Pursuant to
Regulation 74/97 Section 8, the Municipal Act requires the Treasurer to
“prepare and provide to the Council, each year or more frequently as specified
by Council, an investment report”.
The
investment report shall contain,
(a) a
statement about the performance of the portfolio of investments of the
municipality during the period covered by the report;
(b) a
description of the estimated portion of the total investments of a municipality
that are invested in its own long-term and short-term securities to the total
investment of the municipality and a description of the change, if any, in that
estimated proportion since the previous year’s report;
(c) a
statement by the Treasurer as to whether or not, in his opinion, all
investments were made in accordance with the investment policies and goals
adopted by the municipality;
(d) a record of the date of each transaction
in or disposal of its own securities, including a statement of the purchase and
sale price of each security;
(e) such
other information that the Council may require or that, in the opinion of the
Treasurer, should be included.
For the year
ending December 31, 2020, the Town of Markham’s Income Earned on Investments was
$9.68 million, compared to a budget of $9.20 million, representing a $0.48
million favourable variance.
The 2010 budget assumed an average
general fund portfolio balance of $222.2 million to be invested at an average
rate of return of 4.14%. Both the actual average portfolio balance and the
average rate of return were higher than budgeted levels. The details of these two factors will be
discussed below.
Interest
Rate
The Prime
Rate was 2.25% at the beginning of 2010.
By September, it had rose to 3.00% and remained at that level through
the end of the year.
In 2010,
the Town’s investments had an average interest rate of 3.79%, 35 basis points below
forecast. However, through active bond
trading, the Town realized $842,000 of Capital Gains, thereby increasing the
actual rate of return to 4.15%; 1 point higher than the 4.14% forecasted
rate. The difference in the rate of
return accounts for a favourable variance of $16,000.
Portfolio
Balance
The
budgeted average portfolio balance for 2010 was $222.2 million. The actual average general fund portfolio
balance (including cash balances) for 2010 was $233.5 million, resulting in an
additional $11.3 million that was available for investment purposes. The higher portfolio balance accounts for a
favourable variance of $467,000.
Portfolio
Composition
All
investments made in 2010 adhered to the Town of Markham investment policy. At December 31, 2010, 53% of the Town’s
portfolio was comprised of government issued securities. 47% of the portfolio was made up of
instruments issued by Schedule A Banks.
All of these levels are within the targets established in the Town’s
Investment Policy. (Exhibit 1).
The December 31, 2010 investment
portfolio was comprised of the following instruments: Bonds 74%, Term Deposits 17%, and Treasury
Bills 9% (Exhibit 2).
At December 31, 2010, the Town’s portfolio
balance for all funds was $343.5 million (including bank balances). DCA investments represented $60.7 million
of this amount. The Town’s portfolio
(all funds excluding DCA) of $282.8 million was broken down into the following
investment terms (Exhibit 3):
2010
2009
Under 1 month 27.3% 29.9%
1 month to 3
months 6.2% 8.4%
3 months to 1 year 4.0% 2.6%
Over 1 year 62.4% 59.1%
Weighted
average investment term 1,659.1 days 1,537.1 days
Weighted average
days to maturity 1,184.9 days 1,237.4 days
Since December 31, 2009, the weighted
average days to maturity has been relatively stable, dropping only slightly
from 1,237.4 days to 1,184.9 days. This
reflects the fact that the investment strategy has not changed much since
2009. The strategy continued to be to
invest in longer term instruments to take advantage of the wide spread between
short and long term rates.
Money Market Performance
The Town
of Markham uses
the 3-month T-bill rates to gauge the performance of investments in the money
market. The average 3-month T-bill rate
for 2010 was 0.46% (source: Bank of Canada).
Non-DCA Fund money market investments held by the Town of Markham in 2010
(including bank balances) had an average return of 0.96%. Therefore, the Town’s money market
investments outperformed 3-month T-Bills by 50 basis points. See Exhibit 4 for all Money Market securities
held by the Town of Markham in 2010.
Bond Market Performance
2010 marks the
ninth year of the Town’s bond strategy.
The 2010 highlights of the program are as follows:
- 15
bonds were purchased with a face value of $66.3 million
- 6 bonds
were sold with a combined face value of $23.0 million
- $842,000
million of Capital Gains were realized
At December 31, 2010, the Town held 70 bonds (up from
65 in 2009) in the general fund portfolio.
The amortized value of these bonds at year-end was $195.5 million (an
increase of $10.8 million over 2009).
The market value of these bonds at December 31, 2010 was $202.4
million. This translates into $6.9
million of unrealized gains at year end.
In 2010,
the Town continued to increase its bond holdings to take advantage of the relatively
steep yield curve. As well, at certain
points during the year when bond yields temporarily dropped, the Town took
advantage by selling bonds and earning $842,000 in Capital Gains. See Appendix
5 for all 2010 bond transactions.
In
November, 2009, Council granted approval to establish a Capital Gains Reserve
to be funded through surpluses in the Capital Gains account. As the budget for Capital Gains is
$200,000/year (incorporated into the $9.2 million budget), up to $642,000 can
be transferred to the Capital Gains Reserve to offset fluctuations in returns
in future years. The exact amount of
this transfer will be brought forward to Council in the Year End Results of
Operations report later in the first quarter of 2010.
Reserve Funds and Other Interest
The following
table outlines the interest on investments for all major Town funds and
reserves.
|
|
Average Balance
|
Interest Earned
|
Average Rate
|
|
General Portfolio
|
$233,500,000
|
$9,683,000
|
4.15%
|
|
Reserve Funds
|
$113,600,000
|
$937,000
|
0.82%
|
|
Trust Funds
|
$1,716,000
|
$74,000
|
4.31%
|
|
Powerstream Promissory Note
|
$67,866,000
|
$3,787,000
|
5.58%
|
|
MEC/District Energy Loans
|
$16,800,000
|
$785,000
|
4.67%
|
|
Development Charge Reserves
|
$56,800,000
|
$724,000
|
1.27%
|
Because
of the large swing in portfolio balances throughout the year (due to the timing
of the collection and disbursement of taxes), there will always need to be a
significant portion of the Town’s funds invested in the money market.
The
Town’s Interest Allocation Policy (as approved by Council) stipulates that
money market rates be allocated to the interest bearing reserves and bond
interest be allocated to the general portfolio.
The reasons for this are 1) over the long term, bond rates generally
outperform money market rates, therefore the Town is able to achieve higher
rates of return in its general portfolio and thereby reducing the immediate
need for tax increases; 2) bond market rates are more stable which allows for
smoother budgeting; and 3) reserves and reserve funds can more easily absorb
these money market rate fluctuations as the requirements for these funds are
longer term in nature.
The
average rate earned for the Development Charge Reserves is also low as the
majority of investments need to be kept short term, as it is forecasted that
the reserves will be depleted by 2013.
One
minor modification to the Interest Allocation Policy that is recommended is
that bond market interest be allocated to the Town’s Trust Funds. Currently, the Interest Allocation policy
states that bond market interest is to be allocated only to the Varley Trust
Fund. To be consistent, it is
recommended that the other Trust Funds (totalling approximately $350,000) be
allocated the same interest rate (approximately $15,000/year of interest).
