Municipal Eligible Investment Reforms

Municipal Eligible Investment Reforms September 18, 2018 Presentation to: MFOA Investment Workshop Ministry of Municipal Affairs and Housing

1 MUNICIPAL INVESTMENTS: AN INCREASINGLY IMPORTANT REVENUE TOOL IN ONTARIO Combined Ontario municipal investment portfolio size $25 B $20 B $15 B $10 B $5 B Year over Year Growth of Investments Average annual growth 7.42% $0 B 2009 2010 2011 2012 2013 2014 2015 2016 Financial year

2 THE MUNICIPAL INVESTMENT LANDSCAPE 1000 Distribution of Investment Balances across the Sector Half of Ontario municipalities are currently investing Number of municipalities 100 10 222 75 75 47 19 6 25 municipalities have investments over $100 M Key Insights 1 No Investments X <$1M $1M < X < $10M $10M < X < $100M $100M < X < $1B Over $1B Municipal investment portfolio size

3 MUNICIPAL ELIGIBLE INVESTMENTS FRAMEWORK IN ONTARIO Legislation Regulations Municipal Act, 2001* O. Reg. 438/97: Eligible Investments and Related Financial Agreements City of Toronto Act, 2006* O. Reg. 610/06: Financial Activities Rules Status Previous Eligible Investments Framework In general, municipalities invest funds not immediately needed in accordance with a prescribed list of securities as set out in regulation. Prescribed list includes: i. Government issued or guaranteed debt (bonds, debentures, promissory notes, etc.) ii. Bank and financial institution debt, deposit receipts and notes iii. Certain Canadian corporate shares iv. Certain corporate debt (i.e., bonds) v. Certain asset backed securities and corporate paper Credit rating requirements may apply. As of January 1, 2019 eligible municipalities will be able pass a by-law to invest in any security in accordance with the prudent investor standard. Additional amendments to the prescribed list are also in effect. Since January 1, 2018 regulatory amendments have enabled the City of Toronto to invest in any security in accordance with the prudent investor standard.

4 THE NEW MUNICIPAL ELIGIBLE INVESTMENTS FRAMEWORK SUMMARY Using the new rules, a municipality can invest under either (1) the prudent investor standard or (2) the existing prescribed list of investments. To be eligible to invest in any security under the prudent investor standard, a municipality would have to satisfy certain fiscal criteria and establish an investment board or enter into an agreement for another municipality s investment board to manage its investments. Municipalities that are ineligible to invest under the prudent investor standard (or choose not to invest under this new standard) will continue to invest under the existing list of prescribed securities.

5 THE PRUDENT INVESTOR STANDARD Section 418.1 of the Municipal Act was proclaimed in force as of March 1, 2018. Permits a municipality that meets certain requirements to invest money that it does not require immediately in any security in accordance with the prudent investor standard and the regulation. Requires a municipality investing money under this standard to exercise the care, skill, diligence and judgement that a prudent investor would exercise in making an investment. Enables an eligible municipality to pass a by-law to opt into prudent investing as of January 1, 2019. Provides that a by-law opting into prudent investing cannot be revoked. What is it? The municipality must consider the following criteria in planning investments: 1. General economic conditions. 2. The possible effect of inflation or deflation. 3. The role that each investment or course of action plays within the municipality s portfolio of investments. 4. The expected total return from income and the appreciation of capital. 5. Needs for liquidity, regularity of income and preservation or appreciation of capital The municipality must diversify its investments to an extent that is appropriate to general economic and investment market conditions

6 PRUDENT INVESTOR RULES SUMMARY Eligibility Criteria Generally, to be eligible, municipalities would need to (i) individually or collectively achieve a minimum investment balance of $100 million or (ii) individually hold a position with a net financial assets balance of more than $50 million. Governance Framework A municipality must either establish or participate through an investment board, and delegate to it control and management of the municipality s investments (i.e. control of day-to-day investing). This framework is similar to the prudent investor framework for the City of Toronto. Joint Investment Scenarios (1) A group of municipalities may collectively meet the $100 million threshold and together establish an investment board with control and charge of day-to-day municipal investments OR (2) A municipality may enter into an agreement to have an investment board of another municipality (or group of municipalities) already investing under the standard invest on its behalf.

