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HomeMy WebLinkAboutFSD-036-23Clarftwn 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 16, 2023 Report Number: FSD-036-23 Submitted By: Trevor Pinn, Deputy CAO/Treasurer Reviewed By: Mary -Anne Dempster, CAO Resolution#:GG-172-23 File Number: Report Subject: 2023 Update on Prudent Investor Recommendations: By-law Number: 1. That Report FSD-036-23, and any related delegations or communication items, be received; 2. That the Deputy CAO/Treasurer be directed to create the necessary documents and agreements, such as investment policies and enabling by-laws, to facilitate the adoption of the prudent investor standard; 3. That the Deputy CAO/Treasurer works with the Region of Durham and interested local municipalities to explore whether there is sufficient support for establishing a new local Joint Investment Board (JIB) under the prudent investor standard; 4. That the Deputy CAO/Treasurer work with ONE Investment Inc. to facilitate the Municipality joining the ONE JIB if there is insufficient support for a local option; and 5. That all interested parties listed in Report FSD-036-23, and any delegations, be advised of Council's decision. Municipality of Clarington Report FSD-036-23 Report Overview Page 2 In March 2018, the Province of Ontario passed new regulations amending how municipalities in Ontario may invest. These included changes to the eligible investment list, the last time this list was amended, and the creation of regulations around the prudent investor standard for eligible municipalities. At the May 29, 2023, General Government Committee, members requested an update on the prudent investor standard and its applicability to the Municipality of Clarington. 1. Background Previous Reports to Council 1.1 At its meeting of May 29, 2023, the General Government Committee received Report FSD-025-23 Investments Annual Report. This report provided the Committee with a review of the 2022 investment performance and provided a minor update to the Investment Policy to update formatting and add reference to ESG Investing. 1.2 As part of the consideration of the Report, the Committee amended the resolution to add "That Staff report back on the prudent investor standard. 1.3 Staff have previously reported to Council on the prudent investor standard through the following reports: a. Report FND-011-18 Investment Policy provided information regarding the prudent investor standard as part of its investment policy review in 2018; b. Report FND-028-19 Prudent Investor Standard for Municipal Investments — Update and Options Analysis outlined the risks, benefits and options to join the prudent investor standard; c. Report FND-038-20 Investment Options Update provided an update on the prudent investment standard and recommended that Staff be directed to work with ONE JIB to become a member of the joint investment board and adopt the prudent investor standard. The Committee approved the report and recommendation. The report was referred from the November 23-24, 2020 Council meeting back to GGC for November 30, 2020. At this meeting, Staff were requested to present an education session on municipal investing options and regulations to GGC on January 25, 2021; Municipality of Clarington Report FSD-036-23 Page 3 d. At the General Government Committee Meeting of January 25, 2021, an education session was presented to Committee on Municipal Investing. The presentation was received for information; and e. Report FSD-035-21 Update to Municipal Investment Policy updated the investment policy to allow for more flexibility given changing economic conditions. The report indicated that the prudent investor standard remained Staff's recommendation, but the policy changes were to provide some additional flexibility within the legal list approach. The amendments to the policy were approved, and the report was received. 1.4 To summarize the above, there is currently no direction from Council to explore or adopt the prudent investor standard. The Municipality continues to follow the default legal list approach as required by the Municipal Act, 2001. Investment Regulations 1.5 Section 418 of the Municipal Act, 2001 states that municipalities may invest in prescribed securities, in accordance with the prescribed rules, money that it does not require immediately. 1.6 In 2017, the Municipal Act, 2001 was amended to add section 418.1, which states that a municipality may, in accordance with the section and regulations, invest money that it does not require immediately in any security. This created the prudent investor standard available to municipalities in Ontario. 1.7 On March 1, 2018, Ontario Regulation 438/97: Eligible Investments, Related Financial Agreements and Prudent Investment was amended to change certain eligible investments and add regulations for the prudent investor provision under section 418.1. The only change since that time was March 1, 2022, when an updated reference to the Credit Unions and Caisses Populaires Act was made (updating from the 1994 act to the 2020 act). 