HomeMy WebLinkAboutFCS-17-095 - Policy Review - Investment Policy
REPORT TO: Finance and Corporate Services Committee
DATE OF MEETING: May 29, 2017
SUBMITTED BY: Ryan Hagey, Director of Financial Planning
(519)741-2200 extension 7353
PREPARED BY: Bonnie Saunderson, Senior Financial Analyst
(519)741-2200 extension 7115
WARD(S) INVOLVED: All
DATE OF REPORT: April 10, 2017
REPORT NO.: FCS-17-095
SUBJECT: Policy Review Investment Policy
___________________________________________________________________________
RECOMMENDATION:
That the City investment policy FIN-PLA-605, attached as Appendix A to staff
report FCS-17-095, be approved as amended.
BACKGROUND:
The City of Kitchener Investment Policy is governed by the Municipal Act and related
regulations. The policy was last updated in November 2012.
The goal of the City Investment Policy is to set out the guiding principles for the purpose
of investing public funds. The policy applies to all financial assets of the City of
Kitchener including Operating, Capital, Reserve, andTrust Funds.The income
resulting from the investment of City funds is one of the revenue sources available to
reduce the burden on ratepayers.
The primary objective of the policy is the preservation of capital, which is accomplished
in three different ways. First, investments must meet minimum credit rating criteria,
thereby restricting investments to high quality instruments.Second, the types of
investments held are very low risk. Examples include Guaranteed Investment
Certificates (GICs), Money Market funds and Bonds.Third, investments are diversified.
This means that all the City funds cannot be held by a single institution. Theinvestment
policy establishes limits by sector as well as individual issuer to minimize potential
losses on individual securities.
The investment portfolio is designed to attain the maximum rate of return while meeting
the above objective and adhering to all statutory requirements.
The policy also governs the quality of securities the City can accept from others, for
example, Letters of Credit.
*** This information is available in accessible formats upon request. ***
Please call 519-741-2345 or TTY 1-866-969-9994 for assistance.
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REPORT:
From time to time it is necessary to recommend amendments to the investment policy in
order to react to market conditions, changes in legislation or operational needs and
requirements. The purpose of this report is to make 4 minor updates to portions of the
current investment policy and is not meant to be a comprehensive policy review.The 4
changes are:
1.Increase Limits for Schedule I & II Banks and Eligible Pooled Investment Funds
in the Short-Term (ST) and Long-Term (LT) Portfolios
2.Exclude the minimum primary bank account balance required to obtain a
preferred rate from the ST Portfolio
3.Requirements for Downgraded Letters of Credit
4.Increase Limits for Letters of Credit from Credit Unions
The proposed amendments have been recommended to permit greater flexibility within
the investments portfolio and improve returns, while maintaining policy goals.
For easier reference, updated policy sections are highlighted below. Also, in the revised
policy, the changes are in bold, italic type. The remainder of the report summarizes the
proposed updates.
Update 1: Increase Limits for Schedule I & II Banks and Eligible Pooled
Investment Funds in the ST and LT Portfolios
Policy Section: Schedules C & D
over the past few years. Staff have reviewed the current policy and are recommending
increases to the thresholds for Schedule I & II Banks generally, as well as for individual
institutions and Eligible Pooled Investment Funds.This could improve returns while
managing risk.
Schedule I Banks aredomestic banks or banks that are not a subsidiary of a
foreign bank.(e.g. Royal Bank of Canada, National Bank of Canada)
Schedule II Banks are foreign bank subsidiaries authorized under the Bank Actto
accept deposits within Canada. (e.g. HSBC Bank Canada)
An example of an Eligible Pooled Investment Fund is the One Investment
Program; a co-mingled investment program designed specifically for the
municipal and broader Ontario public sector. The One Investment Program
provides Ontariomunicipalities with access to a range of investment options
unavailable to them directly.
Staff have surveyed other local municipalities and found diversity in the limits used by
each municipality regarding Schedule I & II Banks and Eligible Pooled Investment
Funds for ST and LT investments. These are summarized in the table below.