7 GOVERNANCE REQUIREMENTS The investment board is a municipal services board or joint services board under the Municipal Act, 2001. The municipality would delegate to the board control and management of the municipality s investments (i.e. control of day-to-day investing). An investment board cannot include members of council or municipal staff, with the exception of a municipal treasurer. Municipal council must develop an investment policy outlining the municipality s objectives for return on investment, risk tolerance, liquidity needs and other considerations. The investment board must adopt and maintain an investment plan that sets out how investments would be carried out. Each year, or more frequently as required by council, the investment board must prepare an annual report, which would include a statement by the treasurer as to whether investments are consistent with council s investment policy and the board s investment plan.

8 MUNICIPALITIES INDIVIDUALLY ELIGIBLE TO INVEST UNDER THE PRUDENT INVESTOR STANDARD (2016) # Municipality Total Balance Net Assets 1 Durham R 1,924,151,122 882,061,171 2 Halton R 1,765,881,957 1,099,120,746 3 Mississauga C 883,868,413 491,864,626 4 Hamilton C 790,720,269 83,958,423 5 London C 463,070,565 196,514,232 6 Brampton C 355,388,120 453,375,585 7 Richmond Hill T 330,801,789 274,373,367 8 Oakville T 327,208,610 267,683,951 9 Greater Sudbury C 290,916,767 173,318,271 10 Guelph C 227,313,124 74,614,042 11 Markham C 197,742,752 430,096,225 12 Burlington C 186,124,594 174,611,608 13 Brantford C 177,616,667 82,124,812 14 Waterloo C 148,854,104 126,754,766 15 Kitchener C 139,030,212 206,623,776 16 Haldimand County 137,676,262 66,588,213 17 Milton T 106,423,550 89,276,539 18 Peterborough C 94,488,006 81,853,383 19 Aurora T 83,950,425 53,346,916 # Municipality Total Balance Net Assets 20 Cambridge C 72,632,342 97,654,165 21 Clarington M 55,768,350 55,046,267 22 Pickering C 49,423,158 114,844,670 23 Ajax T 40,801,450 113,388,413 24 Essex Co 34,876,841 77,430,400 25 Kenora C 32,825,228 72,344,711 26 Woodstock C 29,225,274 59,348,269 27 Niagara Falls C 26,888,545 103,123,951 28 Whitby T 21,323,178 134,161,722 29 Vaughan C 19,847,806 343,301,204 30 Newmarket T 5,000,000 61,442,214 31 Windsor C - 138,643,000 32 Oxford Co - 75,235,535 33 Sault Ste. Marie C - 59,617,723 34 York R 2,318,411,139-1,438,122,970 35 Peel R 1,468,103,288-147,035,207 36 Ottawa C 1,387,643,332-1,676,685,624 37 Niagara R 402,792,313-69,117,584 38 Waterloo R 162,072,560-568,631,111 39 Kingston C 128,890,480-168,774,329

9 KEY TAKEAWAYS As of January 1, 2019 municipalities will have access to broader investment authorities, including the ability to pass a by-law to invest using the prudent investor standard. Municipalities need to satisfy criteria for investing using the prudent investor standard either individually or collectively. Governance requirements will involve delegating day to day responsibilities for investments to a board. Councils maintain responsibility for developing investment policies.

USEFUL LINKS E-Laws link to Municipal Act (See 418.1) : https://www.ontario.ca/laws/statute/01m25 E-laws link to O. Reg. 438/97 : Eligible Investments, Related Financial Agreem https://www.ontario.ca/laws/regulation/970438

CONTACT Oliver Jerschow Director, Municipal Finance Policy Branch Oliver.Jerschow@Ontario.ca 416.585.6951

City of Toronto Prudent Investor Experience Presentation for MFOA Annual Conference September 18, 2018

Agenda Background New Regulations & the Portfolio Structure Prudent Investor Transition Four Step Process: 1. Establish Investment Board 2. Council Approved Investment Policy 3. Investment Plan 4. Hire Agents (Investment Managers) Q&A 14

Background New Regulations & the Portfolio Structure

Background Amended Financial Activities (O.Reg. 360/15) regulation becomes effective on January 1, 2018. The City s investments will no longer be required to comply with a prescribed list of investments. New rules based upon the Prudent Investor Standard. Prudent Investor Standard requires a trustee to act prudently and with caution, discretion, loyalty, and care, but does not restrict the assets in which a trustee can invest. The trustee must evaluate the risk/reward trade-off. Consideration will now be given to all asset classes including equities. Toronto is the first Ontario municipality to be permitted to utilize the Prudent Investor Standard. 16

