4. 2010 INVESTMENT AND ENDOWMENT FUND REPORT

Rapport sur le fonds d’investissement et de dotation de 2010

COMMITTEE RECOMMENDATIONS

That Council:

1. Approve a one-time special distribution from the City of Ottawa Endowment Fund in an amount of up to $21,253,000 be distributed and that the amount of the payment be lowered if required, to keep the value of the Fund at not less than $200 million after the distribution is made; and

2. Receive this report on the results of the City’s investments for 2010 as required by Ontario Regulation 438/97 as amended to Regulation 292/09, Section 8 (1), and the City’s Investment Policy.

RecommandationS du ComitÉ

Que le Conseil:

1. approuve une allocation spéciale ponctuelle d’un montant maximal de 21 253 000 $ du fonds de dotation de la Ville d’Ottawa et que le montant du paiement soit baissé, s’il y a lieu, afin de garder la valeur du Fonds à 200 M$ minimum une fois l’allocation versée; et

2. prenne connaissance du présent rapport sur les résultats des investissements de la Ville en 2010, comme l’exige le règlement de l’Ontario 438/97 modifié sous le Règlement 292/09, paragraphe 8(1), et la Politique d’investissement de la Ville.

DOCUMENTATION

1. City Treasurer’s report dated 30 May 2011 (ACS2011-CMR-FIN-0026).

Report to/Rapport au :

Finance and Economic Development Committee

Comité des finances et du développement économique

and Council / et au Conseil

30 May 2011 / le 30 mai 2011

Submitted by/Soumis par : Marian Simulik, City Treasurer/Trésorière municipale

Contact Person/Personne ressource : Mona Monkman, Deputy Treasurer Corporate Finance, / Titre

Finance Department/Service des finances

613-580-2424 ext./poste 41723, Mona.Monkman@ottawa.ca

City Wide/à l'échelle de la Ville

Ref N°: ACS2011-CMR-FIN-0026

SUBJECT:	2010 INVESTMENT AND ENDOWMENT FUND REPORT

OBJET :	Rapport sur le fonds d’investissement et de dotation de 2010

REPORT RECOMMENDATIONS

That the Finance and Economic Development Committee recommend Council:

2. Receive this report on the results of the City’s investments for 2010 as required by Ontario Regulation 438/97 as amended to Regulation 292/09, Section 8 (1), and the City’s Investment Policy.

RECOMMANDATIONS DU RAPPORT

Que le Comité des finances et du développement économique recommande que le Conseil :

BACKGROUND

The City of Ottawa is authorized, under Section 418 of the Municipal Act, 2001, to invest funds not immediately required. Ontario Regulation 438/97, as amended to O.Reg. 292/09, outlines the criteria for eligible investments, which provides for a relatively conservative investment mix.

The City’s Investment Policy, as approved by Council on 25 June 2003, sets sector, issuer, credit and term limits, and acts as the governing guideline in the management of the City’s investment portfolios. The reporting requirements in the City’s Investment Policy and Section 8 (1) of O. Reg. 438/97 require that a report be submitted to Council each year. Regulation 438/97 was amended on 12 December 2005, by Regulation 655/05. This regulation provides a wider range of eligible investments in Canadian corporate bonds and equities for the City's Endowment Fund. The regulation and the City’s adopted Statement of Investment Policies and Procedures require yearly reporting on the performance of the Endowment Fund, which has been included in this report.

DISCUSSION

Endowment Fund

The Endowment Fund (Fund) was established from the proceeds received from Hydro Ottawa when it completed its refinancing in 2005. The Province broadened the scope of eligible investments for the Fund to include Canadian equities and corporate bonds. Two external investment managers manage investments for the Fund.

The financial crisis which unfolded in 2008 significantly impacted the Fund and resulted in no payment to the City in 2008. However the value of the Fund recovered and payments were made to the City in 2009 and 2010. The market value of the Fund as at December 31, 2010 was $214.4 million. The performance of the Fund has continued to provide strong returns and the market value has increased to $221.253 million as at May 13, 2011 which provides an opportunity to consider making a payout which is greater than the 6.5% per year target return.

The following are the details of the payments from the Fund compared to expected returns:

	Expected Return[1]	Payments
2008	13,000,000	-
2009	13,000,000	10,915,000
2010	13,000,000	13,643,000
2011	13,000,000	21,253,000[2]
	52,000,000	45,811,000

On June 14, 2006 Council adopted the investment policy and procedures for the Fund which set the target return at 6.5% and established the Endowment Fund Investment Committee to oversee the operation of the Fund. Each year the Investment Committee reviews the returns for the Fund and calculates the amount to be distributed to the City based on a formula of 6.5% of the average market value for the Fund at the end of the three immediately preceding years ending September 30 provided that the Fund does not fall below the initial amount invested of $200 million. The overall return on the Fund for 2010 was 11.5%. Returns for the Fund have been very good and the Fund value has increased significantly which provides an opportunity to make a larger payout at this time to compensate for the events of 2008 which resulted in no payout to the City.