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Table 1 Comparison of Local Municipal Investment Limits
MunicipalityShort-TermLong-Term
CITY OF -100% can be invested in Schedule I-75% limit on the top five chartered
KITCHENERBanks with no more than 25% in anySchedule I banks with no more
one of the top five major charteredthan 15% in any single institution
banks and 20% in any one of the
other Schedule I institutions
-30% limit on Schedule II Banks with-10% limit on other Schedule I
no more than 20% in HSBC and 10%Banks and Schedule II Banks with
in any of the other Schedule IIno more than 5% in any single
institutionsinstitution
-100% can be invested in Eligible-10% limit on Eligible Pooled
Pooled Investment FundsInvestment Funds
CITY OF -100% can be invested in any single-100% can be invested in any
CAMBRIDGESchedule I or II institutionsingle Schedule I or II institution
-100% can be invested inEligible-100% can be invested in Eligible
Pooled Investment FundsPooled Investment Funds
CITY OF -100% can be invested in Schedule I-100% can be invested in Schedule
WATERLOOBanks with no more than 20% in anyIBanks with no more than 20% in
single institutionany singleinstitution
-50% limit on Schedule II Banks with-50% limit on Schedule II Banks
no more than 20% in any singlewith no more than 20% in any
institutionsingle institution
-100% can be invested in Eligible-100% can be invested in Eligible
Pooled Investment FundsPooled Investment Funds with no
more than 10% in the Equity
portfolio
REGION OF -100% can remain inthe Schedule I-35%limit onSchedule I Bankswith
WATERLOOBank where the primary bank accountno more than 10%in any single
is held, and35% can be invested ininstitution
other Schedule I Bankswith no more
than 10%in any singleinstitution
-10% limit on Schedule II Banks with-10% limit on Schedule II Banks
no more than 5% in any singlewith no more than 5% in any single
institutioninstitution
-50% limit on Eligible Pooled-50% limit on Eligible Pooled
Investment FundsInvestment Funds
CITY OF -90% limit on Schedule I Banks with-75%limit on Schedule I Banks with
GUELPHno more than 75% in any singleno more than 75% in any single
institutioninstitution
-25% limit on Schedule II Banks with-25% limit on Schedule II Banks
no more than 25% in any singlewith no more than 25% in any
institutionsingle institution
-15%limit on Eligible Pooled-15%limit on Eligible Pooled
Investment FundsInvestment Funds
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Short-Term (ST) Investments
ST investments are typically held for one year or less. Typical ST investments for the
City include the primary bank account, high interest savings accounts, and GICs. Some
of these ST investments can be accessed at any time (e.g. bank accounts), while others
can only be accessed at the end of the investment term (e.g. GICs).
Increasing the ST investment limits somewhat will allow staff to earn slightly higher
rates of return on the ST portfolio while still maintaining flexibility and mitigating risk.
For instance, over the past three years GIC rates have averaged returns that are 0.25%
to invest more in GICs, which have higher returns than bank accounts, but are still very
secure investments.
Long-Term (LT) Investments
LT investments are typically held for more than one year. Typical LT investments for
the City include bonds, both from governments as well as financial institutions like
banks. As these bonds are meant to be held for a long period of time, they are typically
only cashed in at the time of maturity.
Increasing the LT investment limits somewhat will allow staff to earn slightly higher rates
of return on the LT portfolio while still maintaining flexibility and mitigating risk.
Schedule I & II Bank bonds offer better returns than government bonds, and are still
very secure investments. Although there is an increase in portfolio risk with purchasing
bank bonds instead of government bonds, Schedule I& II Bank debt generally hasa
very strong credit rating. It should be noted that The Municipal Act requires
municipalities to sell bank bonds if their rating falls below AA(low), and that bank debt
can only be purchased if it is rated AA(low) or better, thus limiting portfolio risk.
The chart below shows the difference in yields between government bonds and financial
institution bonds for the last four years. In each of the years, financial bonds have had
higher average rates of return than government bonds.
Table 3 Comparison of Government and Financial Institution Bond Yields
Type2016201520142013
GOVERNMENT1.55%1.28%1.66%2.18%
FINANCIAL2.22%2.14%2.31%2.85%
Spread0.67%0.86%0.65%0.67%
Notes on chart calculations:
Average yields are according to the FTSE TMX Canada Universe Bond Index*
Typical term of investments in the LT portfolio range from 2-10 years.
o Chart averages assume an equal weighting using the FTSE TMX Canada
ST Bond Index (1-5 years) and the FTSE TMX Canada Mid Term Bond
Index (5-10 years).
*FTSE TMX Global Debt Capital Markets (formerlyPC-Bond/ DEX) is the predominant provider
offixed incomeindices in Canada, best known for the Universe Bond Index.
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The ability to pool investment funds with other municipalities has the ability to enhance
yields on investments. The One Investment Program guarantees compliance with the
Municipal Act and the Eligible Investments Regulation. The Fund Managers are further
constrained by the Investment Guidelines that are found on the One Investment
Program website at www.onefunds.net/invest_guide.cfm.
The One Investment Program allows the City to purchase investments of any duration,
and opens up certain investments that otherwise would not be available Corporate
Bonds and Equity. Although the current policy does allow for investment through the
One Investment Program, it is subject to the rules laid out in section 4 b) regarding
Investment Pools. This section speaks to the due diligence that is required before
investing in the One Investment Program, which includes a Council approved by-law.
Given this information and that the Canadian banking system is among the strongest in
the world, staff recommend the ST and LT portfolio maximums be amended to increase
the holdings in Schedule I & II Banks and Eligible Pooled Investment Funds as per the
following chart. Increasing the percentages that can be held in Schedule I & II Banks
and Eligible Pooled Investment Funds gives increased investment income potential with
minimal risk.
