Finance and Corporate Services Committee. Bonnie Saunderson, Senior Financial Analyst (519) extension 7115

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1 REPORT TO: Finance and Corporate Services Committee DATE OF MEETING: May 29, 2017 SUBMITTED BY: PREPARED BY: WARD(S) INVOLVED: Ryan Hagey, Director of Financial Planning (519) extension 7353 Bonnie Saunderson, Senior Financial Analyst (519) extension 7115 All DATE OF REPORT: April 10, 2017 REPORT NO.: FCS SUBJECT: Policy Review Investment Policy RECOMMENDATION: That the City investment policy, attached as Appendix A to staff report FCS , 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 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, and Trust 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. The investment 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 or TTY for assistance. 4-1

2 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 The current low interest rate environment has limited the City s investment opportunities 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 are domestic 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 Act to 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 Ontario municipalities 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. 4-2

3 Table 1 Comparison of Local Municipal Investment Limits Municipality Short-Term Long-Term CITY OF KITCHENER CITY OF CAMBRIDGE CITY OF WATERLOO REGION OF WATERLOO CITY OF GUELPH - 100% can be invested in Schedule I Banks with no more than 25% in any one of the top five major chartered banks and 20% in any one of the other Schedule I institutions - 30% limit on Schedule II Banks with no more than 20% in HSBC and 10% in any of the other Schedule II institutions - 100% can be invested in Eligible Pooled Investment Funds - 100% can be invested in any single Schedule I or II institution - 100% can be invested in Eligible Pooled Investment Funds - 100% can be invested in Schedule I Banks with no more than 20% in any single institution - 50% limit on Schedule II Banks with no more than 20% in any single institution - 100% can be invested in Eligible Pooled Investment Funds - 100% can remain in the Schedule I Bank where the primary bank account is held, and 35% can be invested in other Schedule I Banks with no more than 10% in any single institution - 10% limit on Schedule II Banks with no more than 5% in any single institution - 50% limit on Eligible Pooled Investment Funds - 90% limit on Schedule I Banks with no more than 75% in any single institution - 25% limit on Schedule II Banks with no more than 25% in any single institution - 15% limit on Eligible Pooled Investment Funds - 75% limit on the top five chartered Schedule I banks with no more than 15% in any single institution - 10% limit on other Schedule I Banks and Schedule II Banks with no more than 5% in any single institution - 10% limit on Eligible Pooled Investment Funds - 100% can be invested in any single Schedule I or II institution - 100% can be invested in Eligible Pooled Investment Funds - 100% can be invested in Schedule I Banks with no more than 20% in any single institution - 50% limit on Schedule II Banks with no more than 20% in any single institution - 100% can be invested in Eligible Pooled Investment Funds with no more than 10% in the Equity portfolio - 35% limit on Schedule I Banks with no more than 10% in any single institution - 10% limit on Schedule II Banks with no more than 5% in any single institution - 50% limit on Eligible Pooled Investment Funds - 75% limit on Schedule I Banks with no more than 75% in any single institution - 25% limit on Schedule II Banks with no more than 25% in any single institution - 15% limit on Eligible Pooled Investment Funds 4-3

4 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% higher than the City s primary bank account. Increasing investment limits will allow staff 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 has a 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 Type GOVERNMENT 1.55% 1.28% 1.66% 2.18% FINANCIAL 2.22% 2.14% 2.31% 2.85% Spread 0.67% 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 (formerly PC-Bond / DEX) is the predominant provider of fixed income indices in Canada, best known for the Universe Bond Index. 4-4

5 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 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. PROPOSED LIMITS Short-Term - 100% can be invested in Schedule I Banks with no more than 35% in any one of the top five major chartered banks and 25% in any one of the other Schedule I institutions - 30% limit on Schedule II Banks with no more than 25% in HSBC and 10% in any of the other Schedule II institutions - 100% can be invested in Eligible Pooled Investment Funds Long-Term - 75% limit on the top five chartered Schedule I Banks with no more than 25% in any single institution - 20% limit on other Schedule I Banks and Schedule II Banks with no more than 10% in any single institution - 75% limit on Eligible Pooled Investment Funds with no more 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 The City s primary bank account is currently with CIBC. This account is used for normal 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 the City s primary bank balance exceeds $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 in the City s primary bank account. 4-5

6 The investment policy outlines limits on how much the City can have invested with any single institution, but doesn t explicitly say anything about how to treat the City s primary 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, which isn t always possible given other responsibilities. 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 financial institution s 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: 4-6

7 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 credit union s most recent audited financial 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 both the credit unions 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 Act and associated regulation (O. Reg. 438/97) allows LT investments in credit unions with a minimum credit rating of AA(low), however the legislation is 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 the legislation does 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, staff are 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 4-7

8 (Standard & Poors, Moody s Investors Service, and Fitch Ratings). The City has 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: The recommendation of this report supports the achievement of the city s strategic vision through the delivery of core service. FINANCIAL IMPLICATIONS: There are no immediate financial implications of the changes recommended in this report; however they would increase the City s flexibility with respect to investment choices. Over time, this could result in improved investment yields. COMMUNITY ENGAGEMENT: INFORM This report has been posted to the City s website with the agenda in advance of the council / committee meeting. ACKNOWLEDGED BY: Dan Chapman, Deputy CAO (Finance and Corporate Services) ATTACHMENTS: Appendix A Proposed Investment Policy 4-8

