CHANGES TO MUNICIPAL INVESTMENT POLICY: PRUDENT FINANCES

NRU
June 14, 2017
Sarah Niedoba

While Ontario’s municipalities currently operate on a closed-list investment standard—requiring
municipalities to investing mostly in government-backed bonds, treasury bills and bank deposits—new provincial legislation could lead to a large shift in municipal investment strategies.

In 2015, the province amended Ontario Regulation 610/06 to the City of Toronto Act to, as it says, put in place a “prudent investment standard” for Toronto. Now the city is able to make investments without any hard limits, as long as it is prudent. With the amendments to the Municipal Act, 2001, included in the Modernizing Ontario’s Municipal Legislation Act, 2017, all Ontario municipalities will be permitted the same flexibility.

According to a report by the University of Toronto’s Institute on Municipal Finance and Governance released last week, this change could provide a new source of income for municipalities—as long as they are properly prepared for it.

“The key issue for the new municipal investment regime will be setting up proper governance
mechanisms for monitoring and controlling investments,” IMFG post-doctoral fellow Gustavo Carvalho told NRU. “Potentially, the prudent-investor standard could mean larger returns for municipalities—but it could also mean higher risk.”

Carvalho says that in 2015, the market value of all municipal investments in Ontario was $26-billion, but returns were only $587-million, or 1.2 per cent of combined revenues. Under the new standard, municipalities have the flexibility to strive for a greater return on their investments, provided their staff have the necessary financial expertise.

The larger municipalities that Carvalho has spoken with are excited about the change— York Region  treasury office director Ed Hankins says the region is certainly one of them.

“We’ve been advocating for something like the prudent-investor standard for some time,” he told NRU. “Being able to increase our return on our investments would obviously provide some money for the taxpayer.”

Hankins says that the current closed-list standard restricts the region in its investments, and the new standard will allow it to diversify its holdings.

“The problem with the current list [of permitted investments] is that it doesn’t tend to get updated very quickly,” he explains. “What was good five years ago might not be a good opportunity now.”

While he agrees, Carvalho says that smaller municipalities may not have the resources to support the new standard the way that the region can.

“If large municipalities lose money on one or two investments, they have a big enough portfolio to absorb that risk,” he explains. “If you’re a smaller municipality, you don’t.”

Smaller municipalities also have a modest staff and officials with limited investment or financial
expertise. In the report, Carvalho suggests that the province mandate small municipalities to pool their investments and invest through a third-party manager.

“We’re going to have a situation where the bigger municipalities are going to have a lot of flexibility, and the smaller municipalities might have less so,” he says.

Hankins agrees that steps need to be taken by municipalities to ensure that the new standard is beneficial.

“Certainly [municipalities] need to be prepared with a robust portfolio and a detailed investment policy,” he says. “We’re supportive of allowing other municipalities [in addition to Toronto] to adopt the [new] standard, as long as their council approves the right investment policy.”

Overall, Carvalho sees the changes to the Municipal Act, 2001 as an important opportunity for Ontario’s municipalities.

“This could potentially change the way municipalities finance infrastructure investments, so I think it is important,” he says.