At a meeting of the Endowment Fund Investment Committee on May 17, 2011 the performance of the Fund was reviewed and it was unanimously agreed that the Committee recommend that Finance and Economic Development Committee recommend Council approve a payment from the Fund of $14,131,000 representing a return of 6.5% of the average market value as at May 13, 2011 and the preceding two years ending September 30 and an additional amount of $7,122,000 bringing the total amount distributed to $21,253,000 million provided that the Fund has a minimum value of $200 million immediately after the distribution is made. If Council approves, this will bring the total amount received from the Fund to $45.811 million which would be less than the $52 million expected based on a 6.5% return on the amount invested for the period 2008-2011. The market value of the Fund will fluctuate and therefore it is recommended that an amount of up to $21,253,000 be distributed and that the amount of the payment be lowered if required, to keep the value of the Fund at not less than $200 million after the distribution is made which is the minimum amount required to be held in the Fund at this time. Consistent with the legislation, which requires the returns from the fund to be used for capital formation, the increased value of the payment will be contributed to the City Wide Reserve.

Financial Market Review 2011

Canada orchestrated a modest economic recovery in 2010. The economic growth was generated from domestic activity in residential construction, a rebound in the manufacturing sector and increased world demand for Canadian resources. A steadfast banking system, the Government stimulus packages and dovish monetary policy were key contributors to the economic recovery. The strengthening economy and rich resource base (predominantly Oil) culminated in the Canadian dollar appreciating to par versus the US dollar. Equity markets also benefited from the stimulus initiative and dovish fiscal and monetary policy. The TSX opened the year at 11,500 and closed at 13,500. The positive developments in the economy opened the door for the Bank of Canada to remove some of the exuberant simulative policy in place at the beginning of the year. The Bank of Canada increased the overnight target rate three times in the year taking the rate to from 0.25% to 1.00% by year’s end. 2011 could be a continuation of 2010 however there is reason for concern. Consumer debt has risen to levels that are garnering concern by Officials at the Bank of Canada, the Canadian dollar is having some negative impacts on exports, Geo political conditions threaten the world recovery and energy and commodity prices could cause consumers to hold off on spending.

City stimulus initiatives coupled with existing capital project expenditures resulted in net cash out-flows and lower investment reserve balances at year-end. Declining investment balances were offset to a degree by higher short to mid-term interest rates however the offset was not enough to prevent a reduction in income from investments. Facing the prospect of a reduction in investment holdings due to the aggressive City stimulus spending initiatives along with a forecast for rising interest rates in the future, the City staff focussed investments in the short end. As at December 31, 2010 the short-term portfolio represented 35% of total investments compared to 31% as at December 31, 2009.

2010 Investment Performance General Funds

The performance of the City’s investment portfolios is summarized below. The investment returns shown below represent book returns, which include interest income, realized capital gains and losses and amortized bond premiums and discounts.

Portfolio

Average Portfolio Value

($ million)

Earned Income

($ millions)

Investment Return

(%)

Short-Term Investments

Long-Term Funds

Total General Funds

Sinking Funds

All Funds

618.0

483.8

1,101.8

168.5

1,270.3

4.3

20.0

24.3

9.1

33.4

0.70

4.14

2.21

5.40

2.63

The short-term portfolio includes investments with maturity dates of less than one year. The size of the portfolio varies greatly from a high of $1,014.2 million in August, when the proceeds of the final tax billing for the year have been received to a low of $74.7 million in February 2010. The long-term portfolio includes bonds, debentures and other eligible investments maturing up until 2019. Document 1 provides full details of the distribution of investments by type of issuer, by rating and by maturity.

The maturity profile of the combined short and long-term portfolios remained consistent from 2009 to 2010, with 84% of investments maturing within five years. The short-term exposure to schedule II banks remained at zero however the exposure to commercial paper was increased in response to improvements in credit and financial markets in 2010. No Asset Backed Securities (ABS) were purchased in 2010 however Asset Back Commercial Paper was added back into money market holdings. The City held $9.0 million in longer term Asset Backed Securities (ABS) in the long-term and sinking fund portfolios at year-end 2010. All of these ABS holdings have maintained AAA ratings required by provincial regulation to be eligible for investment by municipalities.

Investments in City of Ottawa Long-Term and Short-Term Securities

O. Reg. 438/97, subsection 4. (1) requires that a municipality shall not invest more than 25 per cent of the total amount in all sinking and retirement funds in respect of debentures of the municipality, as estimated by its City Treasurer on the date of the investment, in short-term debt issued or guaranteed by the municipality.

The City of Ottawa did not issue short-term securities in 2010. In 2010, the Sinking Fund made short-term advances to the City to strategically manage short term balances in advance of the maturity of Sinking Fund By-law 33 of 1991 on February 28, 2011. As the nature of the Sinking Funds portfolio is longer-term, money market instruments are not normally carried on its books, but advances to the City allows the Sinking Fund to participate in the earnings of the City’s Short-Term Investments portfolio. The highest point of Sinking Funds advances to the City in 2010 was $18.0 million, representing 2% of all investment portfolios.