Short-TermLong-Term
PROPOSED -100%can be invested in-75% limit on thetop five
LIMITSSchedule I Banks with no morechartered Schedule I Banks
than 35%in any one of the topwith no more than 25%in any
five major chartered banks andsingle institution
25% in any one of the other
Schedule I institutions
-30% limit on Schedule II Banks-20%limit on other Schedule I
with no more than 25%inBanks and Schedule II Banks
HSBC and 10% in any of thewith no more than 10%in any
other Schedule II institutionssingle institution
-100% can be invested in-75%limit on Eligible Pooled
Eligible Pooled InvestmentInvestment Funds with no
Fundsmore than 10% in the Equity
portfolio
Update 2: Exclude the minimum primary bank account balance required to obtain
a preferred rate from the ST Portfolio
Policy Section: Schedule C
operating and capital revenues and expenditures and its balance can vary greatly
throughout the year. As such, the City requires a significant balance in the account to
deal with regular day-to-day fluctuations. As part of the new five year banking
agreement from 2015, CIBC has offered a preferred interest rate on the entire bank
balance as long as s $40M. The preferred
interest rate is currently better than other on demand deposit options (e.g. high interest
savings accounts), so it is attractive to leave funds
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The investment policy outlines limits on how much the City can have invested with any
single
bank account (i.e. whether the primary bank account balance should be included or
excluded when calculating institution limits). This leads to ambiguity on how to treat the
primary bank account balance when determining institution limits.
Further complicating the issue is the fact that at various times throughout the year (e.g.
tax installment payment dates) the City receives an influx of cash and ends up having
more than 25% of its total ST investment portfolio with CIBC. Having significant
deposits in a short period of time makes it extremely difficult to be in compliance with
the policy at all times throughout the year, but staff believe this can be effectively
managed within a slightly longer timeframe of up to 30 days.
Neighbouring municipalities were surveyed on their treatment of their primary bank
account. The Cities of Waterloo and Cambridge indicated their policies do not
specifically address how the primary bank account should be treated with regard to
calculating institutional limits. However, the Region of Waterloo and the City of Guelph
exclude their entire primary bank account balance when calculating institution limits.
Staff recommend the ST portfolio maximums be amended to exclude the minimum
primary bank account balance required to obtain a preferred rate from the total ST
investment portfolio when calculating the minimum allowed per Schedule I bank, and
that compliance with maximum balances be required within 30 days.
This interpretation balances off the issues of diversity as well as administration. Going
with a lower balance will require the City to manage the ST investment portfolio daily,
onsibilities.
Update 3:Requirements for Downgraded Letters of Credit (LCs)
Policy Section: 11 (b)
The City of Kitchener often requires Letters of Credit (LCs) as security for Subdivision
and Development Servicing. The investment policy requires that issuers of LCs have a
superior credit rating to ensure that the City has access to funds in the event the
contractual obligations to the City are not fulfilled.
Recently, the City became aware that one of the LCs it was holding from an institution
no longer met the minimum rating requirement (it originally met the requirements, but
was since downgraded). The current policy wording does not address this
scenario.Staff surveyed other local municipalities and found that none of them have
wording in their investment policies to deal with such a situation.
Staff recommend adding wording that if the City becomes aware of a downgrade to a
rating, a new acceptable LC may be requested.
Update 4:Increase Limits for Letters of Credit (LCs) from Credit Unions
Policy Section: 11 (a) (ii)
The current investment policy states the City shall accept a Letter of Credit (LC) issued
by a Credit Union provided:
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1. The Credit Union is verified as a member of the Central 1 Credit Union
2. The Central 1 Credit Union (rated R-1(middle)) maintains or improves its
rating
3. The Credit Union has its Head Office in Ontario
4. The LC does not exceed $100,000
The current policy limit of $100,000 hinders the ability of developers to access LCs for
larger projects. Developers have experienced setbacks as the City has declined larger
LCs as security against site development works.
In order to both mitigate risk to the City, while also providing greater flexibility to accept
larger LCs from credit unions, staff recommend increasing the limit from a dollar cap of
$100,000 per LC to a cumulative LC limit of 1% of Tier 1 Capital as reported on the
ncial statements.
Tier 1 capital is composed of share capital and retained profits and is disclosed on the
audited annual financial statements. Tier 1 capital is also monitored closely by
regulators through capital rations and provides an assessment of b
scale and capital base. Increasing the limit for LCs from credit unions provides
increased ability for developers to drive economic growth with minimal risk to the City.
