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Prudent Investor Update, May 15, 2019

How much to invest under prudent investing?


If you are pondering whether the prudent investor makes sense for your municipality, you may be wondering how much money can be invested under the standard.

The regulation notes that it must be “money not required immediately.” But what does that involve?

ONE Investment and the Municipal Finance Officers Association (MFOA) are working through what this means in practical terms with an aim to offer guidance to those who may want to consider prudent investing.

The City of Toronto, which was able to introduce prudent investor earlier, used an 18-month time horizon for money not required immediately. This meant anything needed beyond 18 months could be invested under the PI standard.  This is one example and a possible benchmark.  

MFOA has convened a working group of municipal finance staff to further look at how to develop cash flow planning and forecasting for the prudent investor regime.

The working group is comprised of ten municipal finance staff from municipalities who are considering prudent investor. It was struck this spring with the goal of sharing information, learning from one another and ultimately providing some guidance for other municipalities, said Colin Macdonald, Policy Team Lead for MFOA.

The section of the Municipal Act that authorizes investment under the prudent investor standard provides that the following items are 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.

Beyond that, municipalities need to determine what funds it needs on hand. Good cash flow planning links to many facets of municipal finance, like accounting, budgeting, and asset management planning. All of it has to be translated into a cash flow plan that identifies how much money is needed and when for operating and capital expenses, including reserves and reserve funds.

“We know this is a challenge that many are facing. We’re looking to learn from one another, and from other jurisdictions that have already been through similar shifts,” said Macdonald.

To be eligible, a municipality must have a total of $100 million in “money not required immediately,” or net financial assets of $50 million. Or, alternatively, a municipality with less money could combine with others to come to a total of $100 million to invest through a Joint Investment Board (JIB). ONE is currently in the process of forming a JIB so that all municipalities can benefit from prudent investor if they so choose.

“Cash flow planning determines the amount you have available for investing, shapes your investment timing, and therefore influences your asset allocation. So, it’s important to consider all of the underlying assumptions,” Macdonald said. “We want to look at whether there are better ways to make forecasts and manage the uncertainty that is a reality for municipal government.”