At 31 December 2010, the City of Ottawa held $67.8 million or 7.3% of total investment assets, in its own long-term debentures.

Compliance with Investment Policy

For the year 2010, all investments were made in accordance with the investment policies and goals adopted by City Council. Details of investments by issuer categories for the City’s investment portfolios are shown in Document 1.

By limiting investment purchases to high-quality investment-grade securities controls credit exposure for each of the investment portfolios. Some exposure, within approved policy limits, to lower-rated and un-rated municipal issuers allows the City to capture higher yields over higher-rated issuers. As of 31 December 2010, 100 per cent of investments held in the Short-Term Investments portfolio were rated R-1 mid or better. Details of the credit exposure by rating are shown in Document 1.

The Long-Term and Sinking Fund portfolios are weighed more heavily towards highly rated federal, provincial and municipal debt. 100 per cent of the assets held in these portfolios are invested in securities rated AA- or higher as at 31 December 2010. Details are shown in Document 1.

Term Exposure

The term exposure of the General Funds in 2010 remained at 1.4 years.

Sinking Fund assets were invested in longer-term securities consistent with future commitments, while at the same time capturing higher returns for longer-dated securities. The weighted term-to-maturity of the Sinking Fund portfolio as of 31 December 2010 was 3.5 years.

Investment Management Expenses

The City’s portfolio management fees are estimated by measuring the costs associated with the investment section relative to the size of the assets under management. These costs include staff salary, custodial services, market information systems, portfolio management software, an allocation for general administrative expenses and other miscellaneous expenses.

In 2010, direct costs associated with managing the City’s investments represented 3.6 basis points on the average total amount of all invested funds including the Endowment Fund of $1.485 billion. These costs compare favourably to the management fees of other comparable investments including the ONE Investments, which has fees of 19 basis points for its Money Market Fund and 40 basis points for its Bond Fund.

RURAL IMPLICATIONS

There are no rural implications as a result of this report.

CONSULTATION

The public consultation process is not applicable.

LEGAL/RISK MANAGEMENT IMPLICATIONS

There are no legal/risk management impediments to receiving this report. Approval for the special payment identified in the recommendations is only being sought for the current year and therefore no change to the Endowment Fund's Statement of Investment Policies and Procedures is required.

CITY STRATEGIC PLAN

There are no implications to the Strategic Plan in receiving this report.

TECHNICAL IMPLICATIONS

Not applicable.

FINANCIAL IMPLICATIONS

The 2011 adopted Budget provides for a contribution from the Endowment Fund to Capital in the amount of $13,000,000. If approved the amount of $21,253,000 will be transferred to the City Wide reserve.

It is the opinion of the City Treasurer that all investments were made during 2010 in accordance with the City’s Investment policy.

SUPPORTING DOCUMENTATION

Document 1 - Investment portfolios by asset class, term and credit exposure

DISPOSITION

Following consideration by Finance and Economic Development Committee, this report will be forwarded to Council for its consideration.

Document 1

Investment Portfolio 2010

ALL FUNDS	Par Value ($1,000)		% of Total[3]		Policy Range (%)
ALL FUNDS	2010	2009	2010	2009	Policy Range (%)
Cash balances	44,648	21,501
Federal	237,626	213,826	27	22	20 - 100
Provincial	159,483	241,072	18	25	5 - 75
Municipal	128,427	149,563	15	16	0 - 50
City of Ottawa	67,755	73,946	8	8	0 - 50
Schedule I Bank	194,643	197,430	22	10	0 - 70
Schedule II Bank	0	0	0	0	0 - 25
Commercial Paper	45,000	30,000	5	3	0 - 20
Asset-Backed Commercial Paper	15,000	0	2	0	0 - 20
Asset-Backed Securities	9,000	35,950	1	4	0 - 25
Other	17,604	23,875	2	2	0 - 25
Grand Total	919,186	987,163	100	100

Term Exposure for the General and Sinking Funds as at 31 December

Maturity	General Funds (%)		Sinking Funds (%)
Maturity	2010	2009	2010	2009
Less than 1 year	48	46	65	18
1 - 5 years	36	39	17	60
5 - 10 years	15	14	18	22
10 years or more	1	1	0	0
		100	100	100

Short-Term Investments Credit Exposure as at 31 December

Rating	2010 (%)	2009 (%)
R-1 High	82	57
R-1 Mid	18	43
R-1 Low	0	0
	100	100

Long-Term and Sinking Fund Credit Exposure as at 31 December

Rating	Long-Term (%)		Sinking Funds (%)
Rating	2010	2009	2010	2009
AAA	48	52	73	68
AA	52	42	27	32
AA-	0	6	0	0
A+	0	0	0	0
A	0	0	0	0
BBB and Unrated	0	0	0	0
	100	100	100	100

[2] Current market value less $200,000,000 which is the minimum amount to be maintained in the Fund in accordance with Ontario Regulation 655/05 as amended.