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Prudent Investor Update, September 12, 2018

Debunking Myths: Prudent Investor and the Small/Midsized Municipality

For treasurers of Ontario’s many small towns and mid-sized communities, the new prudent investor standard for the municipal sector may seem barely relevant.

But all municipalities are trying to make ends meet and pay for costly infrastructure needs.  With better investment options, municipalities can reduce the burden on taxpayers and do more for their communities with the new standard.

Bracebridge Director of Finance/Treasurer Stephen Rettie, who serves on ONE Investment’s Peer Advisory Committee, shares and debunks some of the most common myths about how this change can benefit communities of all sizes:

Myth: Only large municipal governments will be eligible to participate.

With eligibility requirements of $100 million in available investment assets, the prudent investor standard looks like something for Ontario’s few big municipal governments.

That is simply not true.

Joint investing is allowed. ONE Investment is dedicated to creating a prudent investor solution that will allow municipalities of any size to participate jointly and benefit from the broader options.

About 350 communities have populations under 25,000. There is ample opportunity to leverage group investment power. ONE has been doing this under the “legal list” framework for 25 years. It currently manages $2 billion in assets on behalf of about 150 municipal investors.

Myth: It is complicated. I don’t have the staff capacity or resources to figure it out.

Half of Ontario’s municipalities have fewer than 10 full-time employees. It isn’t uncommon for the Treasurer to also be the Clerk and/or the IT Director. Treasurers don’t have the time or resources to navigate financial markets and provincial regulations.

That’s why ONE does the heavy lifting and creates turnkey investment solutions. To enhance ONE’s current offering, it is also looking into how to comply with Ontario Securities regulations and expand its service to possibly include providing professional advice to municipalities on investing, including:
  • Building investments into a municipal capital financing strategy; and,
  • Providing advice on the appropriate Investment Policy and portfolio structure.

While the prudent investor standard is new for the municipal sector, it’s been around for pensions for a long time. There is ample experience with the standard within Ontario.

Myth: It’s risky. We can’t afford to lose anything. GICs and Savings Accounts are the safest route for a small municipality.

In truth, it’s riskier to do nothing.

Under prudent investor, municipalities will have the option to invest in a broader array of investment products. This can mean better returns, and better managed risk through a more diverse portfolio.

The big risk with savings accounts and GICs is that the rate of return is often lower than inflation. That means over the long-term, money is losing value. In fact, the non-residential construction price index (NRBCPI) in Ontario is reporting increases greater than consumer inflation. Since Q2 2017, the NRBCPI index has seen an increase of approximately 6.3%, according to Statistics Canada.

Without a change in how municipal governments save for long-term capital projects, property taxpayers end up carrying a bigger burden. That is why AMO advocated so hard for prudent investor standard for municipal governments.

Myth: My Council will never go for it. And if I have turnover this fall, it’ll be even harder.

Although municipal Council priorities can change, and each Council has its own characteristics and unique needs, sound management of municipal finances is fundamental for all municipalities, no matter the size. ONE understands the dynamic between Treasurers and Councils.

ONE provides Treasurers with support to help communicate with elected officials. This includes presentation templates that can be localized, and fact sheets written specifically for Council audiences. ONE staff can also provide support onsite, by attending staff and local Council meetings (as required) to address questions about ONE Investment.  

Under prudent investor, ONE will offer additional supports, such as sample by-laws and policies, as well as work with experts who will provide legislative and investing advice.