1.8 Since 2018, the economic environment has changed significantly, and the current limitations for eligible investments remain very restrictive. For example, under the regulations, the Municipality could own equity in a Canadian corporation such as Bell or Rogers (via the ONE Investment Inc pools) but could not own the debt of that same corporation unless it was A -rated or higher. It is odd that this can occur because equity ranks behind debt and is, therefore, riskier than debt. 1.9 There is currently no indication that these regulations are under review. Municipality of Clarington Page 4 Report FSD-036-23 2. Update on Current Prudent Investors City of Toronto 2.1 The City of Toronto was the first municipality in Ontario to be provided prudent investor standards through changes to the City of Toronto Act. The rules are similar to those in the Municipal Act, 2001 with the exception that the City of Toronto did not have an option on whether to adopt the standard or not. 2.2 The City of Toronto's Board consists of seven members, including the CFO/Treasurer of the City of Toronto. The members have a variety of financial backgrounds, with at least half indicating a professional designation in accounting or finance. 2.3 The City's Statement of Investment Policy was prepared under the prudent investor standard and could serve as an example for the Municipality of Clarington. The Board considered and approved the Investment Plan, which it follows to meet Council's approved policy. City of Barrie 2.4 The City of Barrie was the first municipality to adopt the prudent investor standard, in accordance with the Municipal Act, 2001, on its own. The City also created an Investment Board under the applicable legislation. The City's Investment Board held its first meeting on February 12, 2020. 2.5 The Board comprises five members, including the Treasurer; all other members are independent. The City's website does not provide biographical information on the members or their full names. 2.6 The City of Barrie has posted the Terms of Reference for the Investment Board on their website. The City of Barrie's Investment Policy is established under the prudent investor standard and could be an example used in developing the Municipality of Clarington's policy. ONE JIB 2.7 The ONE JIB had its first meeting on May 19, 2020, and was established as a Joint Investment Board under the Municipal Act, 2001 by the Town of Bracebridge, Town of Huntsville, Town of Innisfill, City of Kenora, District Municipality of Muskoka, and the Town of Whitby. 2.8 Since the creation of ONE JIB, the City of Quinte West, the Municipality of Neebing, and the City of Thunder Bay have become members. The Town of Aurora has approved Municipality of Clarington Report FSD-036-23 Page 5 adoption and is in the process of completing the required investment policies to become a member. 2.9 The ONE JIB Board consists of nine individuals, including one Treasurer, with a variety of backgrounds. Eight of the nine members are either Chartered Financial Analysts (CFA) or Chartered Professional Accountants (CPA) or both. The ninth has an MBA and is a Senior Fellow at the Institute of Municipal Finance and Governance at the University of Toronto and a former Treasurer of an upper -tier municipality. 2.10 Asa joint board, each member develops its own investment policy. The ONE JIB then approves a tailored investment plan to meet each municipality's needs in accordance with the applicable policy. Samples of the policies and plans are available in various meeting agendas and minutes of the ONE JIB. 2.11 It is important to highlight that ONE JIB is independent of ONE Investment Inc. ONE JIB uses the services of ONE Investment Inc. for administration but is not required to solely use the investment options of ONE Investment Inc. Further, the Deputy CAO/Treasurer is a board member of ONE Investment Inc. but is not a member of ONE JIB. City of Ottawa 2.12 On June 22, 2022, the City of Ottawa adopted the prudent investor regime by adopting By-law 2022-317. 2.13 The City of Ottawa established the Ottawa Investment Board on December 7, 2022. The Mandate of the Board is to facilitate the prudent investment of the Fund(s) including outsourcing of investment management to an Outsource Chief Investment Officer (OCIO). 2.14 The City of Ottawa's Terms of Reference of the Ottawa Investment Board are available online and could be adapted to meet Clarington's needs. The Board consists of four public members and the City of Ottawa Treasurer (as Chair). The Manager, Treasury is the non -voting secretary of the Board and there is a reserve public member appointed as well. The terms of reference identify staggered appointment terms to ensure that there is continuity of the Board, this may be a beneficial consideration if Clarington creates its own board. 