STAFF REPORT ACTION REQUIRED Updated City of Toronto Investment Policy – 2012 Date:

September 24, 2012

To:

Executive Committee

From:

Deputy City Manager and Chief Financial Officer

Wards:

All

Reference P:\2012\Internal Services\Cf\Ec12022cf (AFS #16047) Number:

SUMMARY The purpose of this report is to obtain Council authority for staff to implement modest amendments to the City's Investment Policy. These amendments address issues arising from the management of the City's investment portfolios during an environment of low interest rates as well as permitting the Sinking Fund to structure its investments to match the City's issuance of 30-year debt. The Independent Investment Advisory Committee has been involved in the development of the Policy and agrees with the recommended amendments.

RECOMMENDATIONS The Deputy City Manager and Chief Financial Officer recommends that 1.

Council approve the City’s Investment Policy – 2012 (Policy) as amended and attached as Appendix B.

Financial Impact The adoption of the updated investment policy is expected to result in a modest positive impact on the City's annual investment earnings and rates of return. DECISION HISTORY The Policy was previously approved by Council at its meetings held in January 1998, June 2004, February 2009 and June 2010.

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COMMENTS The Capital Markets Section of the Corporate Finance Division is responsible for the internal investment management of several City investment portfolios. The Independent Investment Advisory Committee mainly provides advice in establishing policies related to investments by analyzing policy matters and making recommendations regarding investment strategies. The Committee was created by Council in April, 2011, replacing the former Investment Advisory and Sinking Fund Committees, and is comprised of three citizen members with extensive expertise in investment management and capital markets and the Deputy City Manager and Chief Financial Officer (DCM/CFO) as Chair. Citizen appointments were approved by Council in October 2011. The Section manages the City’s funds in a manner that provides the highest investment return consistent with maintaining the maximum security of principal. This strategy is applied to meeting the cash requirements of the City while conforming to all legislation governing the investment of City funds. Fund management must incorporate both the legislative constraints and the risk profile of each portfolio. Investment policies and procedures approved by Council govern the management of each of the individual portfolios. Although specific policy limits with respect to issuer names and credit quality limits vary between the portfolios, the primary objectives, in priority order, for all City investment activities are as follows: 1.

Ensure Safety of Principal Investments will be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolios. The Capital Markets section manages the exposure to interest rate risk through the establishment of limitations relating to diversification of investment assets. These limitations include credit rating, sector and issuer exposure as well as term structure. a.

Credit Rating Limitations The credit rating limitations established reflect both the requirement of the current legislation and the City’s own judgement on prudent investment standards. These limits are in place to avoid the risk of default of principal or interest payments by those issuers in which the City has invested its funds.

b.

Sector and Issuer Exposure Limitation The sector and issuer exposure limitations are intended to reflect the relative safety of each issuer and to deem an appropriate amount of exposure to a particular sector. All eligible investments must adhere to established

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individual issuer and sector limitations. By limiting the exposure to any one issuer or sector, management can reduce the overall credit and liquidity risk in a portfolio. c.

Term Limitations Portfolio term structure limitations must be established to ensure that the portfolio can accommodate future cash requirements. Each portfolio has a term requirement that may be dictated by legislation or determined by the specific characteristics of the portfolio itself. Term limitations have been established to restrict the term exposure for particular issuers.

2.

Maintain Adequate Liquidity Liquidity refers to the ease in which a security can be converted into cash. Maintaining adequate liquidity helps to ensure that excess funds are invested until they are needed and enables the City to meet all operating requirements that might be reasonably anticipated. The drawback to this is the inverse relationship between liquidity and return. The more liquid the security, generally, the lower the investment return.

3.

Maintain Sustainable Rate of Return while Conforming to Other Objectives The objectives of safety of principal and maintenance of liquidity must not be compromised in order to maximize returns. Once the essential parameters governed by the first two objectives have been addressed, the portfolios are structured to maximize their rates of return within these guidelines.

In developing investment policies and goals for funds under management, primary consideration is given to the objectives of each portfolio. The recommended amendments to the investment policy are summarized in Appendix A. The investment policy as amended is attached in Appendix B.

Proposed Amendments to the Investment Policy The proposed amendments to the Policy provide several options that are required for the City to manage more effectively in a low interest rate environment as well as addressing changes in the Sinking Fund's maturity structure to allow for matching investment holdings to the City's issuance of debt with a term of 30 years. As an example, the 10-year Government of Canada bond rate of return has decreased from 3.99% at 2007 year-end to the current rate of 1.97%, thus requiring the City to be able to access additional investment options such as extending term in order to maximize portfolio returns. In 2010, the City began to issue debt with 30 year maturities to better match the useful economic life of infrastructure assets with their financing and to take advantage of capital Staff Report for action on Updated City of Toronto Investment Policy - 2012

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market conditions and investor demand. Amendments to the Policy are now required to recognize that sinking fund investments require comparable maturities to match 30 year debt repayment requirements. Also, in addition to the City, Canadian municipalities and provinces have been increasing 30 year bond issuance, offering fixed income securities with competitive yields and good credit quality that would benefit the City's Funds. In addition, the recommended Policy permits investments in fixed-income securities issued by Canadian government agencies and corporations who have high credit quality and parental support while offering increased incremental yields as compared to other directly-issued government bonds. The proposed amendments for the Toronto Trust Group of Funds investments and maturities recognize that each individual trust fund administered by the City must comply with the Trustee Act. Each Trust Fund's mandate sets specific limits that are within the broader approved guidelines for the Toronto Trust Group of Funds. For example, the Long-Term Care Homes and Services Trust Fund is an externallymandated Fund. The objectives and income requirements of this Trust Fund have changed and are reflected in the proposed amendments to the Policy, having been approved by the Fund Administrators in Long-Term Care Homes and Services. Other amendments to the Investment Policy of a housekeeping nature are being recommended. Included are the deletion of references to the Sinking Fund and the Investment Advisory Committees as they were replaced by the Independent Investment Advisory Committee and the clarification of various clauses containing technical language within the Policy as suggested by the City Auditor. Subsequent to the approval of the Policy, the City's investment procedures will be updated to reflect the approved amendments. The Policy is continuously monitored to ensure that it will continue to be relevant during future economic and financial conditions to provide the tools needed to provide staff with the opportunity to achieve the objectives of the City's respective investment portfolios.

