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TO: |
Mayor and Members of Council |
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FROM: |
Andy Taylor, Commissioner of Corporate Services Barb Cribbett, Treasurer |
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PREPARED BY: |
Mark Visser,
Manager of Strategy, Innovation & Investments, Corporate Services |
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DATE OF MEETING: |
2005-May-02 |
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SUBJECT: |
2005 First
Quarter Investment Performance Review |
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RECOMMENDATION:
THAT the report dated
PURPOSE:
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 her 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.
BACKGROUND:
Beginning in April 2005, the recommendations of the February 2005 Reserve Study report will take effect. In order to fund major capital replacements for the next 20 years, the Reserve Study recommended allocating interest to over $60 million of reserve balances, primarily to the “Life Cycle Replacement and Capital Reserve Fund”. In the past, interest income earned on the $60 million of reserves benefited the Operating Budget/General Fund and helped to achieve the Investment Income operating budget (2004 budget = $6.66 million). Starting in April, the $60 million of reserves will receive interest of approximately $400,000 per quarter that would have otherwise been allocated to the General Fund.
Actual Investment Income in 2004 was $7.46 million compared to a budget
of $6.66 million, resulting in a favourable variance of $0.8 million in 2004. During the 2005 Budget process, the 2005
Budget for Investment Income was not increased above the $6.66 million level
pending finalization of the recommendations from the Reserve Study (described
above). The $0.8 million favourable
variance in 2004 may not materialize in 2005 as interest on approximately $60
million of reserve fund balances will start earning interest in April
2005.
For the three months ending
The 2005 budget assumes an average
general fund portfolio balance of $180 million to be invested at an average
rate of return of 3.70%. Both the actual average portfolio balance and the average
rate of return (after Capital Gains) were above budgeted levels. The details of these two factors will be
discussed below.
At the
beginning of 2005, the Canadian Bank Rate was 2.75%. It remained at this level for the entire
first quarter. During the first quarter
of 2005, the Town’s investments had an average interest rate of 3.53%; 17 basis
points lower than budget. However,
through active bond trading, the Town realized $237,000 of Capital Gains in the
quarter, thereby increasing the actual rate of return to 4.00%; 30 basis points
over the budgeted rate. The difference
in the rate of return accounts for $150,000 of the $382,000 favourable
variance.
The
budgeted average portfolio balance for 2005 remained at the 2004 level of $180
million due to the aforementioned Reserve Study recommendations. The actual average general fund portfolio
balance for the first quarter of 2005 was $205.4 million, resulting in an
additional $25.4 million that was available for investment purposes throughout
the first quarter. The higher portfolio
balance accounts for $232,000 of the $382,000 favourable variance
Portfolio Composition
All
investments made in the first quarter of 2005 adhered to the Town of
The
At
Under 1 month 33.5%
1 month to 3 months 24.1%
3 months to 1 year 16.5%
Over 1 year 25.9%
Weighted average
investment term 732.3
days
Weighted average days to
maturity 475.9
days
The Town
of
2005 marks the fourth year of the bond trading
strategy. The 2005 YTD highlights of the
program are as follows:
At the
beginning of 2005, bond yields were low.
As a result, the Town capitalized on these high prices by selling a
handful of bonds at a substantial profit.
As the quarter came to a close, bond yields began to rise and the Town
purchased $8.5 million of bonds for the General account and another $3.0
million for the DCA account. Looking
ahead, the Town will attempt to take advantage of the rate fluctuations to earn
additional Capital Gains, while increasing the long-term bond portfolio as
rates continue to rise.
FINANCIAL CONSIDERATIONS:
In the first quarter of 2005,
the Bank Rate remained constant at 2.75%.
While it is expected that rates will gradually increase in 2005, the
strong Canadian dollar and high oil prices may keep the rates in check. For the remaining nine months of 2005, the
Town average return on investments is expected to be in the 3.70%-4.00% range.
While
the portfolio balance for the first quarter was well over budgeted levels, this
trend will not continue. Beginning in
the second quarter, interest will be allocated to over $60 million of reserve
balances (primarily to the new “Life Cycle Replacement and Capital Reserve
Fund”). It is forecasted that the
remaining three quarters will be much closer to budgeted levels. Taking the first quarter results into
account, this will still net a positive Investment Income variance for the year.
ATTACHMENTS:
Exhibit
1 – Investment Portfolio by Issuer
Exhibit
2 – Investment Portfolio by Instrument
Exhibit
3 – Investment Terms
Exhibit
5 – 2005 Q1 Bond Market Investments
Exhibit 6 – 2005 Q1 DCA Fund Investments
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Barb Cribbett, Treasurer |
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Andy Taylor, Commissioner of Corporate Services |
Q:\Finance and Administration\Finance\SHARED\2005
General Committee Finance\0515 2005 Q1 Investment Report.doc
