Ontario municipalities investing abroad after rule change

Theglobeandmail.com
July 8, 2020
Mark Rendell

A group of Ontario municipalities has begun pooling investments and buying international securities, the first local governments in the province beyond Toronto to take advantage of a rule change allowing municipalities to diversify their portfolios into non-Canadian products.

Six small municipalities -- Kenora, Muskoka, Bracebridge, Huntsville, Innisfil and Whitby -- have formed a joint board that will oversee a combined portfolio of about $300-million. The board, created in partnership with ONE Investment, a non-profit municipal money manager, has the ability to approve a range of strategies based on a “prudent investment” standard defined by the Ontario Municipal Act and similar to that used by public pension funds.

Local governments often set aside money for future infrastructure projects, investing it in low-risk securities over a long period. Until recently, Ontario municipalities were limited to a list of Canadian securities approved by the province.

Most other provinces limit municipal investment options in a similar manner, with exceptions in Nova Scotia and Alberta.

“There was lack of diversification options because everything had to be within Canada, and Canada just doesn’t have that diverse of an economy, when you look at the world scale,” said Stephen Rettie, Bracebridge’s chief administrative officer and deputy treasurer, who sits on the new nine-member investment board.

In 2018, the City of Toronto gained the power under provincial regulations to choose its own investments, including international securities, and established the Toronto Investment Board to oversee long-term decisions. This new regime was expanded to the rest of the province in early 2019 on an opt-in basis. It has taken 18 months for the first municipalities to transition into the new system and establish their own board.

“It just made sense,” said Mike Melinyshyn, Innisfil’s chief financial officer and director of corporate services, who is also on the new board. “You have the opportunity to take large sums of money and invest them at much higher rates. It totally reduces the impact on the taxpayers.

“To me, it’s analogous to the [Canada Pension Plan] board that was set up however many years ago to revamp the CPP to make it sustainable,” Mr. Melinyshyn added.

Each of the six participating municipalities had to pass its own bylaws to use the new regime, and each city council laid out its own risk tolerance and investment goals. The new investment board, which officially launched at the beginning of July, is independent of the city councils (and even bars councillors from being members) and is in charge of ensuring the fund managers follow each municipality’s goals and timelines.

“You’ve got to remember we’re dealing with people’s tax dollars, so we’re not going to go into any sort of high-risk investments,” Mr. Rettie of Bracebridge said.

“But with a well-diversified portfolio to maximize the yield where you can, then hopefully you’re beating inflation, and therefore you have to collect less tax dollars in the future when you finally get your shovels in the ground and start building,” Mr. Rettie said.

While the joint investment board will initially oversee funds for the six founding municipalities, the hope is that others will join in as they pass the necessary bylaws, said Judy Dezell, co-CEO of ONE Investment. To participate, municipalities must start their own investment boards or join an existing one.

Ms. Dezell said a number of municipalities have already expressed interest in joining the board. This is in line with a broader trend toward municipalities thinking differently about their investment strategy, she said. “Municipalities, for the most part, are actually increasing their equity exposure, which is something brand new.”

Ontario municipalities need to get more creative with their long-term financial planning, Mr. Melinyshyn said.

“The reality is the downloading of services from the provincial government, the cutting of transfer payments [to local governments], all that kind of stuff impacts the municipalities, which directly impacts the property tax payers,” he said.