Background Four Step Process Affecting Approximately $5 Billion in Financial Assets Before January 1, 2018 1. Council Establishes Investment Board 2. Council Adopts Investment Policy 3. Investment Board Develops Investment Plan 4. Investment Board Hires Agents 17

Overview of Portfolio Structure Short Term Fund (Working Capital) Long Term Fund Sinking Fund Managed by CFO (City Staff) Managed by Investment Board Funds not immediately required 18

Long Term Fund: Reserve and Reserve Funds 893 1,030 1,189 1,315 1,398 1,538 1,698 2,159 2,712 2,645 2,451 2,439 2,947 3,440 3,540 3,705 4,019 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 The budgeted balance for 2017 is $3.9 billion. The balance is forecasted to slowly decline to approx. $3.6 billion by 2020. 19

Sinking Fund: Debt Maturities 1,200,000,000 Maturity Schedule Summary As of December 31, 2017 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000-2018 2019 2021 2023 2024 2025 2026 2027 2035 2036 2040 2041 2042 2044 2046 20

Guiding Principals Peter Wallace, City Manager: We need to invest as if we were to provide a lifetime of income for a disabled child Rob Rossini, DCM & CFO: Crawl, Walk, Run Commitment to Best Practices 21

Step 1: Establish an Investment Board

Establish an Investment Board How? How do you establish a local board? What is the process to do this? Who is involved in this process? Who will champion this process? Roles and Responsibilities Staff vs. Board Directional versus Operational 23

Establish an Investment Board - Other Establish a Steering Committee Direction from Council How many members on the Investment Board? Qualifications of members Compensation? (Fiduciary not Advisory) Budget 24

Establish an Investment Board - Members Recruitment (Clerk s Office) Selection Criteria & Evaluation Nominating Panel (3 Councillors) Use of Consultants (RFP Process) Survey of Investment Boards Investment Policy 25

Step 2: Council Approved Investment Policy

Investment Policy Considerations (1) Investment Beliefs & Objectives Roles and Responsibilities (Council, Staff, Board) Asset Mix Nature of the Funds (Time Horizon) Asset classes (Fixed Income, Equities, Real Assets) Risk/Return 27

Investment Policy Considerations (2) Environmental, Social, and Governance (ESG) Annual Review (Semi-annual?) Compliance Custodian Interaction between short and long funds 28

Investment Policy 29

Investment Policy 30

Step 3: Investment Plan

Investment Plan - Goals Take the broader guidelines of the Investment Policy and provide a detailed Investment Plan (Execution) RFP for Investment Consultant Investment Plan Manager Search Longer term contract to work with the Board Monitor Performance of Investment Managers 32

Investment Plan Scope Expansion Check the work completed for the Policy Suggestions to Change Investment Policy Real Assets Education Equities Global benchmark versus Breakdown Fixed Income Average Credit Rating Transition How to Convert and Fund? 33

Step 4: Hire Agents (Investment Managers)

Hire External Investment Managers RFP versus Consultant Evaluation Process Will the Staff be involved? Will the Investment Board be involved? Pooled versus Segregated Documentation 35

Questions?

Appendix (Links) Establishment of an Investment Board https://www.toronto.ca/legdocs/mmis/2017/ex/bgrd/back groundfile-101438.pdf Investment Policy (June 2018) https://www.toronto.ca/legdocs/mmis/2018/ex/bgrd/back groundfile-116242.pdf Toronto Investment Board Meetings & Agendas http://app.toronto.ca/tmmis/decisionbodyprofile.do?func tion=doprepare&meetingid=14098#meeting-2017.ib1 37

New Investment Options: ONE s Response to New Investment Powers MFOA Annual Conference September 18, 2018 38

Agenda Why invest? Investments today Can investments make a difference? New investment rules: a brief recap What ONE is doing What you should be doing 39

Why Invest? 40

Why Invest? Better returns on funds is always helpful Short-term funds or long-term Real benefits of new investment powers come from higher returns from asset classes with longer investment horizons. In short, to help with capital. We have lots of assets We are underinvesting in assets We have huge expenditure pressures Limited and sensitive tax sources 41

The Shift in Asset Ownership It is expected that municipalities provide, own, operate and maintain their assets Asset ownership has shifted from senior governments to local municipal governments This trend is likely to continue 42

Government Revenues Municipal spending responsibilities and revenues don t align! 43