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A comprehensive review of the Policy is undertaken at least on an annual basis and amendments to the City’s Policy will be presented to Council for approval.

CONTACT Joe Farag Director, Corporate Finance Tel: 416-392-8108 E-mail: [email protected]

Martin Willschick Manager, Capital Markets Tel: 416-392-8072 E-mail: [email protected]

SIGNATURE

_______________________________________ Cam Weldon Deputy City Manager and Chief Financial Officer

ATTACHMENTS Appendix A - Summary of the Recommended Changes to the City of Toronto Investment Policy Appendix B – City of Toronto’s Investment Policy and Procedures (2012)

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Appendix A Summary of the Recommended Changes to the City of Toronto's Investment Policy. 1.

Approved list of Issuers and limits

It is recommended that the following issuers of fixed income securities be added to the approved list of issuers in the Investment Policy: Supranationals A Supranational is an entity that is formed by two or more central governments through international treaties. The purpose of creating a supranational is to promote economic development for the member countries. The International Bank for Reconstruction and Development (World Bank) is an example of supranational institution. The minimum credit rating required is AAA by S&P, Aaa by Moody’s or AAA by DBRS. Ontario Universities, Colleges and Hospitals The inclusion of these investments is an expansion of the current eligible list of investments in specific corporations and institutions that might be considered important to municipalities. The minimum credit rating required is AA- by S&P, Aa3 by Moody’s or AA(low) by DBRS. Canadian Corporations In addition to Canadian chartered banks, the City of Toronto Act (COTA) authorizes investment in fixed-income securities issued by a Canadian corporation for a term of more than 1 year but less than 5 years provided the securities are rated "A" or higher. If credit rating agencies downgrade a bond after it was purchased by the City, it can remain in the City's portfolio as long as it is rated "A" or higher with proper compliance monitoring procedures. Canadian corporation securities will be government-related and have above average credit quality. The recommended issuers to be added are: South Coast British Columbia Transportation Authority (Translink) is a regional authority governed by the South Coast British Columbia Transportation Authority Act. Translink is responsible for providing a regional transportation system that Staff Report for action on Updated City of Toronto Investment Policy - 2012

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is designed to transport passengers and goods within Metro Vancouver. Its institutional characteristics correspond to both those defining municipal governments in Canada (legislated balanced budget requirements and taxing authority) and transit authorities (fare-box revenues). Translink is rated AA by DBRS and Aa2 by Moody's. OMERS (Ontario Municipal Employees' Retirement System) Administration Corporation and Subsidiaries' debt is unconditionally and irrevocably guaranteed by OMERS. Governed by the OMERS Act 2006 and subject to the Pension Benefits Act of Ontario, OMERS administers a contributory defined benefit pension plan for employees for a wide range of municipal public sector employers in Ontario. In the event of a wind-up, the repayment of the obligations guaranteed by OMERS would have priority over the claims of plan members. OMERS is rated AAA by DBRS and AAA by S&P. bcIMC Realty Corporation is a wholly-owned subsidiary and real estate operating company of British Columbia Investment Management Corporation (bcIMC) who manages pension and other funds for public-sector employees in British Columbia. bcIMC Realty owns and manages a high-quality and diversified real estate portfolio, featuring several premier Canadian properties, including Commerce Court. With more than $91.1 billion in assets under management, it represents one of the largest pools of investment capital in Canada. bcRealty is not guaranteed by bcIMC Realty. Ownership is stable in light of provincial legislation that requires bcIMC Realty to be owned by pension funds who are generally long-term investors. IbcIMC is rated AA by DBRS. 2.

Eligible Investment, Issuer and Sector Limit of the currently Approved Issuers Toronto General Group of Funds It is recommended that: the issuer investment limit for Government of Canada Guaranteed issuers (rated AAA) be increased from 15% to 25% for the Toronto General Group of Funds. the investment limits for provincials and their guarantees, as well as municipalities and the Regions, be categorized by their credit ratings since a similar level of credit risk is implied for the issuers with the same credit rating.

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the sector limit for the municipalities other than Toronto and the Regions be increased from 50% to 60%. the sector limit for Asset Back Securities that are rated AAA be increased to 15% from 5%. term limits of the provincial issuers and their guarantees, as well as Canadian municipal and regions issuers, be set at 30 years. The Sinking Fund It is recommended that: the investment limits for provincials and their guarantees, as well as municipalities and the regions, be categorized by their credit ratings (instead of issuer by issuer) since similar level of credit risk is implied for the issuers with the same rating. the investment limit for municipalities other than Toronto and the Regions that are rated AA- and higher be increased to 20% from 15% and for bonds from the previous issuers rated A- and higher, it is recommended that the investment limit be increased to 10% from 5%. the issuer investment limit for National Bank (for short-term money market investments only) be increased to 20% from 15%. the term limits of provincial issuers and their guarantees, as well as Canadian municipal and Region issuers, are set at 30 years.

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