2.15 Ottawa's structure differs from the City of Barrie's as it has an OCIO that acts as the executing fiduciary and manages the various service providers (investment custodian, plan custodian, legal advisors, auditors). The Board is still responsible for the management of the OCIO and ensuring that they act within the policy established by Ottawa Council. Municipality of Clarington Page 6 Report FSD-036-23 3. Options for Prudent Investor Eligibility for Standard 3.1 To establish an investment board individually for the Municipality, on the day that a by- law is passed by Council to adopt section 418.1 of the Municipal Act, the Municipality must have, in the opinion of the Treasurer, at least: • $100,000,000 in money and investments that it does not require immediately, or $50,000,000 in net financial assets as indicated in Schedule 70 of the most recent Financial Information Return supplied to the Ministry and posted on the Ministry's website on the day the municipality passes the by-law. 3.2 Alternatively, if the Municipality enters into an agreement to establish and invest through a Joint Investment Board with one or more other municipalities, all of the municipalities must have, in the opinion of each treasurer, a combined total of at least $100,000,000 in money and investments that the municipalities do not require immediately. This would establish a brand-new board. 3.3 Finally, the Municipality could enter into an agreement with an already established investment board or joint investment board. 3.4 As of December 31, 2022, the Municipality of Clarington had investments of over $158,100,000 and additional cash of over $66,200,000. In addition, the net financial assets were over $117,800,000; therefore, all three options for entering the prudent investor standard would be available to the Municipality. Create an Investment Board 3.5 An investment board is a municipal services board established by a municipality and must follow the requirements of a local board in the Municipal Act, 2001. 3.6 The Board must be given the control and management of the Municipality's investments by delegating the municipality's powers to make investments and the municipality's duties under section 418.1 of the Municipal Act. 3.7 An officer or employee of the Municipality, except for the Treasurer, may not be appointed as members of the Board. There are no restrictions on the minimum number of Board members, except that, in order to allow the Treasurer to sit on the Board, there must be at least four members. 3.8 It would be recommended that the board members be compensated for their expertise and service to the Board. A matrix of required skills should be included, and it would be Municipality of Clarington Report FSD-036-23 Page 7 advisable, given the care and control of investments, that persons with financial or investment backgrounds make up the Board. 3.9 Resources would be required to meet the requirements of the Municipal Act, 2001 including minutes, agendas, integrity commissioner requests, closed meeting investigators and other duties identified by the Clerk. 3.10 The Board could hire external investment managers, which may or may not include existing investment advisors to the Municipality. Similarly, the Board in Barrie hired internal staff to manage the investments within the parameters of the Board's investment plan. The City of Barrie has two dedicated investment staff, whereas the Municipality of Clarington currently does not have a dedicated investment resource. 3.11 If Council were to establish its own Investment Board, it would be advisable to hire a Manager, Investments to liaise with the Board to allow for certain internal investment management, management of the funds/investments required immediately (less than 18 months), work with external market managers to establish relationships and balance the portfolio and provide guidance to the Treasurer. Create a New Joint Investment Board 3.12 The Municipality could work with other municipalities, such as the Region of Durham and other local municipalities, to create its own Joint Investment Board. This board would be a joint municipal services board established jointly by all of the "founding" members. Additional members could join after the establishment. 3.13 There are several options in creating a joint board that could be considered. Staff from the Region of Durham, Municipality of Clarington, City of Pickering and Town of Ajax have had preliminary discussions regarding a joint board similar to the Durham Municipal Insurance Board. This board could utilize the services of ONE Investment as they know how to run this type of board. This option would allow this board to have more say, a local focus and partnership opportunities without recreating the wheel while leveraging existing expertise in the area. 3.14 Alternatively, a local board could be established that we have to administer as a group (similar to the current DMIP, where the Region's staff are the administrative support). This would require additional investments locally to establish the support structure and administer the day-to-day operations of the JIB. 3.15 Discussions were held between the Region of Durham and the Treasurers of each local municipality, within Durham, to determine the feasibility of establishing a local JIB for Durham municipalities. Regional Staff have sought direction from Regional Council to confirm interest in pursuing the prudent investment standard and to provide delegated authority to the Regional Treasurer to determine the best option for implementing the Municipality of Clarington Page 8 Report FSD-036-23 standard. Should Regional Council support pursuing the prudent investor standard, further discussions between all local municipalities will be undertaken to determine whether establishing a local JIB is the best option for implementation. 