Infrastructure Investment 44

Investing Today 45

Investing Today Legal list as amended from time to time About $29 B in investments in 2016, about $16 B if GBE are netted off (2016 FIR) About $26 B in all types of reserves and reserve funds No clear idea of how it is invested (short vs long) ONE Equity about $340 M (one indicator of long-term funds) 46

Not a Major Source of Revenue Statement of Operations: Revenue (2016) Investment 1% Other municipalities 1% Other 10% User Fees 21% Taxation 42% Fines and penalties 1% Licences and permits 3% Grants 21% 47

Not a Major Source of Capital Financing SOURCES OF TCA FINANCING 2014 2015 2016 2017 Debt 15.5% 14.1% 15.8% 19.0% Levy 5.8% 4.1% 4.3% 4.0% Reserves 41.3% 41.0% 42.2% 41.4% Grants 20.5% 21.2% 20.1% 16.1% User Fees 1.8% 1.0% 1.3% 1.5% DCs 12.7% 13.0% 13.2% 14.6% Investment 0.1% 0.1% 0.0% 0.0% Other 2.4% 5.5% 3.1% 3.4% Total 100.0% 100.0% 100.0% 100.0% 48

Can Investments Make a Difference? 49

What s Changed? Emphasis on asset management and supporting financial plans Provincial asset management regulation Federal gas tax requirements Major financial challenges Expanded range of investment options and services 50

Pension Analogy A career is about 30 years Shorter time frame than many of our assets We put money aside (along with our employer) to OMERS The plan invests the money we contribute At the end of 30 years, we receive benefits that are a combination of direct member/employer contributions and investment returns 51

Pensions and Investment Returns You will receive approximately 10 times more in pension benefits than you contributed. About 70% of the pension benefits is from investment returns and the rest from contributions. OMERS 2016 returns are: Asset Return Allocation Fixed Income 4.3% 29% Public Equity 14.7% 34% Private Equity 11.1% 12% Infrastructure 12.3% 16% Real Estate 11.4% 14% Total 11.5% 105% Source: 2017 OMERS Annual Report These are not money market rates of return 52

Long Term Capital Saving Plans An Example Have a project of $1.5 million How much to put aside under different rates of return to do the project in 10 years? 20 years? Select rates of return shown below for 10 and 20 years Product 10 Year 20 Year Money Market 2.01% 2.91% ONE Bond 4.26% 5.08% TSX Equity 9.67% 9.60% 53

Thousands 10 Year and 20 Years Compared 1,600 Using Investments to Finance Capital Works 1,400 1,200 158 316 628 405 644 1,000 998 800 600 400 1,342 1,184 872 1,095 856 200 502-10 Yr 10 Yr 10 Yr 20 Yr 20 Yr 20 Yr MM Corp Bond TSX MM Corp Bond TSX Tax Investment 54

Accumulation Function: Portion from investment returns vs cash contributions Interest Years Rate 5 10 15 20 25 30 2.50% 4.9% 10.7% 16.4% 21.7% 26.8% 31.7% 2.75% 5.4% 11.8% 17.9% 23.7% 29.2% 34.3% 3.00% 5.8% 12.8% 19.4% 25.6% 31.4% 36.9% 3.25% 6.3% 13.8% 20.8% 27.4% 33.7% 39.5% 3.50% 6.8% 14.8% 22.3% 29.3% 35.8% 41.9% 3.75% 7.2% 15.7% 23.7% 31.1% 37.9% 44.2% 4.00% 7.7% 16.7% 25.1% 32.8% 40.0% 46.5% 4.25% 8.1% 17.7% 26.5% 34.6% 42.0% 48.7% 4.50% 8.6% 18.6% 27.8% 36.2% 43.9% 50.8% 4.75% 9.1% 19.6% 29.2% 37.9% 45.8% 52.9% 5.00% 9.5% 20.5% 30.5% 39.5% 47.6% 54.8% 5.25% 10.0% 21.4% 31.8% 41.1% 49.4% 56.7% 5.50% 10.4% 22.3% 33.1% 42.6% 51.1% 58.6% 5.75% 10.9% 23.2% 34.3% 44.2% 52.8% 60.4% 6.00% 11.3% 24.1% 35.6% 45.6% 54.4% 62.1% 6.25% 11.7% 25.0% 36.8% 47.1% 56.0% 63.7% 6.50% 12.2% 25.9% 38.0% 48.5% 57.5% 65.3% 6.75% 12.6% 26.8% 39.1% 49.9% 59.0% 66.8% 7.00% 13.1% 27.6% 40.3% 51.2% 60.5% 68.2% 7.25% 13.5% 28.5% 41.4% 52.5% 61.9% 69.6% 7.50% 13.9% 29.3% 42.6% 53.8% 63.2% 71.0% 7.75% 14.3% 30.1% 43.7% 55.1% 64.5% 72.3% 8.00% 14.8% 31.0% 44.8% 56.3% 65.8% 73.5% 8.25% 15.2% 31.8% 45.8% 57.5% 67.0% 74.7% 8.50% 15.6% 32.6% 46.9% 58.7% 68.2% 75.8% 8.75% 16.0% 33.4% 47.9% 59.8% 69.4% 76.9% 9.00% 16.5% 34.2% 48.9% 60.9% 70.5% 78.0% 9.25% 16.9% 35.0% 49.9% 62.0% 71.6% 79.0% Equal amounts invested each year at various interest rates and time periods 55

