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HomeMy WebLinkAboutFIN-2021-20 - Investment Policy Update Finance and Corporate Services Committee REPORT TO: DATE OF MEETING: 4/19/2021 SUBMITTED BY: Ryan Hagey, Director of Financial Planning PREPARED BY: Ryan Hagey, Director of Financial Planning WARD(S) INVOLVED: All Wards DATE OF REPORT: March 30, 2021 REPORT NO.: FIN -2021-20 SUBJECT: Investment Policy Update RECOMMENDATION: That the City investment policy FIN-PLA-605, attached as Appendix A to staff report FCS-17-095, be approved as amended. REPORT HIGHLIGHTS: The purpose of this report is to amend the Investment Policy based on content presented through the Long Term Financial Plan (LTFP) The main changes involve better role definitions, updating the standards for eligible investments, and exclusion from the Prudent Investor standard This report supports the delivery of core services. BACKGROUND: The City of Kitchener Investment Policy is governed by the Municipal Act and related regulations. The policy was last updated in 2017. The goal of the 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, and Trust Funds. The income resulting from the investment of City funds is one of the revenue sources available to reduce the financial burden on ratepayers. The objectives of the policy, in order of importance include: Adherence to statutory requirements with the Municipal Act and related regulations. Preservation of capital that the possibility of losing the invested funds is extremely unlikely. Liquidity sufficient funds availa they are due. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. Return on Investment - The investments will be managed to attain the maximum rate of return while meeting the other objectives. The policy also governs the quality of securities the City can accept from others, for example, Letters of Credit. As part of the comprehensive content presented during the Long Term Financial Plan change to using a multi-year average to budget for investment income, as well as content changes to the Investment Policy which would be approved at a later date. The attached Investment Policy is largely consistent with the version presented to Council during the LTFP discussions. REPORT: The proposed Investment Policy is in a revised format and includes changes to the way it is presented. The primary content changes include: Better role definitions (Section 3 Scope Responsibilities) Updated standards for eligible investments (Section 4 Eligible Investments a) Exclusion from the Prudent Investor Standard (Section 4 Eligible Investments b) Each of these is briefly discussed below. Better role definitions (Section 3 Scope Responsibilities) The previous policy did not include any role definitions. The updated version includes clear definitions from Council, the Chief Administrative Officer, the Chief Financial Officer, and the Director of Financial Planning. Having better role definitions in financial policies was one of the recommendations from the LTFP. Updated standards for eligible investments (Section 4 Eligible Investments a) The City is limited by the Municipal Act and associated regulation in terms of the kinds of/quality of instruments in which it can invest. Under the updated policy, the City will be Schedule A of the policy. Under the previous policy only investments quality were considered. preserving capital, but should also better meet the policy goal of improving return on investment. During the historically low interest rate environment caused by COVID-19, investment returns for items like GICs, and bonds have been significantly lower than normal. The change to the quality of investment options will also apply to letters of credit accepted by the City as financial security. This will help development within the City, as some a letter of credit from their preferred financial institution instead of a different institution that would require a higher premium for their services. The change investments in add represents little risk to the City and is consistent with policies in other municipalities. Exclusion from the Prudent Investor Standard (Section 4 Eligible Investments b) As noted above, the City is limited by the Municipal Act and associated regulation in terms of the kinds of/quality of instruments in which it can invest. In 2018, a new section (Prudent Investment, 418.1) was added to the Municipal Act. Under the Prudent Investor Standard, ould choose to invest in more volatile products that could potentially provide higher returns, but also have a greater degree of risk, such as investing in stocks traded on the open market. Staff are not recommending this option at this time for a number of reasons including: It is more risky, because investment options are unlimited o While the Municipal Act is quite restrictive and limits returns, it also almost guarantees that invested funds will not be lost due to bankruptcy It relinquishes all control to an investment board o A municipality must either establish or participate through an investment board, which cannot include members of council or municipal staff, with the exception of a municipal treasurer. This would significantly limit the ypes of investments being entered into and would represent a risk to the municipality It is permanent o Once a municipality opts into Prudent Investment it cannot opt back out If Council is interested in pursuing Prudent Investment, the policy decision recommended as part of this report could be revisited at some point in the future. STRATEGIC PLAN ALIGNMENT: This report supports the delivery of core services. FINANCIAL IMPLICATIONS: There are no immediate financial implications of the changes recommended in this report. ; however they would increase ult in improved investment yields. COMMUNITY ENGAGEMENT: INFORM the council / committee meeting. PREVIOUS REPORTS/AUTHORITIES: Investment Policy FIN-PLA-605 APPROVED BY: Jonathan Lautenbach, Chief Financial Officer ATTACHMENTS: 1. Investment Policy POLICY Policy No: FIN-PLA-605 Approval Date: Click here to enter a Policy Title: INVESTMENT date. Policy Type: COUNCIL Reviewed Date: August 2019 Category: Finance Next Review Date: August 2024 Reviewed Date: Click here to enter text. Sub-Category: Financial Planning Author: Senior Financial Analyst Last Amended: Click here to enter a date. Dept/Div: Finance/Financial Planning Replaces: Click here to enter text. Repealed: Click here to enter a date. Replaced by: Click here to enter text. 