3.16 It should be noted that establishing a local JIB would involve a significant up -front cost and could take up to 24 months to implement, based on the experience of the ONE JIB. This option would require regulatory approvals from the Ontario Securities Commission, selecting members for the Investment Board, and completing the required by-laws, policies, and agreements. Join An Existing Joint Investment Board (ONE JIB) 3.17 There is only one current joint investment board operating in the Province of Ontario. The ONE JIB is currently seeking potential municipalities to join. 3.18 As ONE JIB is already established, the work required to set up the board, hire managers, and develop investment plans and policies is already complete. The Municipality of Clarington could take the existing documents as a starting point for developing Clarington's required policies and enabling by-laws. There would be no up- front costs required to join the JIB. 3.19 This option would be the cheapest and likely the shortest timeframe (approximately 6) to complete as it is the only "turn -key" option. The ONE JIB's expertise on its board may also be hard to duplicate on a stand-alone board or a new joint board. Status Quo 3.20 The default investment regulation is the legal list approach. This approach permits specific types of investments, which consist of relatively low -risk investments. 3.21 Over the past three years, Staff have started to take a more active approach to investment utilizing new vehicles such as Principal Protected Notes and bonds rather than the historical GIC approach. These investment products provide the ability for higher returns while still protecting the capital investment. There is an opportunity risk as the investments may only return the principal. 3.22 Remaining with the status quo restricts the Municipality's ability to diversify its investments against certain risks fully. The rate of return is significantly impacted by the health of financial institutions. The ability to hold corporate bonds and equities is significantly restricted and only available through ONE Investment pooled funds; the municipality does not have the ability to dictate which institution is held. 3.23 A benefit to the status quo is that there would be no additional costs, direct or in kind, to set up or join an investment board as we are already managing our investments this Municipality of Clarington Report FSD-036-23 Page 9 way. Conversely, a prudent investor standard would free up staff time dealing with investments as the management would be at the Board level. 4. Financial Considerations 4.1 One of the main financial considerations with the decision to proceed with exploring prudent investor is staff time. There are no external consultants required at this point and there are no costs to fees to pay to join an existing board. 4.2 Investing is hard to predict so it would not be reasonable to quantify an expected return as it would be dependent on the financial policy Council establishes, the financial plan the board approves, and the overall market. 4.3 A move to prudent investor opens opportunities to further diversify the Municipality's investment portfolio which is a key tool in risk mitigation. The Municipality would not be required to change any of the investments we currently hold as there is no obligation to invest outside the legal list. However, the prudent investor standard will provide a greater menu of options to choose from. 4.4 The prudent investor standard would allow access to investment professionals to provide internal advice that we may not otherwise be able to attract. The managers would also be able to devote more time and resources to the management of the investment pool than what we can provide. 4.5 A key item to consider is that if Council adopts the prudent investor standard, they are committed to this approach. You cannot go back from the requirements of prudent investor without ministerial approval, we must always be part of either a joint board or our own board. 5. Concurrence Not Applicable. 6. Conclusion It is respectfully recommended that Staff work to adopt the prudent investor standard. It is further recommended that Staff work with the Region of Durham and interested local municipalities to determine whether there is sufficient support for establishing a new local joint investment board. If there is insufficient support for a local board, staff are recommending that the Municipality join the ONE JIB to leverage the expertise of the already established Board. Municipality of Clarington Report FSD-036-23 Staff Contact: Trevor Pinn, CPA, CA, Deputy CAO/Treasurer, 905-623-3379 or tpinn@clarington.net. Attachments: Not Applicable Interested Parties: The following interested parties will be notified of Council's decision: • The Region of Durham and local municipalities; • ONE Investment Inc. Page 10