Do’s and Don’ts for the prudent investor standard
On January 1, Ontario will have its first live example of how the prudent investor standard may work for municipal governments. That is when the prudent investor standard will come into full effect for the City of Toronto.
Former Toronto Chief Financial Officer Rob Rossini, who recently retired, said the City needed the full two years that the Province gave the City to prepare.
The City was required to set up an independent Investment Board comprised of external experts and the City’s Chief Financial Officer. No members of Council are allowed on the board to remove it entirely from the political realm.
Rossini said they conducted an exhaustive search for a skills-based Board, striving to find a good mix of financial and investment experts with those who understand the public sector.
The Board is responsible for developing and implementing the investment strategy (plan), guided by a Council-approved investment policy. For this work the City drew extensively from expert external consultants and peers in the pension world, drawing on examples from public sector pension plans like OMERS and the Healthcare of Ontario Professional Pension Plan (HOOPP).
Rossini believes having an arm’s length Board of experts is beneficial. Given market cycles, having a steady, impartial hand at the wheel helps reduce the likelihood of short-term political reactions to market changes leading to poor investment decisions. He added that staff were able to provide comfort to Council by assuring them that the City and the Investment Board would take a “crawl, walk, run approach” to investing.
Other preparation work included reviewing and aligning investments so that the City has liquid assets available to move into new securities when the prudent investor standard comes into effect.
Ultimately, both City staff and Council welcomed the opportunity to generate incremental revenue through improved investment returns. For example, many municipal investments are in bonds, which are currently seeing lower valuations as interest rates rise. Through prudent investments, municipalities can better manage risk over the long-term by having access to a broader array of investment options.
Municipal governments are still waiting for regulation from the Province for detailed requirements related to the prudent investor standard. A summary of the proposed regulation, with details of the proposed governance framework, eligibility criteria and approaches for joint municipal investments, was released for consultation in the fall.
Based on the feedback, the Province has signalled it may make some changes to the governance framework. But there are no final answers yet. Heather Douglas and Kelly Rodgers, of One’s Investment Program’s Advisory Committee, offered the following advice on “Do’s and Don’ts” during this transition period.
Don’t rush to make changes. First and foremost, there are many unknowns until the regulation is released in final form. While it had been anticipated before the new year, that timeline may be shifting. There will be new opportunities and a lot of preparation work ahead. It’s not a good time to make big changes or decisions.
However, there are a number of important things you can do right now to make sure you are ready for the new standard.
Do review your existing finances and investment holdings.
The first step is to know how much money would be available for investing under the new standard. According to the legislation, eligible municipalities who opt-in to the prudent investor standard will be able to invest “money that it does not require immediately” in any security. While not exhaustive, such money includes:
- 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.
Now is a good time to consider what money the municipality holds during a year that can be characterized as ’money that is not required immediately’ and what funds are required for immediate needs.
Municipalities may also want to consider their current investment portfolio with a view to getting ready for the time when the prudent investor regulation will come into force. In particular, positions in longer-term holdings should be examined. Municipalities may wish to make adjustments so that funds are available to move into new securities when the time comes.
Do review your asset management plan. Asset management plans are a municipality’s capital planning roadmap, helping a municipality to know how much it needs for capital work and when. This will be critical knowledge for any investment plan. A municipality needs to know the approximate amount of money available to invest and the investment horizon for such money, i.e. short, mid or long-term. Getting a handle on this now will help with the next step of finding the right mix of securities to get optimal returns over the required timeframe.
Don’t put it on the backburner. It may seem like there are still a lot of unknowns and a lot of time before anything changes. But stay tuned and keep up to date. This newsletter will share news on the regulation and insights into what it means for the sector.
There will be a lot of work to do to get ready for the new approach to investing. The One Investment Program will also be working hard to develop new offerings that will allow all municipalities to benefit from the prudent investor standard.
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