9 APPENDIX A POLICY Policy No: Policy Title: Policy Type: Category: INVESTMENT POLICY COUNCIL Finance Approval Date: August 30, 2004 Reviewed Date: May 2017 Next Review Date: May 2022 Sub-Category: Financial Planning Author: Dept/Div: Bonnie Saunderson, Senior Financial Analyst Finance & Corporate Services Department/Financial Planning Amended: April 7, 2008 Replaces: I-605 Repealed: May 29, 2017 Replaced by: 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: Asset-backed Securities: Commercial Paper: Credit Union: Diversification: 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. Short term notes or drafts issued by a corporation, incorporated under the laws of Canada or a province of Canada. Community based financial co-operatives owned and controlled by members. Process of investing in a range of security types by class, sector, maturity, and quality rating. 1 of

10 DBRS: Forward Rate Agreement (FRA): Interest rate risk: Long-term investment: Liquidity: The One Investment Program: Schedule I Bank: Schedule II Bank: Schedule III Bank: Short-term investment: Supranational Institution: Dominion Bond Rating Service is a service that assesses the credit rating of institutions. 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. Risk of an increase or decrease in the value of a fixedincome security caused by declining or rising interest rates. Investment whose term to maturity is greater than one year. Measure of asset s convertibility into cash. 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. A chartered bank operating under the Bank Act. The voting shares must be widely held with no investor holding more than 10% and foreign ownership limited to 25%. A chartered bank operating under the Bank Act. Schedule II banks may be wholly owned by non-residents. A foreign bank branch of foreign institutions operating under the Bank Act under certain restrictions. Investment whose term to maturity is one year or less. An agency sponsored by highly rated foreign bank(s) or 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. 2 of

11 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 Management Permanent Full-Time Employees Permanent Full-Time Non Union Permanent Full-Time C.U.P.E. 791 Temporary Part-Time Non-Union Student Permanent Full-Time Union Continuous Part-Time Employees Part-Time Employees Continuous Part-Time Non-Union Continuous 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) (b) (c) (d) (e) General Fund Capital Fund Reserve Funds Enterprise Funds 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. 3 of

12 OBJECTIVES, CONT D (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 4 of

13 OBJECTIVES, CONT D (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 have a minimum DBRS rating of A(high) or its equivalent. 5 of

14 ELIGIBLE INVESTMENTS, CONT D (a) Forward Rate Agreements, cont d (i) Conditions, cont d 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. 6 of

15 ELIGIBLE INVESTMENTS, CONT D (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 assetbacked 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) (ii) (iii) (iv) (v) (vi) (vii) a written statement of investment policies and objectives a description of eligible investments a description of who may invest in the program, how often, what size deposit and withdrawal are allowed a description of how earnings are allocated and distributed a description of how investments are safeguarded and how often the investments are priced and the program audited a schedule for receiving statements and portfolio listings 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. 7 of

16 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 portfolio contains 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 historical cost data, the City s calculated returns are derived from the 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. 8 of

17 STANDARD OF CARE, CONT D (a) (b) Prudence, cont d 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 s credit risks or market 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. 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 investment of the Corporation s portfolio which complies with this policy, 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. 9 of

18 STANDARD OF CARE, CONT D (d) (e) Delegation of Authority, cont d Reporting 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. The Treasurer shall provide an investment report to Council at least twice per year. The investment report should include: (i) (ii) (iii) (iv) (v) (vi) (vii) statement by Treasurer whether all investments made in accordance with policy, amount and percentage of portfolio represented by each authorized investment category, monthly short term investment balances, long term investment balances, earned rates, proportion of total investments invested in the City s own long and short term securities, statement of all transactions involving purchase and sale of City s 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. 10 of

19 SECURITIES FOR SUBDIVISION AND DEVELOPMENT SERVICING, CONT D (a) Permitted securities The City of Kitchener shall accept only the following approved securities: (i) (ii) 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). 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 the Credit Union s Tier 1 Capital as per the Credit Union s most recent audited financial statements. (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. 11 of

20 Formal Amendments I-605 was repealed and replaced Policy template was re-formatted and given new numbering system I-605 was repealed and replaced and given new policy number. 12 of

21 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 s Fitch Superior: extremely strong capacity to repay principal and interest AAA AA(high) AA AA(low) AAA AA+ AA AA- Aaa Aa1 Aa2 Aa3 AAA AA+ AA AA- Good: strong capacity to repay principal and interest A(high) A A(low) A+ A A- A1 A2 A3 A+ A A- 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 Quality DBRS S&P Fitch Superior: extremely strong capacity to R-1(high) A-1+ F-1+ repay principal and interest R-1(middle) Good: strong capacity to repay principal and interest R-1(low) A-1 F-1 13 of

