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Prudent Investor Update, May 16, 2018

Prudent investor and Investment Policy: What you need to know

One of the key requirements of the new prudent investor regulation for municipalities is an investment policy approved by Council and reviewed at least annually.  In addition to various other requirements, a municipality is also required to give control and management of its investments to a municipal service board (IB) or to a joint municipal service board (JIB).

The investment policy can be thought of as the document which sets out the ground rules. The statute requires the municipality to exercise the “care, skill, diligence and judgement” of a prudent investor. It is the municipality’s duty to develop a carefully constructed, reasonably detailed investment policy.

While most municipalities will already have a statement of investment policies and goals in place, those that want to take part in the prudent investor option will need to revisit it for the new regulation. It must provide sufficient detail so that the IB or JIB can effectively manage the municipality’s investment strategy.

The specific regulatory requirements aren’t surprising.  The investment policy should address:
  • objectives for return on investment
  • risk tolerance
  • the municipality’s need for liquidity, including funding needed for planned projects and contingency funding need to cover unexpected expenses.

The legislative requirements also include an obligation to diversify investments in a way that reflects economic and market conditions.

Legal counsel at WeirFoulds believes that when developing an appropriate investment policy, municipalities will be able to build on what they already have in place.

However, a critical factor for the prudent investor option is deciding what are “funds not required immediately.” Under the new municipal prudent investor regulations, the IB or JIB must manage those funds, while the municipality will continue to manage funds that are needed in the short term. The challenge is that there isn’t a comprehensive definition in the legislation, regulation or case law, although the legislation makes it clear that certain money must be included in the “funds not required immediately” category.

All municipalities will want to strike a balance between ensuring that there is money ready to cover immediate needs, while setting aside funds for investments that can yield better returns for future projects. The local asset management plan is a good place to start in deciding what is needed in the future, and when.

Municipal governments must also know how much cash flow they need to manage day-to-day operations and to set aside for those “rainy day” unanticipated expenses. The City of Toronto, which had a head start on the process, used an investment horizon of less than 18-months for funds that it must have on hand to meet the daily cash flow requirements of the City.

The next newsletter will delve more deeply into the meaning of “funds not required immediately.” But it is important to recognize now that municipalities must take care in determining which funds fall into that category. Once funds are under the management of an IB or JIB, municipal staff do not control the day-to-day investment decisions. That is one of the reasons that crafting an investment policy carefully is so important.

The City of Toronto used outside consultants to help with revising its investment policy and most municipalities wouldn’t be expected to have the expertise in house.  ONE Investment hopes to provide support through a new proactive customer service team, made up of retired municipal treasurers and a CFA Charterholder, to help provide guidance. This will offer municipal governments advice that is affordable and knowledgeable about the municipal context