Moving Towards Prudent Investing
Many municipalities are considering their investment options, as the new year brings changes under Ontario’s investment regulations for municipalities. The decision about prudent investing requires some preparation, both for your new Council and for finance staff. The good news is there is no rush or deadline to decide about the Prudent Investor standard. Your municipality can pass a by-law starting in January 2019, but you can take advantage of the new investment powers anytime after that. Here are four things you can do to move the municipality towards prudent investing.
#1 Prepare Yourself and Council
- Take time to educate Council on the prudent investor standard and anticipate potential questions. Even if you have been discussing the changes with Council earlier, new members will need to get up to speed.
- Review current municipal investments, investment policies and objectives.
- Review the municipal asset management plan to determine if existing investments are aligned with needs and timing to replace or refurbish infrastructure.
- Monitor the ONE Investment newsletter for updates on prudent investor and other investment insights.
#2 Define Funds Not Required Immediately
- If you are interested in pursuing Prudent Investment, keep in mind that it applies only to funds “not required immediately” for management by an arms-length Investment Board.
- Each municipality will need to define the funds not required immediately. ONE Investment recommends using the criteria of all money not required in the next 18 months. We do this for two reasons:
- Most investors define investible, long-term money as terms of over 12 months.
- The City of Toronto’s choice of time frame provides a useful precedent on this issue. They chose an 18-month horizon to allow for awkward periods, such as year-end, when staff may be away to allow time for decision-making related to instruments maturing at that time.
- Keep these principles in mind as you consider defining these amounts:
- It is not necessarily safe to hold long-term investments in short-term instruments. This represents a time horizon mismatch; short-term investments may be liquid, but they are likely not earning as much as you need them to, and that is a risk.
- For contingency reserves, it is not necessarily optimal to hold them entirely in short-term investments for liquidity. If you have funds that you are likely never to need to access, you will probably be better off investing them for the long term.
#3 Consider Consolidating Accounts
- If you have a number of small reserve funds that you are investing individually, it is likely preferable to consolidate them for efficiencies: Many municipalities segregate the funds in the general ledger for accounting purposes, not in individual investment accounts. An exception is trust funds, there may be legal requirements to keep these funds separate.
- For contingency funds, it may make sense for different reserve funds to support each other in times of heavy draws as they are unlikely to be used all at once.
#4 Familiarize Yourself with the Steps to Prudent Investing
- There are several steps that a municipality will need to follow in order to undertake prudent investing. It’s helpful to start thinking about how to proceed with these steps. It is also important to keep in mind that ONE Investment is developing a turnkey service to help municipalities pursue prudent investing.
- To invest under the Prudent investor standard, a municipality must have $100 million in investments or $50 million in Net Financial Assets, either on their own, or with other municipalities investing in a pooled arrangement. If you need to pool your funds, you will have to identify other municipalities to work with, or choose ONE Investment, which is building a pooled model.
- Municipalities will need to establish or enter into an agreement to appoint an Investment Board or (IB) or Joint investment Board (JIB), which is a municipal service board. ONE’s model will include a Joint Investment Board.
- Municipalities must then pass an appropriate Prudent Investor by-law.
- To implement prudent investing, municipalities need to establish and maintain an investment policy that identifies objectives, risk tolerance, etc.
- The IB or JIB will then need to adopt and maintain an investment plan which reflects the municipality’s investment policy for annual review and approval by Council.
- The municipality will need a compliance monitoring system to ensure that the money is invested under the direction and supervision of the IB/JIB ,in compliance with the investment policy and the investment plan.
- A municipality will also need a mechanism for regular reviews and reports (at least annually) to address any changes to objectives, risk tolerance, etc. Making the necessary updates to the municipality’s investment policy is also an important part of the process. The IB/JIB would similarly have a process to reflect these changes in the investment plan.