EMERGING ISSUES:
Investing in Credit Unions
The current investment policy states the City may hold ST investments with credit
unions that have a credit rating of R-1(middle or high). The Municipal Actand
associated regulation (O. Reg. 438/97) allows LT investments in credit unions with a
minimum credit rating of AA(low), however the legislationis silent on the minimum credit
rating required for credit union investments with a duration of less than two years.
Some municipalities are interpreting this silence to mean these credit union investments
are allowable, as they are not specifically restricted or disallowed anywhere in the
legislation. Recently, a credit union has approached the City to consider using a similar
interpretation of the legislation.
Although thelegislationdoes not specifically require a credit rating for ST investments in
credit unions, many investment advisors are of the opinion this is not intentional, but
simply an oversight and that following the legislation in this regard exposes
municipalities to greater risk. For these reasons, staffare not recommending a change
to the policy at this time.
Credit Ratings
The City may require a Letter of Credit to be held against the completion of required site
development works for development proposals.The current policy states the City shall
accept a Letter of Credit issued by a Schedule I bank, Schedule II bank, Schedule III
bank or Trust Company with a Dominion Bond Rating Service (DBRS) credit rating of
R-1(middle or high) or AAA, AA(low, middle or high) (or its equivalent if unavailable).
In October 2015, a credit union was downgraded by DBRS to a credit rating of A(low)
and no longer meets our policy requirements. However, this credit union still maintains
a AA credit rating with the other credit rating agencies allowed under the Municipal Act
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declined letters of credit from this credit union as security against site development
works as our current policy only allows an alternate credit rating if a DBRS credit rating
is unavailable. City Legal staff have received phone calls from developers and this
credit union to inquire why we are not accepting their letters of credit when they still
have an AA credit rating with the other credit rating agencies.
Of the four credit rating agencies mentioned above, DBRS is the only Canadian based
agency. Although the Municipal Act allows any of the credit rating agencies to be used,
ignoring the lowest credit rating and using a higher rating exposes the City to greater
risk. For these reasons, staff are not recommending a change to the current policy with
regard to credit ratings.
ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN:
vision through the delivery of core service.
FINANCIAL IMPLICATIONS:
There are no immediate financial implications of the changes recommended in this
report;
choices. Over time, this could result in improved investment yields.
COMMUNITY ENGAGEMENT:
INFORM
advance of the council / committee meeting.
ACKNOWLEDGED BY:
Dan Chapman, Deputy CAO (Finance and Corporate Services)
ATTACHMENTS:
Appendix A Proposed Investment Policy
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POLICY Policy No:FIN-PLA-605
Approval Date:August 30, 2004
Policy Title:INVESTMENT POLICY
Policy Type:COUNCILReviewed Date:May2017
Next Review Date:May2022
Category:Finance
Sub-Category:Financial Planning
Amended:April 7, 2008
Author:Bonnie Saunderson, Senior
Financial Analyst
Replaces:I-605
Dept/Div:Finance & Corporate Services
Repealed:May 29, 2017
Department/Financial Planning
Replacedby:FIN-PLA-605
Related Policies, Procedures and/or Guidelines:
Municipal Act, 2001,S.O. 2001, c. 25, Part XIII, Section 418(1)
Municipal Act, 2001, Ontario Regulation 438/97
1.POLICY PURPOSE:
It is the policy of the City of Kitchener to invest public funds in a manner that will
provide the highest investment return while protecting and preserving capital,
maintaining liquidity, meeting the daily cash flow demands of the City and
conforming to all legislation governing the investment of public funds.
2.DEFINITIONS:
Short or long term debt instruments, which are backed by
Asset-backed
high quality assets (such as loans or mortgages) of the
Securities:
issuer, issued under Reg. 733 (50)(1) of the Loans and Trust
Corporations Act.
Commercial Short term notes or drafts issued by a corporation,
Paper:incorporated under the laws of Canada or a province of
Canada.
Credit Union:Community based financial co-operatives owned and
controlled by members.
Diversification:Process of investing in a range of security types by class,
sector, maturity, and quality rating.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
DBRS:Dominion Bond Rating Service is a service that assesses the
credit rating of institutions.
Forward Rate Contract with a qualified financial institution allowing an
Agreement investor to fix the interest rate to be received on an
(FRA):investment for a specified term beginning at an agreed to
future date.
Interest rate Risk of an increase or decrease in the value of a fixed-
risk:income security caused by declining or rising interest rates.
Long-term Investment whose term to maturity is greater than one year.
investment:
Liquidity:convertibility into cash.
The One Pooled investment fund meeting the eligibility criteria defined
Investment by the regulations under the Municipal Act. It is operated by
Program:the Local Authorities Service Limited and CHUMS Financing
Corporation.
Schedule I A chartered bank operating under the Bank Act. The voting
Bank:shares must be widely held with no investor holding more
than 10% and foreign ownership limited to 25%.
Schedule II A chartered bank operating under the Bank Act. Schedule II
Bank:banks may be wholly owned by non-residents.