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. The purpose of the policy is to establish guidelines and controls related to the investment and holding of public funds to ensure funds are available when needed, while maximizing return. 2. DEFINITIONS: Asset-backed Securities short- or long-term debt instruments, which are backed by high quality assets (such as loans or mortgages) of the issuer, issued under Reg. 733(50)(1) of the Loans and Trust Corporations Act Commercial Paper short-term notes or drafts issued by a corporation, incorporated under the laws of Canada or a province of Canada 1 of 10 Policy No: Policy Title: Credit Risk risk to an investor that the issuer of an investment will default interest or principal payments 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 Dominion Bond Rating Service (DBRS) a service that assesses the credit rating of institutions Forward Rate Agreement (FRA) contract with a qualified financial institution allowing an investor to fix the interest rate to be received on an investment for a specified term beginning at an agreed to future date Interest rate risk risk of an increase or decrease in the value of a fixed income security caused by declining or rising interest rates Long-term investment investment whose term to maturity is greater than one year Liquidity ONE Fund Public Sector Group of Funds pooled investment fund meeting the eligibility criteria defined by the regulations under the Municipal Act. It is operated by the Local Authorities Service Limited and CHUMS Financing Corporation Regulation Ontario Regulation 438/97 related to section 418 and 418.1 of the Schedule I Bank a chartered bank operating under the Bank Act. The voting shares must be widely held with no investor holding more than10% and foreign ownership limited to 25% Schedule II Bank a chartered bank operating under the Bank Act. It may be wholly owned by non-residents Schedule III Bank a foreign bank branch of foreign institutions operating under the Bank Act under certain restrictions Short-term Investment investment whose term to maturity is two years or less 2 of 10 Policy No: Policy Title: Supranational Institutions an agency sponsored by highly rated foreign bank(s) or Governments issuing debt to fund loans in developing countries for large infrastructure projects. They may be owned or guaranteed by a consortium of national governments Trust Company financial institution which acts as a fiduciary, trustee or agent in the administration of trust funds, estates and custodial arrangements 3. SCOPE: POLICY APPLIES TO THE FOLLOWING: All Employees All Full-Time Employees All Union Management C.U.P.E. 68 Civic Non Union C.U.P.E. 68 Mechanics Temporary C.U.P.E. 791 Student I.B.E.W. 636 Part-Time Employees K.P.F.F.A. Specified Positions only:! Other:! Council Local Boards & Advisory Committees The investment policy applies to all financial assets of the City of Kitchener held within the general fund, capital fund, reserve funds, enterprise funds, and trust funds. R esponsibilities Council Under section 224(e) of the Municipal Act 2001, Council is responsible for ouncil is required to make decisions that adhere to the financial policies and procedures that have been put in place to provide investment income for the municipality. Chief Administrative Officer Under section 229(a) of the Municipal Act 2001, the Chief Administrative Officer is responsible municipality for the purpose of ensuring the efficient and effective operation of in place that support the effective administration related to investment of City funds. 3 of 10 Policy No: Policy Title: Chief Financial Officer (Treasurer) Under section 286(1) of the Municipal Act 2001, the treasurer is responsible for nicipality on behalf of and in the Monitoring adherence to statutory requirements Ensuring preservation of capital Monitoring interest rate risk Ensuring liquidity of investments Maximizing return on investments Director of Financial Planning As part of their role the Director of Financial Planning has been delegated authority and is responsible for: Establishing investment procedures aligned with this policy Monitoring cash flow to make effective investment decisions Ensuring proper controls are in place related to investments Delegating specific investment related tasks to staff where appropriate 4. POLICY CONTENT: Objectives be: a) Adherence to statutory requirements Investment activity will be governed by the Municipal Act as amended and limited to eligible investments under the Act and associated provincial regulations 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 including: Utilizing credit ratings to assess the overall credit risk related to a particular investment 4 of 10 Policy No: Policy Title: Diversifying the overall investment portfolio in accordance with this policy Properly assessing and mitigating risk associated with fluctuating interest rates for short- and long-term investments c) Liquidity to meet all operating and capital requirements that might be reasonably anticipated and to limit temporary borrowing requirements. 