THUNDER BAY – A shift in how the City of Thunder Bay invests its financial reserves could open up millions in new revenue for the municipal government, though that won’t come without some new risks.
Investment policy changes approved unanimously by city council Monday will allow the city to put over a third of about $112 million in long-term investments into global equities, and nearly half of that fund into the stock market overall. The city's previous investment policy had capped equity exposure at 25 per cent.
The city’s investments have traditionally been restricted to a lower-risk “legal list” set by the province, including government and bank debt, and some Canadian equities and asset-backed securities.
Now, Thunder Bay will move to join a Joint Investment Board founded by six Ontario municipalities, including Kenora, in 2020, after provincial reforms allowed cities to invest outside of the legal list.
The board’s funds are managed by ONE Investment, a non-profit formed by Ontario municipal associations, and its policies are guided by Ontario’s legislated Prudent Investor Standard.
Mayor Bill Mauro, who had a role in shaping the provincial legislation as a minister in the Kathleen Wynne government, said the model manages risk but has big potential upsides.
“Basically what we’re talking about here is a bit more risk – that’s why the history is important to know – [but] an opportunity to significantly enhance our revenues in the good years.”
In six of the last seven years, the ONE Investment portfolio outperformed legal list returns, reported director of financial services Emma Westover. The difference amounted to nearly nine per cent in some years, and as little as 0.7 per cent in others.
In one year, 2019, the Prudent Investor list had a 16.7 per cent rate of return, compared to 7.5 per cent under the legal list.
With over $100 million invested, Mauro suggested, the city stands to gain millions in good years like that.
That's amplified by the fact the city is not taxed on its capital gains, pointed out Coun. Mark Bentz.
It's impossible to quantify the exact impact of moving to the new investment policy, Westover said in an interview, but confirmed it would amount to millions more in investment revenue in some years, based on historical trends. Future reviews of the investment strategy will likely be able to estimate the impact, she said.
"You may see the bigger drops and you may see bigger gains [in individual years], but over time the investments are expected to grow," she said. "So when the city needs those funds, every expectation is that a greater amount will be there.”
The city’s agreement with the ONE Investment joint investment board will include “moderate risk tolerance” for maximum losses of up to 5 to 10 per cent a year, though the city’s report stressed it doesn’t anticipate any losses being realized.
In some ways, the transition will reduce financial risks by allowing the city to diversity its portfolio and rely less on the Canadian market, said Westover, which she said can be volatile due to its dependence on commodity prices.
The city’s $112 million in long-term investments would have a 43 per cent equity exposure under the proposed agreement, mostly in global equities. That would bring the city's equity exposure on its total investments to around 30 per cent.
City manager Norm Gale told councillors he was confident in the move.
“I’m advised by the treasurer and her team, and I’m 100 per cent confident in this based on their advice to me,” he said.
Mauro said he had no specific suggestions on what the city should do with potential gains, which would accumulate in reserve funds and could be used for a variety of purposes at the direction of council.
In its report, administration suggested any gains could help address significant infrastructure maintenance shortfalls.
“Certainly we are thinking of this transition as helping the city navigate increasing infrastructure pressures,” Westover said.
The city will continue to manage short-term and third-party funds held in trust using the legal list.
The draft investment agreement would require ONE Investment to assess how portfolio managers are implementing "responsible investing principles," but notes it may not be able to exclude specific types of assets.
The change won’t be official until council passes an enabling bylaw, following approval of the city’s investment plan by the ONE Investment joint investment board, scheduled for March.