Schedule III A foreign bank branch of foreign institutions operating under
Bank:the Bank Act under certain restrictions.
Short-term Investment whose term to maturity is one year orless.
investment:
Supranational An agency sponsored by highly rated foreign bank(s) or
Institution:governments issuing debt to fund loans in developing
countries for large infrastructure projects. Supranational
institutions may be owned or guaranteed by a consortium of
national governments.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
Trust Financial institution which acts as a fiduciary,trusteeor
Company:agentin the administration of trust funds,estatesand
custodial arrangements.
3. SCOPE:
POLICY APPLIES TO THE FOLLOWING:
All Employees
ManagementPermanent Full-Time Employees
Permanent Full-Time Non UnionPermanent Full-Time C.U.P.E. 791
TemporaryPart-Time Non-Union
StudentPermanent Full-Time Union
Continuous Part-Time EmployeesPart-Time Employees
Continuous Part-Time Non-UnionContinuous Part-Time Union
Council Local Boards & Advisory Committees
Specified Positions Only:
The investment policy applies to all financial assets of the City of Kitchener held
within the following:
(a) General Fund
(b) Capital Fund
(c) Reserve Funds
(d) Enterprise Funds
(e) Trust Funds
4. POLICY CONTENT:
OBJECTIVES
The primary objectives, in order of priority, of the City's investment activities shall
be:
(a) Adherence to statutory requirements
Investment activity will be governed by the Municipal Act as amended.
Investments will be limited to investments eligible under the Act and
related subsequent provincial regulations.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
OBJECTIVES
(b) Preservation of capital
Safety of principal is a key objective of the investment program.
Investments of the City shall be undertaken in a manner that seeks to
ensure the preservation of capital in the overall portfolio. This is
accomplished as follows:
(i) Credit Risk:
1. Credit Ratings
All long-term non-government investments will be in
securities of borrowers with a minimum Dominion Bond
Rating System (DBRS) rating of AA(low) (or its equivalent
rating if unavailable). Schedule A contains the equivalent
ratings. All short-term investments will be in securities with a
minimum DBRS rating of R-1(middle) (or its equivalent rating
if unavailable). Schedule B contains the equivalent ratings.
2. Diversification
Investments must adhere to sector and individual issuer
limitations established under Schedule C to minimize
potential losses on individual securities.
(ii) Interest Rate Risk
The following measures will minimize the risk associated with
fluctuating interest rates:
Structure portfolio so securities mature to meet ongoing cash
requirements to reduce the need to sell securities on the
open market prior to maturity
Primarily invest operating funds in shorter-term securities or
investment pools
Diversifying longer-term holdings to match term exposures to
requirements of underlying funds and to mitigate effects of
interest rate volatility
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
OBJECTIVES
(c) Liquidity
The City's investment portfolio will remain sufficiently liquid to enable the
City to meet all operating and capital requirements that might be
reasonably anticipated and to limit temporary borrowing requirements.
Where possible, securities are selected to mature concurrent with
projected cash demands. As these cannot be fully anticipated, the
portfolio shall consist largely of securities with an active secondary or
resale market.
(d) Return on Investments
The investment portfolio shall be designed to attain the maximum rate of
return while meeting the above three objectives.
ELIGIBLE INVESTMENTS
The City of Kitchener may invest in securities expressed and payable in
Canadian dollars issued or guaranteed by issuers identified in Schedule E and
Schedule F subject to the restrictions, limitations and terms in Schedule C and
Schedule D.
(a) Forward Rate Agreements
A Forward Rate Agreement (FRA) is an agreement to make an investment
on a future date in a security in order to minimize the cost or risk
associated with the investment because of fluctuations in interest rates.
The agreement fixes the interest rate that will be paid on an investment at
a future date when know cash inflows such as tax payments will be
received. The agreement is subject to the conditions set out below:
(i) Conditions
1. The Agreement is made with a bank listed as Schedule I, II
or III in the Bank Act (Canada) whose long-term debt
obligations h
equivalent.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
(a)
(i) Conditions
2. Agreement shall specify the forward amount, settlement day,
forward rate of interest, and reference rate of interest, and
shall require a settlement payment on settlement rate if the
forward and reference rate of interest are different.
3. All forward amounts under other forward rate agreements
shall not exceed the total amount of the principal of the
investment.
4. Settlement day is within 12 months of the day on which the
agreement is executed.
5. Settlement shall not exceed the difference between the
amount of interest that would be payable on the forward
amount calculated at the forward rate of interest and the
amount that would be payable calculated at the reference
rate of interest.
