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Prudent Investor Update, July 4, 2018

Making the Link: Asset Management Plan, Cash Flow and Investment Strategy

“We were leaving too much money on the table.”

That’s the way Whitby Treasurer Ken Nix sums up the municipal sector’s traditionally conservative approach to investing.

However, he says that municipal governments are now recognizing that they cannot afford to walk away from potential investment returns. And like his peers, Nix is looking at ways to maximize investment earnings to better fund the future.  

Over the past few years, as Ontario municipalities created provincially-mandated Asset Management Plans, they developed a deeper understanding of their long-term infrastructure needs. For most communities, tax revenues and provincial transfers aren’t going to be enough to build and maintain infrastructure over the long-term, Nix says.

Municipalities can use the Asset Management Plan to determine how much they will need for capital projects every year. It is relatively straight forward to know when roads and other assets will need repair, renovation or replacement and how much that will cost. This detailed cash flow analysis then helps in choosing different investment options based on how much revenue they can deliver and the timeframe for maturity.

Whitby recently revamped its investment policy and hired in-house investment expertise to help drive a more proactive approach to investing. A well-diversified portfolio can help manage the additional risk.

Under the current prescribed list, there are numerous options that can deliver better returns over the longer-term. For example in 2017, the ONE’s Universe Corporate Bond Portfolio performed better than its benchmark with a year added value of 63 basis points before fees. The Canadian Equity Portfolio delivered a one-year total return of 10.02% - slightly outperforming the S&P/TSX Composite Index, as well as the large-cap index, the S&P/TSX 60 Index.

And the potential for better returns is compelling, especially with new prudent investor powers around the corner.

Nix acknowledges that beyond the Asset Management Plan, the future can be challenging to predict. Councils can differ in their priorities and favoured projects, as well as how they want to manage tax increases. Then there are the larger economic factors at play that can drive (or derail) growth and change the fiscal landscape – not to mention provincial politics at play.

Nix used to leave about two-thirds of his total portfolio in shorter-term investments that he could cash out within a year to manage these unknowns. But he’s now looking at adjusting that to just about one-third of the portfolio, so the Town can earn more on behalf of taxpayers.

Councils get on board as well, says Nix, if they can see that it will reduce pressure on the tax base.