22 SCHEDULE C: INVESTMENT POLICY SUMMARY SHORT-TERM PORTFOLIO Sector Credit Rating Maximum Portfolio Share Limit Government of Canada 100% Provinces R-1 middle, high 100% 25% / issuer Municipalities R-1 middle, high 20% 10% / issuer Schedule I banks R-1 middle, high 100% For top 5 major chartered banks: 35% / issuer * Other Schedule I banks: 25% / issuer Schedule II banks and Schedule III banks R-1 middle, high 30% HSBC Canada: 25% / issuer Other Schedule II and III banks: 10% / issuer Credit Unions and Trust Companies R-1 middle, high 20% 10% / issuer Eligible Pooled Investment Funds 100% * The minimum primary bank account balance required to obtain a preferred rate is excluded from the 35% limit per issuer. 14 of

23 SCHEDULE D: INVESTMENT POLICY SUMMARY LONG-TERM PORTFOLIO Sector DBRS Credit Rating Maximum Portfolio Share Limit Government of Canada 100% Governments of other Countries and Supranationals AAA 10% 5% / issuer Provincial Municipal AAA AA(high), AA, AA(low) A(high), A, A(low) 50% 25% / issuer 25% / issuer 10% / issuer Region of Waterloo 35% Other municipalities Including Infrastructure Ontario (IO), Municipal Finance Authority of British Columbia (BCMFA), boards and Conservation authorities College, University, Housing Corp. & Hospital AAA AA(high), AA, AA(low) 25% 10% / issuer 10% 5% / issuer Municipal Total 35% Debt in Incorporated Municipal Electrical Utilities 100% Total issued to City at incorporation 15 of

24 SCHEDULE D: INVESTMENT POLICY SUMMARY LONG-TERM PORTFOLIO (CONT D) Sector DBRS Credit Rating Maximum Portfolio Share Limit Financial Schedule I banks top 5 major chartered banks Other Schedule I, Schedule II and Schedule III Banks, Loans and Trust Companies, Credit Unions AAA AA(high), AA, AA(low) AAA AA(high), AA, AA(low) 75% 25% / issuer 20% 10% / issuer Financial Total 75% Eligible Pooled Investment Funds 75% 10% limit on Equity portfolio 16 of

25 SCHEDULE E: SUMMARY OF ELIGIBLE DEBT INVESTMENTS AND CONDITIONS Bonds, Debentures, Promissory Notes or Other Evidences of Indebtedness Issuer Canada or province or territory of Canada Agency of Canada or a province or territory of Canada Country other than Canada Municipality in Canada School board or similar entity in Canada 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 institution as defined in s.3 of the Post-Secondary Choice and Excellence Act, 2000 or Board of Governors of college of applied arts and technology Conditions Minimum DBRS rating of AA(low) or its equivalent. When an investment falls below this standard, the municipality shall sell the investment within 90 days. Money raised is to be used for school purposes. Minimum DBRS rating of AA(low) or its equivalent. When an investment falls below this standard, the municipality shall sell the investment within 90 days. 17 of

26 SCHEDULE E: SUMMARY OF ELIGIBLE DEBT INVESTMENTS AND CONDITIONS, CONT D Bonds, Debentures, Promissory Notes or Other Evidences of Indebtedness Issuer Board of a Public Hospital within the meaning of the Public Hospitals Act Non-profit housing corporation as defined in s.13 of Housing Development Act or local housing Corporation as defined in s.2 of Social Housing Reform Act, 2000 Bank Defined As Schedule I, II or III by the Bank Act Loan Corporation or Trust Company, Credit Union or League, Province of Ontario Savings Office International Bank for Reconstruction and Development (IBRD) Supranational financial institution or government organization other than International Bank for Reconstruction and Development (IBRD) Asset-backed securities made under Loan and Trust Corporations Act Corporation incorporated under the laws of Canada or a province of Canada Conditions Minimum DBRS rating of AA(low) or its equivalent. When an investment falls below this standard, the municipality shall sell the investment within 90 days. Minimum DBRS rating of AA(low) or its equivalent. When an investment falls below this standard, the municipality shall sell the investment within 90 days. Minimum DBRS rating of AA(low) or its equivalent. Minimum DBRS rating of AA(low) or its equivalent. Minimum DBRS rating of AAA or its equivalent. When an investment falls below this standard, the municipality shall sell the investment within 90 days. Unrated Municipalities shall invest through The One Investment Program. Unrated Municipalities shall invest through The One Investment Program. 18 of

27 SCHEDULE E: SUMMARY OF ELIGIBLE DEBT INVESTMENTS AND CONDITIONS, CONT D Bonds, Debentures, Promissory Notes or Other Evidences of Indebtedness Issuer Corporation incorporated under s.142 of the Electricity Act, 1998 Conditions As long as it is held, it ranks at least equally in payment 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 19 of

28 SCHEDULE F: SUMMARY OF ELIGIBLE SHARE INVESTMENTS AND CONDITIONS Issuer Corporation incorporated under the laws of Canada or a province of Canada Conditions Only permitted through The One Investment Program with the following exceptions: 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 20 of