(ii) Use of Forward Rates by the City
The City may enter into Forward Rate Agreements to reduce the
risk of future interest rate changes associated with known cash
inflows. A report analyzing the risks and return profile of the
transaction, the risk exposure to the City without the FRA and
specific risk control measures must be approved by the Treasurer
prior to entering into a FRA agreement. The FRA may only be
executed with Schedule I, II or III Banks whose minimum DBRS
rating is AA(low) (or its equivalent if unavailable). The term of any
FRA must be less than 12 months and comply with the issuer limits
in Schedule C.
The FRA must specify the forward amount, settlement date,
forward interest rate, reference rate of interest and schedule of
approximate payments/costs to or by the City should the reference
and forward rate differ.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
(b) Investment Pools
Council must approve a by-law which authorizes the City of Kitchener to
enter into an Agency Agreement for the purpose of participation in joint
municipal investment funds. Unrated municipalities are only permitted to
invest in the following securities if made through The One Investment
Program: commercial paper, corporate debt and shares, and asset-
backed securities.
A thorough investigation of the pool/fund is required prior to Council
approval and on a continual basis. Investigation should include the
following:
(i) a written statement of investment policies and objectives
(ii) a description of eligible investments
(iii) a description of who may invest in the program, how often, what
size deposit and withdrawal are allowed
(iv) a description of how earnings are allocated and distributed
(v) a description of how investments are safeguarded and how often
the investments are priced and the program audited
(vi) a schedule for receiving statements and portfolio listings
(vii) a fee schedule, and when and how it is assessed
DIVERSIFICATION
The City of Kitchener will diversify its investments by security type and institution
according to Schedules C and D. These restrictions apply at the time an
investment is made. At specific times, portfolio limitations may be exceeded as a
result of timing of individual instrument maturities.
SAFEKEEPING AND CUSTODY
Investments are held in safekeeping either in the City's safety deposit box or by
the vendor financial institution.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
TERM OF INVESTMENTS
To the extent possible, the City will attempt to match its investments with
anticipated cash flow requirements. Unless matched to a specific cash flow, the
City will not directly invest in securities maturing more than 365 days from the
date of purchase.
Reserve and Trust Funds may be invested in securities exceeding 365 days if
the maturity of such investments is made to coincide as nearly as possible with
the expected use of the funds.
PERFORMANCE STANDARDS
The investment portfolio shall be designed with the objective of obtaining a rate
of return throughout budgetary and economic cycles commensurate with the
investment risk constraints and the cash flow needs.
(a) Yields
Yields on the short-term portfoliocontains securities with a term to
maturity of 1 year or less on the purchase date--should be higher than the
rate given by the City's bank for the City's general bank account.
Bond indices used as long-term benchmarks calculate returns based on
prevailing market values. As the accounting system maintains only
purchase cost. Since the comparison of cost based returns to market
returns is not meaningful, there is no benchmark for the long-term
portfolio.
STANDARD OF CARE
(a) Prudence
Investments shall be made with judgment and care under circumstances
then prevailing, which persons of prudence, discretion and intelligence
exercise in the management of their own affairs, not for speculation, but
for investment, considering the probable safety of their capital as well as
the probable income to be derived.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
STANDARD OF CARE
(a) Prudence
Investment officers and employees exercising due diligence and acting in
accordance with written procedures and this Policy shall be relieved of
personal responsibility for an
price changes, provided deviations from expectations are reported in a
timely fashion and the liquidation or the sale of securities are carried out in
accordance with the terms of the Policy.
(b) Ethics and Conflicts of Interest
Officers and employees involved in the investment process shall refrain
from personal business activity that could conflict with the proper
execution and management of the investment program, or that could
impair their ability to make impartial decisions. Employees and investment
officials shall disclose any material interests in financial institutions with
which they conduct business. They shall further disclose any personal
financial/investment positions that could be related to the performance of
the investment portfolio. Officers and employees shall not undertake
personal transactions with the same individuals with whom business is
conducted on behalf of the Corporation.
(c) Internal Control
The Treasurer shall ensure adequate internal controls over investment
policies and procedures. The Treasurer shall establish a process of
independent review by an internal or external auditor.
(d) Delegation of Authority
The investment policy and any amendments must be adopted by City
Council. The City Treasurer will have overall responsibility for the prudent
pursuant to the requirements of the Municipal Act. The Director of
Financial Planning will be responsible for and have the authority for the
implementation of the investment program and the establishment of
written investment procedures to provide for the effective control and
management of investments. These procedures require explicit
delegation of authority to persons responsible for investment transactions.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
STANDARD OF CARE
(d) Delegation of Authority
No person may engage in an investment transaction except as
provided under the terms of this policy and the procedures
established by the Director of Financial Planning.
(e) Reporting
The Treasurer shall provide an investment report to Council at least twice
per year. The investment report should include:
(i) statement by Treasurer whether all investments made in
accordance with policy,
(ii) amount and percentage of portfolio represented by each authorized
investment category,
(iii) monthly short term investment balances,
(iv) long term investment balances,
(v) earned rates,
(vi) proportion of total
short term securities,
(vii)
own securities, if any.
