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HomeMy WebLinkAboutFIN-2025-088 - Surety Bonds RegulationFinancial Services Department www.kitchener.ca REPORT TO: Finance and Corporate Services Committee DATE OF MEETING: March 17, 2025 SUBMITTED BY: Katie Fischer, Director Financial Reporting & ERP Solutions, 519-904- 9354 PREPARED BY: Katie Fischer, Director Financial Reporting & ERP Solutions, 519-904- 9354 WARD(S) INVOLVED: All Wards DATE OF REPORT: March 3, 2025 REPORT NO.: FIN-2025-088 SUBJECT: Surety Bonds Regulation RECOMMENDATION: That the housekeeping amendments required on the City investment policy FIN-PLA- 605, attached as Appendix A to staff report FIN-2025-088, be approved. REPORT HIGHLIGHTS: The purpose of this report is to incorporate housekeeping amendments to the Investment Policy to reflect the new regulation associated with acceptance of surety bonds as securities under the Planning Act. This report supports the delivery of core services. BACKGROUND: On November 20, 2024, a new regulation O. Reg. 461/24: Surety Bonds - Section 70.3.1 of the Act came into force under the Planning Act R.S.O. 1990, c. P.13.This regulation provides land owners and those applying for planning approvals with the option of using surety bonds as securities required for development approvals. REPORT: Municipalities generally require securities as a condition of development approvals, such as part of a site plan or subdivision agreement, to ensure that monies to guarantee the installation of services will be available to the City when required.Traditionally, these securities were in the form of cash (via bank draft or certified cheque) or a letter of credit. Surety bonds are a new security option that the City is required to accept for development approvals under the Planning Act. Under the new regulation, the surety bond will provide a guaranteed payment to the municipality if the developer defaults in performing an obligation *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. guaranteed by the surety bond, within 15 business days after the municipality provides notice of default. Developers have indicated that surety bonds are more flexible and frees up capital, as compared to the traditional cash or letter of credit securities, which can thereby be used to build homes faster. -PLA-605 provides the approved form of securities that the City accepts, This policy is therefore recommended to be amended to reflect the new form of security that the City is required to accept. Additionally, staff have noted an unintentional omission previously in the policy and have proposed to add in the language associated with accepting cash securities as is current practice. The amended policy, with proposed changes tracked (shown in red font colour), is attached in Appendix A. STRATEGIC PLAN ALIGNMENT: This report supports the delivery of core services. FINANCIAL IMPLICATIONS: Capital Budget The recommendation has no impact on the Capital Budget. Operating Budget The recommendation has no impact on the Operating Budget. COMMUNITY ENGAGEMENT: INFORM council / committee meeting. PREVIOUS REPORTS/AUTHORITIES: FIN-PLA-605 Investment Policy Municipal Act, 2001, S.O. 2001, c.25 Planning Act, R.S.O. 1990, c. P.13 APPROVED BY: Jonathan Lautenbach, Chief Financial Officer ATTACHMENTS: Appendix A FIN-PLA-605 Investment Policy POLICY FIN-PLA-605 Investment Category Sub-category FIN - Finance FIN - Financial Planning Approval Type Department/Division Author and Position COUNCIL Financial Planning Senior Financial Analyst Date Approved Last Next Review Date Reviewed/Amended August 30, 2004 March 3, 2030 March 3, 2025 Related Policies or Procedures Municipal Act, 2001, S.O. 2001, c. 25, Part XIII, Section 418(1) Municipal Act, 2001, S.O. 2001, c. 25 O. Reg. 438/97: Eligible Investments, Related Financial Agreements and Prudent Investment Planning Act, R.S.O. 1990, c.P.13 O. Reg. 461/24: Surety Bonds - Section 70.3.1 of the Act 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. Definitions Asset-backed Securities struments, 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 ued by a corporation, incorporated under the laws of Canada or a province of Canada Credit Risk the issuer of an investment will default interest or principal payments Credit Union - community based financial co-operatives owned and controlled by members Page 1 of 10 Diversification security types by class, sector, maturity, and quality rating Dominion Bond Rating Service (DBRS) of institutions Forward Rate Agreement (FRA)d 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 in the value of a fixed income security caused by declining or rising interest rates Long-term investment ty is greater than two years. Liquidity ONE Fund Public Sector Group of Funds eligibility criteria defined by the regulations under the Municipal Act. It is operated by the Local Authorities Service Limited and CHUMS Financing Corporation Regulation Investments, Related Financial Agreements and Prudent Schedule I Bank he Bank Act. The voting shares must be widely held