Rethinking Investments Why can investment income be a significant source of financing? Time Compounding Returns Risk controlled investments 56

New Investment Rules 57

Prudent Investor Standard Eligibility Municipalities eligible to invest under the PI standard are those with: $100 million in money and investments that they do not require immediately, or $50 million in net financial assets These conditions can be met by a single municipality or by municipalities investing in a pooled arrangement 44 municipalities of 443 qualify on their own (FIR 2016) 58

What Can Municipalities Do? A Municipality can: Continue to restrict its investments to the Legal List; or Move to the PI standard by: Establishing its own investment board (IB) or, with one or more other municipalities, establishing their own joint investment board (JIB) Investing through an existing IB or an existing JIB Move from the Legal List to the PI standard if it meets the requirements. However, a municipality cannot move back to the Legal List without a regulation 59

Two Approaches to Municipal Investing Two approaches to municipal investment: The Legal List - under Section 418 of the Municipal Act The Prudent Investor (PI) Standard - Under Section 418.1 of the Municipal Act NOTE: City of Toronto is covered under a separate Act and regulations. Under its own Act and regulations, since January 1, 2018, the City has been subject to the PI standard. 60

What ONE is Doing 61

Millions Legal List Prodcuts Will Continue ONE Balances by Portfolio 400 350 300 351 In addition HISA balances of $1.1 B 250 200 242 237 TOTAL with HISA = $2.0 B 150 100 As of Sept 13,2018 50 35 - MM Bond UCB Equity 62

Legal List (con t) ONE has a current pooled investment program These products are structured to be in full compliance with O. Reg. 438/97 These products will continue for municipal investors who remain on the legal list Working on some ideas to bring some diversification to this group of products, but not until 2019 Issue: With PI as an option, how much attention will future changes to the legal list receive? 63

What is ONE doing? Helping the sector understand and possibly transition to the new investment option through education and use of best practices including: Series of newsletters on new legislation and prudent investor standard Building a new business model to permit access to the prudent investor standard in pooled arrangements for small, rural and northern municipalities. Assembling a team of experts to provide investors advice on: Investments and portfolio structure Building investments into a capital financing strategy Working on the mechanics next. Major area of interest from potential investors. 64

What You Should Be Doing 65

Tuning Up Your Investments Establish investment objectives Cash flow analysis Reserve adequacy analysis Review your investment policy (especially if there is regulatory change) Enhance your long-term asset management plan through long-term financial planning 66

What should you do on your Asset Management Plan? Sustainability requires long-term plans. It doesn t just happen. Asset Management Plans (AMP) and financing strategies are critical. Continue to refine and modify your AMP and financing strategy. Be open to making financial decisions differently and consider investment income as a potential source of financing for your AMP. Recognize the power of compound interest. 67

Conclusion 68

Summary In light of new investment opportunities, munciipalities should review their investment objectives, investment policies, etc ONE will provide greater assistance in the future re: investing and using investments to finance capital works. ONE will be providing access to broader investment powers (prudent investor) to municipalities that would not be eligible on their own. Significant potential for investment returns to substitute for tax dollars in financing asset management plans. Stay tuned to your associations (AMO and MFOA) for ongoing information on the investment regulation. 69

Questions? Dan Cowin Executive Director MFOA dan@mfoa.on.ca 416.362.9001 x 223 70