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Prudent Investor Update, June 13, 2018

Top 5 Best Practices for Municipal Investing

Essex County has consistently kept property tax increases at or below inflation, while at the same creating a nearly fully-funded reserve position for both the replacement of existing infrastructure and the expansion of new roadway, active transportation and facility infrastructure needs.

CAO Robert Maisonville, who was previously the County Treasurer, says that a key strategy for achieving this goal has been through investments and long-term planning. The County’s portfolio raises enough interest income to not just build adequate reserves to address the time value of money, but to also fund operations equivalent to 1% of their property tax.

New options from prudent investor will help municipalities further improve returns and better manage risk. Roberto Rossini, former Chief Financial Officer for the City of Toronto, helped the City transition to the new standard over the last few years.

Toronto and Essex may seem worlds away from one another, but their experiences inform a few essential best practices that apply to pretty much all municipal investing:
  1. Know municipal needs really well: The County of Essex has been deeply involved in asset management planning for more than 20 years. But in addition, it develops master plans and conducts operational reviews regularly. Maisonville says that this in-depth understanding of the County’s present and future needs is the foundation that guides all investment decisions.  Rossini adds that understanding exactly how much is needed and when, and investing accordingly, ensures a municipality is never forced to sell investments at a bad time just to meet need for liquidity.

  2. Create a diversified portfolio: Diversification is the only way to generate solid returns over the long term. Essex has a mix that includes ONE Investment’s equity portfolio, as well as bonds and other products. This mix has provided a measure of comfort and stability even through bumpy markets. Rossini notes that while the exact mix will vary depending on municipal needs and time horizons, his experience suggests that equities can make up to 30% of a municipal sector portfolio, with real estate and infrastructure making up 10% to 15%, and bond/money market-type offerings taking up the balance. Rossini points to index funds, which would be available under prudent investor but not on the prescribed list, as a good way to access equity markets without having to pick specific winners and losers. The ONE Equity portfolio offers a diverse, conservatively managed portfolio of equities to deliver better returns for long-term investments.

  3. Use investment laddering: Essex employs this important strategy to ensure that products, like bonds and other investments, are maturing at different times. This helps better manage risk by ensuring that the municipality isn’t stuck trying to reinvest too much of its financial portfolio during unfavourable market conditions. With a steady stream of money moving in and out, they can take advantage of opportunities in good markets and manage impacts of poor markets.

  4. Be engaged with Council: Its important to educate and engage with Council so they understand the municipal investment strategy and can see how it is working. It takes time to build trust and demonstrate expertise. Performance will be the ultimate measure, but even when you have to share bad news (as will happen on occasion with any portfolio), explaining the big picture and strategies to manage risk helps provide Council the comfort they need. As well, as they see the value in investing, they will support strategic spending on plans and reviews that inform the investment strategy.  In terms of the transition, Rossini notes that frequently keeping the Mayor’s office informed and bringing Council along through the process helped to temper expectations.

  5. Don’t forget non-financial goals: Investing public dollars comes with an even greater responsibility to consider environmental, governance and social (EGS) goals. In a political context, investment choices will be under added scrutiny for values other than financial results. Pension funds, such as OMERS, provide good guidance on how to frame an investment policy that addresses the non-financial goals. Municipalities need to balance softer goals without being so overly prescriptive that opportunities are very limited.
Investment revenue has to be part of any municipal finance strategy, given the increased demands on municipal budgets and the burden on the property tax base. These best practices can help drive successful portfolios that provide municipal governments with consistent returns through market ups and downs.

ONE Investment has been supporting municipal governments with turnkey investment solutions for more than 25 years.ONE is developing new products and services to offer all municipalities the opportunity to take part in the broader options and  benefits of the prudent investor standard.