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Prudent Investor Update, May 30, 2018

How much to invest?

For an interested municipality, one of the key questions under the prudent investor standard is determining how much money it has available to invest.

To be eligible to invest under the prudent investor standard, a municipality must have $100 million in money and investments ‘not required immediately’ or have net financial assets of more than $50 million. Municipalities can also invest jointly, if they can collectively meet either of these two financial criteria.

While there isn’t a comprehensive legal definition of ‘money not required immediately,’ the concept isn’t new or unique to investing under the prudent investor standard. The concept has been embedded in municipal legislation for more than 50 years. The section of the Municipal Act that authorizes investment under the prudent investor standard provides that the following items are to be included in the ‘money not required immediately’ bucket:
  • money in a sinking, retirement or reserve fund;
  • money raised or received for the payment of a debt of the municipality or interest on the debt; and/or,
  • proceeds from the sale, loan or investment of any debentures
However, this isn’t an exhaustive list. It is up to the municipality to determine what funds it needs immediately, for operations and other budgeted items for the year. Money for unanticipated “rainy day” expenses or other contingencies like tax stabilization reserves may also fall in this category. Consider anything for which the municipality may need to access funds quickly.

Once a municipality has determined what money it needs immediately, it can determine the amount of funds that can be invested under the prudent investor standard.  Municipal treasurers should also consider the municipality’s asset management plans.

Under the prudent investor standard, the investment board (IB) or joint investment board (JIB) will then control and manage these long-term investments in accordance with the approved investment policy.

Staff will continue to oversee investments that are not under IB/JIB control and management. Products like High Interest Savings Accounts and money market instruments offer short-term opportunities that are more liquid and appropriate for funds needed in the three- to 12-month time frame.

The City of Toronto, working with similar rules, is currently using an investment horizon of 12 -months for funds that it must have on hand to meet the daily cash flow requirements of the City.

Municipal investments have become an increasingly important source of revenue to finance infrastructure plans and manage other cost pressures. The prudent investor standard will allow a municipality to take advantage of longer-term, more diverse investment strategies that can deliver better returns. At the end of the day, it can help reduce the impact on local tax rates while helping to address important infrastructure needs.

While new to the municipal sector, it is important to remember that there is ample experience in Ontario with the prudent investor standard, which has governed trustees and pension funds for some time.

ONE Investment is preparing turnkey solutions for the new prudent investor standard, which will help simplify some of the complexities of the new regime for municipal governments.  ONE’s goal is to ensure that all municipalities, regardless of how much they have to invest, can benefit from broader investment powers.