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 a) Section 418 of Ontario Regulation 438/97 provides a list of eligible securities that the municipality may invest in. The regulation includes securities such as bonds, debentures, promissory notes, and other evidence of indebtedness. The City of Kitchener will consider potential investment opportunities related to all eligible securities types included in the regulation provided that: comply with all other aspects of this policy Schedule A and meet the minimum credit rating requirements and conditions as outlined in the regulation They have not been specifically restricted or excluded in this policy b) Exclusions Prudent Investor Standard (Section 418.1) Part of Ontario Regulation 438/97 includes new prudent investor standards that allow municipalities that meet certain eligibility criteria the option to invest in a broader range of securities. The City of Kitchener has not opted-in to this new standard and as such, is only authorized to invest in securities described under section 418 and not section 418.1 of the regulation. 5 of 10 Policy No: Policy Title: c) The City may enter Forward Rate Agreements (FRA) to reduce the risk of future interest rate changes associated with known cash inflows provided that: The FRA is only executed with Schedule I, II, or III Banks whose minimum The term of any FRA must be less than 12 months An agreement must specify the forward amount, settlement date, forward interest rate, reference interest rate, as well as other pertinent details as prescribed in the regulation The agreement must be reviewed and approved by the Treasurer and comply with all other requirements of the regulation d) funds. Unrated municipalities are only permitted to invest in the following securities if made through the ONE Fund Program: Commercial paper Corporate debt and shares Asset-backed securities A Council approved bylaw is required prior to entering into any such agreement. Diversification The City of Kitchener will diversify its investments by security type and institution according to Schedule B. 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 and letters of credit are stored physically on site or electronically on City servers. 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 6 of 10 Policy No: Policy Title: City will not directly invest in securities maturing more than two years from the date of purchase. Reserve and Trust Funds may be invested in securities exceeding two years 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. Yields on the short-term general bank account. 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. Investment officers and employees exercising due diligence and acting in accordance with written procedures and this Policy shall be relieved of 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. 7 of 10 Policy No: Policy Title: 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) Reporting The Treasurer shall provide an investment report to Council at least twice per year. Authorized investment dealers Authorized investment dealers must be registered as Investment Dealers with the Ontario Securities Commission and be members of the Investment Dealers Association of Canada, and be approved by the Treasurer. Securities for subdivision and Development Servicing 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. The City of Kitchener shall accept only the following approved securities: a) 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 minimum DBRS rating A (low) (or equivalent). b) Letter of Credit (in prescribed form acceptable to the City Solicitor) issued by a Credit Union provided that: The Credit Union is verified as a member of the Central 1 Credit Union The Central 1 Credit Union is rated A (low) (or equivalent) or higher The Credit Union has its Head Office in Ontario The cumulative Letters of Credit do not exceed 1% of the Credit financial statements. 8 of 10 Policy No: Policy Title: 5. HISTORY OF POLICY CHANGES Administrative Updates 2016-07-01 - I-605 policy template re-formatted to new numbering system and given number FIN-PLA-605. Formal Amendments 2008-04-07 - Resolution passed by Council 2012-12-03 - Resolution passed by Council, see report FCS-12-189 2016-06-01 - I-605 policy template was re-formatted to new numbering system and given number FIN-PLA-605 2017-06-05 - Resolution passed by Council, see report FCS-17-095. 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 Quality DBRS S&P Fitch Superior: extremely strong capacity AAA AAA Aaa AAA to repay principal and interest AA (high) AA+ Aa1 AA+ AA AA Aa2 AA AA (low) AA- Aa3 AA- Good: strong capacity to repay A (high) A+ A1 A+ principal and interest A A A2 A A (low) A- A3 A- 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 Quality DBRS S&P Fitch Superior: extremely strong capacity to repay R-1 (high) A-1+ F-1+ principal and interest R-1 (middle) Good: strong capacity to repay principal and R-1 (low) A-1 F-1 interest 9 of 10 Policy No: Policy Title: Schedule B: INVESTMENT POLICY DIVERSIFICATION SUMMARY SHORT-TERM PORTFOLIO Sector Maximum Limits** Portfolio Share Government of Canada 100% None Provinces 100% 25%/issuer Municipalities 20% 10%/issuer Schedule I Banks 100% Top 5 major chartered banks: 75%/issuer*; Other Schedule I banks: 25%/issuer Schedule II Banks and 30% HSBC Canada: 25%; Schedule III Banks Other Schedule II and III banks: 10%/issuer Credit Unions and Trust 20% 10%/issuer Companies Pooled Investment Funds 100% None * The minimum primary bank account balance required to obtain a preferred rate is excluded from the limit per issuer. ** Compliance with limits is required within 30 days of non-compliance. INVESTMENT POLICY DIVERSIFICATION SUMMARY LONG-TERM PORTFOLIO Sector Maximum Limits Portfolio Share Government of Canada 100% None Governments of other 10% 5%/issuer countries and supranationals Provinces 50% 25%/issuer Municipalities 35% total 10%/issuer Region of Waterloo 35% Other municipalities 25% College, University, Housing 10% Corp., Hospital Incorporated Municipal 100% Common Shares Total issued to City at Electrical Utilities incorporation; Preferred Shares None Financial 75% total Top 5 - 25%/issuer Schedule I banks top 5 75% major chartered banks Other 10%/issuer Other Schedule I, II, III 20% banks, Trust Companies, Credit Unions Pooled Investment Funds 75% 10% limit on equity portfolio 10 of 10