of investment and municipal finance experience, an average of 26 years per member. • Except for Bill Hughes, they are all Chartered Financial Analyst (CFA) charterholders with distinguished careers either directly managing institutional investments or consulting to institutions on their investments. • Bill Hughes is a recognized expert on municipal finance who teaches the subject at University of Toronto's Munk School of Global Affairs. The IAC has worked with ONE to define an appropriate investment offering for all of Ontario's municipalities with effective implementation. To date, their work has included the following: • Regular review of current ONE offerings; • Confirmation of desired investment outcomes that meet municipal needs and for which prudent solutions should be designed; • Advice on the appropriate asset classes to generate those solutions and the asset allocations for the solutions; • Advice on the managers to fill those mandates; • Review of the documentation required to fulfill prudent investor offerings, including the Client Questionnaire, template Investment Policy Statement and Investment Plan. James C.L. Clark (CPA, CA, CFA) is the President of Dunhelm Consulting and has more than 25 years of broad pension experience in pension fund management, investment consulting, marketing, sales and client service. A former manager of a $1 billion pension plan with the Bank of Montreal, he currently provides investment and communication consulting services to institutional investors and investment managers. Mr. Clark also serves on the University of Ottawa's Treasury Committee and on several other boards and committees dealing with investment and portfolio management issues. He has lectured for York University's MBA program and contributed to numerous pension industry publications. Jennifer Dowty (CFA) is an equities analyst and business reporter at The Globe and Mail. She has approximately 18 years of experience working in the financial industry, of which nearly 14 years was at Manulife Asset Management. While at Manulife, Jennifer was a portfolio manager overseeing Canadian and global equity mutual funds, institutional funds, and pension plans. [Publish Date] 15 13422209.2 James G. Giles (CPA, CFA) retired from his role as Chief Investment Officer of Foresters Financial (Foresters), where he directly oversaw over $6 billion of investment assets, including international insurance and Canadian pension funds. James broadened the asset exposure of Foresters and hired external managers, where necessary. Prior to that, he managed real estate income trusts and preferred shares, as well as investment accounting. With over 25 years in the financial sector, he has lectured students seeking the Chartered Financial Analyst designation and the then Society of Management Accountants. He has been quoted in the media on investment matters and represented Foresters on industry groups such as the Pension Investment Association of Canada Bill Hughes (MBA, MES) is a Senior Fellow at the Institute on Municipal Finance and Governance at the University of Toronto. Bill has over 35 years' experience in finance and public policy in both the provincial and municipal governments. Before joining the Institute, Bill was the Commissioner of Finance and Treasurer for the Regional Municipality of York. He has held senior positions in the Ontario government, mainly at the Ministries of Finance and Infrastructure, where he was the Assistant Deputy Minister of Infrastructure Policy and Planning. Bill was a member of the board of directors of the Move Ontario Trust until its wind-up in 2017. He is a lecturer at the University of Toronto's Munk School of Global Affairs and Public Policy, where he co -teaches a course on policy development. Christine Tessier (CFA) is Vice -President, Investments and Treasury at CAA Club Group, where she is responsible for oversight and management of the company's nearly $1 B in pension, corporate and insurance assets. Christine brings over 16 years' investment experience, with a specific focus in product development and design, investment consulting and strategic planning. She has experience in retail and institutional markets and has developed or researched products across the asset class spectrum, spanning straightforward and complex solutions. Christine has a Bachelor of Commerce degree from Laurentian University. Geri James (CFA) has over 25 years' experience designing, implementing and monitoring investment strategies for pension plans, non -profits, sovereign wealth funds, governments and other institutional investors. As well, she has designed and launched investment vehicles such as pooled funds, mutual funds and exchange traded funds. Geri spent nine years as an investment consultant with AON Hewitt followed by 17 years in various roles, including Head of Business Development, Head of Product and Chief Operating Officer, for BlackRock Asset Management Canada Limited. She was an ongoing guest lecturer on investments at Humber College. In addition to her work with The One Investment Advisory Committee, Geri is currently a Director of the Board of the Police Credit Union, Board Chair of the Wilderness Canoe Association and a founding member of Sparrow, a refugee sponsorship and resettlement program. [Publish Date] 16 13422209.2 As the ONE JIB is a municipal board, ONE Investment will also retain the secretarial services normally provided by a Municipal Clerk to the ONE JIB. Denis Kelly received a Bachelor of Laws from Queen's University and was called to the Bar in 1981. He was a Solicitor in the City of North York Legal Department from 1981 to 1987. Denis then served in municipal Clerk's Offices in various capacities -- as Deputy City Clerk (1987 to 1991) and Y City Clerk (1991 to 1997) for the City of North York, Clerk -Administrator for ff the Town of East Gwillimbury (1998 to 1999) and Regional Clerk for the Regional Municipality of York (1999 to 2017). Over his long career in the municipal sector, Denis' portfolio included providing legal services and leading the Council and Committee, Access and Privacy and Information Management programs for three municipalities. Denis also acted as the Corporate Secretary for the Greater Toronto Services Board between 1999 and 2001. Denis lives in Thornhill, Ontario, with his family. [Publish Date] 17 13422209.2 Appendix B - STEPS TO ESTABLISH ONE JOINT INVESTMENT BOARD (ONE JIB) 1. ONE Staff will work with municipal staff of each founding municipality ("Founding Municipality") to assist in drafting a report to Council for initial direction and authority to establish ONE JIB in conjunction with ONE Investment and to opt into the prudent investor regime on or after January 1, 2019 by passing a by-law under subsection 418.1(2) of the Municipal Act, 2001 (the "Act'). Council: (after the Founding Municipalities authorize staff in conjunction with ONE Investment to inaugural meeting of develop an agreement to establish ONE JIB, together with all related matters such council in December, as Codes, policies and appointments and to adopt the prudent investor regime on 2018) or after January 1, 2019. 2. ONE Staff will develop an Initial Formation Agreement and a ONE JIB Agreement. 3. The Initial Formation Agreement will establish ONE JIB as a joint municipal service board, authorize investment through ONE JIB of the money and investments that the Founding Municipalities do not require immediately (the "Investible Funds") and provide for those matters necessary or desirable to facilitate the establishment and operation of ONE JIB. 4. The ONE JIB Agreement will set out the basis on which the Founding Municipalities and other municipalities that wish to participate by investing their Investible Funds through ONE JIB will be able to do so. 5. ONE Staff will develop job descriptions for the members of ONE JIB, interview and recommend the appointment of members and arrange for indemnity/insurance for the members of ONE JIB. 6. ONE Staff will develop a Code of Conduct and Conflict of Interest Policy as well as recommend an integrity commissioner (interim). 7. ONE Staff will develop a Know Your Client Framework which will be called a Municipal Client Questionnaire. 8. In light of existing municipal Statements of Investment Policies and Goals, ONE Staff will develop one or more investment policy statement "IPS" templates which reflect a range of possible investment objectives and strategies. 9. ONE Staff will formulate a monitoring system to provide assurance that investments comply with each IPS and investment plan. 10. ONE Staff will establish the mechanism for regular reviews of the IPS to assist participating municipalities in their efforts to update or amend their IPSs. 11. ONE Staff will develop guidelines to help the Founding Municipalities review and organize investments in anticipation of a transfer of their Investible Funds on or after January 1, 2019. 12. As they develop draft materials ONE Staff will periodically meet with municipal staff to review and obtain input on these policies and documents. [Publish Date] 18 13422209.2 13. Each Founding Municipality will complete and provide ONE Staff with its Municipal Client Questionnaire. 14. After ONE Staff has completed the various drafts and templates, and each Founding Municipality has provided the required Municipal Client Questionnaire, each Founding Municipality will work with municipal staff as they prepare reports to Council setting out their recommendations, a draft IPS, a draft investment plan that complies with the draft IPS and the related authorizing by-law (Authorizing By-law). Council: Enact an Authorizing By-law that authorizes: the execution of the Initial (before or after Formation Agreement; the establishment of ONE JIB pursuant to that January 1, 2019) agreement; the completion of a Municipal Client Questionnaire; the approval of the IPS; the approval of a draft investment plan; and the execution of the ONE JIB Agreement, which will have a future effective date. Also authorize, approve or adopt, all the necessary Codes, Policies, and appointments set out above. Each Founding Municipality must certify as at the day ONE JIB is established that it meets the criteria in s. 15(2) of the regulation (O. Reg. 438/97, Part II). 15. ONE JIB will hold its initial meeting at which it will approve and execute the ONE JIB Agreement following which the ONE JIB Agreement will be executed by each of the Founding Municipalities. 16. ONE Staff will consult with ONE JIB about potential updates to each IPS, each investment plan and other documents. 17. ONE Staff will assist municipal staff as they prepare reports recommending the adoption of the prudent investor regime pursuant to a Prudent Investor Enabling By-law, required updates to the IPS and related policies and decisions and they prepare the required by-law pursuant to which each Founding Municipality will opt into the prudent investor regime. Council: (on or after Formally opt into the prudent investor regime by enacting a Prudent Investor January 2019 and Enabling By-law (under subsection 418.1(2) of the Act) with a future effective after the ONE JIB date. Approve any modifications to the IPS or other documents. Agreement has been entered into by each Founding Municipality and ONE JIB) 18. Founding Municipalities will transfer Investible Funds to ONE JIB for investment. [Publish Date] 19 13422209.2