with no investor holding more than10% and foreign ownership limited to 25% Schedule II Bank the Bank Act. It may be wholly owned by non-residents Schedule III Bank gn institutions operating under the Bank Act under certain restrictions Short-term Investment Supranational Institutions 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 a fiduciary, trustee or agent in the administration of trust funds, estates and custodial arrangements Policy Scope 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. Page 2 of 10 Application Employees (Indicate below which categories apply: All employees, Permanent full-time, Temporary full-time, Continuous part- time, Casual, Probationary, Student, Management, Non-union) All employees Unions (Indicate below which categories apply: All Unions, CUPE 68 Civic, CUPE 68 Mechanics, CUPE 791, IATSE, IBEW, KPFFA) Click or tap here to enter text. Council Specified Positions: Click or tap here to enter text. Other: Local Boards and Advisory Committees Responsibilities: Council Under section 224(e) of the Municipal Act 2001, Council is re financial integrity of the municike 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 e affairs of the municipality for the purpose of ensuring the efficient and effective operati includes ensuring that processes are in place that support the effective administration related to investment of City funds. Chief Financial Officer (Treasurer) Under section 286(1) of the Municipal Act 2001, the treasurer is respons of the financial affairs of the municipality on behalf of and in the manner directed by 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 PlanningReporting & ERP Solutions As part of their role the Director of Financial PlanningReporting & ERP Solutions has been delegated authority and is responsible for: edures aligned with this policy effective investment decisions lated tasks to staff where appropriate Policy Content Objectives: Page 3 of 10 The primary objectives, in ordervestment activities shall 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 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 sufficiently liquid to enable the City 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: investment policy objectives and comply with all other aspects of this policy A and meet the minimum credit rating requirements and conditions as outlined in the regulation Page 4 of 10 They have not been specifically restricted or excluded in this policy stor 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. 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 regulation 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) The City of Kitchener may enter into in joint municipal investment 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 letters of credit are stored physically on site or electronically on City servers. Page 5 of 10 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 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 portfolio should be higher than 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 personal responsibility for an individual security 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. Page 6 of 10 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) Cash in the form of bank draft or certified cheque, at the discretion of the Treasurer. a)b) 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)c) 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. d) Surety Bond (in prescribed form acceptable to the City Solicitor) in accordance with the requirements of O. Reg. 461/24: Surety Bonds - Section 70.3.1 of the Act under the Planning Act, R.S.O. 1990, c. P.13. If a Letter of Credit or a Surety Bond was previously accepted in accordance with the above and the institution has since been downgraded and/or no longer meets the minimum Page 7 of 10 requirements, the City may request a new acceptable form of security. Results of Review No Edits Required Housekeeping Edits Substantial Edits Repeal/Replace Policy History Administrative and Housekeeping Changes Date Nature of Change I-605 policy template re-formatted to new numbering system and given number 2016-07-01 FIN-PLA-605 Substantial Changes Date Council/CLT Directive Resolution passed by Council 2008-04-07 Resolution passed by Council, see report FCS-12-189 2012-12-03 I-605 policy template was re-formatted to new numbering system and given 2016-06-01 number FIN-PLA-605 Resolution passed by Council, see report FCS-17-095 2017-06-05 Resolution passed by Council, see report FIN-2021-20 2021-04-26 Page 8 of 10 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 Moody 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 Page 9 of 10 Schedule B: 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 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, 10% Housing Corp., Hospital Incorporated Municipal Electrical Utilities None Financial 75% total Top 5 - 25%/issuer 75% major chartered banks Other Schedule I, II, III 20% banks, Trust Companies, Credit Unions Pooled Investment Funds 75% 10% limit on equity portfolio Page 10 of 10