AUTHORIZED INVESTMENT DEALERS
Authorized investment dealers must be registered as Investment Dealers with the
Ontario Securities Commission and members of the Investment Dealers
Association of Canada, and approved by the Treasurer.
SECURITIES FOR SUBDIVISION AND DEVELOPMENT SERVICING
This policy relating to securities required for Subdivision and Development
Servicing has been designed to provide adequate protection to the City of
Kitchener and to be fair and reasonable to developers and other interested
parties.
The objective of the securities policy is to ensure that monies to guarantee the
installation of services will be available to the City when required.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
SECURITIES FOR SUBDIVISION AND DEVELOPMENT SERVICING
(a) Permitted securities
The City of Kitchener shall accept only the following approved securities:
(i) Letter of Credit (in prescribed form acceptable to the City Solicitor)
issued by a Schedule I bank, Schedule II bank, Schedule III bank
or Trust Company with a DBRS rating of R-1(middle or high) or
AAA , AA(low, middle or high) (or its equivalent if unavailable).
(ii) Letter of Credit (in prescribed form acceptable to the City Solicitor)
issued by a Credit Union provided that:
1. The Credit Union is verified as a member of the Central 1
Credit Union
2. The Central 1 Credit Union (rated R-1(middle)) maintains or
improves on their rating
3. The Credit Union has its Head Office in Ontario
4. The cumulative Letters of Credit do not exceed 1% of
(b) Credit Ratings
If a Letter of Credit was previously accepted in accordance with
paragraph 11.(a)(i) above, and the institution has since been
downgraded and no longer meets the minimum requirements, the
City may request a new acceptable Letter of Credit.
Refer to attached Schedules A F for credit ratings, portfolio limits and eligible
investments.
5. HISTORY OF POLICY CHANGES
Administrative Updates
No administrative history available.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
Formal Amendments
2012-12-03 - I-605 was repealed and replaced.
2016-06-01 - Policy template was re-formatted and given new numbering system.
2017-05-29 - I-605 was repealed and replaced and given new policy number.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
SCHEDULE A: LONG-TERM CREDIT RATINGS
The following chart compares the different scales for long-term securities used by four
rating agencies recognized in Ontario Regulation 438/97.
Credit QualityDBRSS&PFitch
Superior: extremely strong capacity to AAAAAAAaaAAA
repay principal and interestAA(high)AA+Aa1AA+
AAAAAa2AA
AA(low)AA-Aa3AA-
Good: strong capacity to repay principal A(high)A+A1A+
and interestAAA2A
A(low)A-A3A-
SCHEDULE B: SHORT-TERM CREDIT RATINGS
The following chart compares the different scales for short-term securities used by three
rating agencies recognized in Ontario Regulation 438/97.
Credit QualityDBRSS&PFitch
Superior: extremely strong capacity to R-1(high)A-1+F-1+
repay principal and interestR-1(middle)
Good: strong capacity to repay principal R-1(low)A-1F-1
and interest
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
SCHEDULE C: INVESTMENT POLICY SUMMARY SHORT-TERM
PORTFOLIO
Maximum
SectorCredit RatingPortfolio Limit
Share
Government of 100%
Canada
ProvincesR-1 middle, 100%25%/issuer
high
MunicipalitiesR-1 middle, 20%10%/issuer
high
Schedule I banksR-1 middle, 100%For top 5 major chartered
highbanks:35% / issuer*
Other Schedule I banks: 25% /
issuer
Schedule II banks R-1 middle, 30%HSBC Canada: 25% / issuer
and Schedule III highOther Schedule II and III
banksbanks: 10%/issuer
Credit Unions and R-1 middle, 20%10%/issuer
Trust Companieshigh
Eligible Pooled 100%
Investment Funds
*The minimum primary bank account balance required to obtain a preferred rate
is excluded from the 35% limit per issuer.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
SCHEDULE D: INVESTMENT POLICY SUMMARY LONG-TERM
PORTFOLIO
Maximum
SectorDBRS Credit RatingPortfolio Limit
Share
Government of Canada100%
Governments of other AAA10%5%/issuer
Countries and
Supranationals
ProvincialAAA50%25%/issuer
AA(high), AA, AA(low) 25%/issuer
A(high), A, A(low)10%/issuer
Municipal
Region of Waterloo35%
Other municipalities25%10%/issuer
Including Infrastructure
Ontario (IO), Municipal
Finance Authority of
British Columbia
(BCMFA),boards and
Conservationauthorities
College, University, AAA10%5%/issuer
Housing Corp. & HospitalAA(high), AA, AA(low)
Municipal Total35%
Debt in Incorporated 100%Total issued
Municipal Electrical to City at
Utilitiesincorporation
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
SCHEDULE D: INVESTMENT POLICY SUMMARY LONG-TERM
Maximum
SectorDBRS Credit RatingPortfolio Limit
Share
Financial
Schedule I bankstop 5 AAA75%25% / issuer
major chartered banksAA(high), AA, AA(low)
Other Schedule I, AAA20%10% / issuer
ScheduleII and Schedule AA(high), AA, AA(low)
III Banks, Loans and Trust
Companies, Credit Unions
Financial Total75%
Eligible Pooled Investment 75%10% limit on
FundsEquity
portfolio
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
SCHEDULE E:SUMMARY OF ELIGIBLE DEBT INVESTMENTS AND
CONDITIONS
Bonds, Debentures, Promissory Notes or Other Evidences of Indebtedness
IssuerConditions
Canada or province or territory of
Canada
Agency of Canada or a province
or territory of Canada
Country other than CanadaMinimum DBRS rating of AA(low) or its
equivalent.
When an investment falls below this
standard, the municipality shall sell the
investment within 90 days.
Municipality in Canada
School board or similar entity in Money raised is to be used for school
Canadapurposes.
Local board as defined in the
Municipal Affairs Act(not including
a school board or a municipality)
Conservation authority
established under the
Conservation Authorities Act
Municipal Finance Authority of
British Columbia
Ontario Infrastructure Projects
Corporation (IO)
Post-secondary education Minimum DBRS rating of AA(low) or its
institution as defined in s.3 of the equivalent.
Post-Secondary Choice and
Excellence Act, 2000 or Board of
When an investment falls below this
Governors of college of applied standard, the municipality shall sell the
arts and technologyinvestment within 90 days.
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
SCHEDULE E:SUMMARY OF ELIGIBLE DEBT INVESTMENTS AND
CONDITIONS
Bonds, Debentures, Promissory Notes or Other Evidences of Indebtedness
IssuerConditions
Board of a Public Hospital within Minimum DBRS rating of AA(low) or its
the meaning of the Public equivalent.
Hospitals Act
When an investment falls below this
standard, the municipality shall sell the
investment within 90 days.
Non-profit housing corporation as Minimum DBRS rating of AA(low) or its
defined in s.13 of Housing
equivalent.
Development Act or local housing
Corporation as defined in s.2 of When an investment falls below this
Social Housing Reform Act, 2000standard,the municipality shall sell the
investment within 90 days.
Bank Defined As Schedule I, II or Minimum DBRS rating of AA(low) or its
III by the Bank Act
equivalent.
Loan Corporation or Trust Minimum DBRS rating of AA(low) or its
Company, Credit Union or equivalent.
League, Province of Ontario
Savings Office
International Bank for
Reconstruction and Development
(IBRD)
Supranational financial institution Minimum DBRS rating of AAA or its equivalent.
or government organization other
than International Bank for When an investment falls below this
Reconstruction and Development standard, the municipality shall sell the
(IBRD)investment within 90 days.
Asset-backed securities made Unrated Municipalities shall invest through The
under Loanand Trust
One Investment Program.
Corporations Act
Corporation incorporated under Unrated Municipalities shall invest through The
the laws of Canada or a province One Investment Program.
of Canada
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
SCHEDULE E:SUMMARY OF ELIGIBLE DEBT INVESTMENTS AND
CONDITIONS
Bonds, Debentures, Promissory Notes or Other Evidences of Indebtedness
IssuerConditions
Corporation incorporated under As long as it is held, it ranks at least equally in
s.142of the Electricity Act, 1998payment of principal and debt with all
unsecured debt.
Total debt investment after the proposed
investment is not greater than the total debt
investment in such a corporation prior to the
proposed investment.
May not be held longer than 10 years
Above conditions do not apply if acquired
through a transfer by-law or otherwise under
that Act.
Source: Municipal Act, 2001 Ontario Regulation 438/97, Last amendment: O. Reg.
39/07
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Policy No:FIN-PLA-605
Policy Title:INVESTMENT POLICY
SCHEDULE F:SUMMARY OF ELIGIBLE SHARE INVESTMENTS AND
CONDITIONS
IssuerConditions
Corporation incorporated under Only permitted through The One Investment
the laws of Canada or a province Programwiththe following exceptions:
of Canada
Securities of a corporation if the
municipality first acquires the securities
as a gift in a will and the gift is not made
for a charitable purpose. However, the
securities must be sold within 90 days
after it vests in the municipality
Shares of a corporation if:
o the corporation has a debt payable to
the municipality
o under a court order, the corporation
has received protection from its
creditors
o the acquisition of the shares in lieu of
the debt is authorized by the court
order, and
o the treasurer of the municipality is of
the opinion that the debt will be
uncollectible by the municipality
unless the debt is converted to shares
under the court order
Source: Municipal Act, 2001 Ontario Regulation 438/97, Last amendment: O. Reg.
39/07
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