Investment of local government funds

Cash resources (reserves, surplus and current funds) are essential to maintain municipal and regional district operations. Municipalities and regional districts must balance investment risk against potential investment returns within the requirements of the Community Charter, while still meeting the daily cash flow demands of the local government.

Legislative requirements

The Local Government Act, section 377(1)(c) Financial management: application of Community Charter and the Community Charter, section 183 Investment of municipal funds specify what types of investments are eligible for a local government:

• Securities of the Municipal Finance Authority
• Pooled investment funds under the Municipal Finance Authority Act, section 166 - Short term pooled investment funds
• Securities of Canada or of a province
• Securities guaranteed for principal and interest by Canada or by a province
• Securities of a municipality, regional district or greater board
• Investments guaranteed by a chartered bank
• Deposits in a savings institution, or non-equity or membership shares of a credit union
• Other investments specifically authorized under this or another Act

The legislation limits investment risk and guides local governments toward high-quality, secure investments that will contribute to the fundamental goal of preservation of capital.

Investment policy

All local governments that invest funds should have an investment policy. The investment policy would clearly identify the primary objectives of the local government's investment program. These objectives may include diversification, liquidity, return, and preservation of capital. It can also create requirements and guidelines so that investments maximize the local government's ability to meet their chosen objectives.

Preservation of capital

Because local governments are investing public money, preservation of capital (initial investment) should be the foremost objective of any investment program. Investments should be chosen in a manner that seeks to ensure preservation of capital by minimizing credit and interest rate risk.

Credit risk

Credit risk is loss due to failure of the counter party or investment issuer, and may be minimized by:

• Limiting investments to the safest types of securities
• Prequalifying the financial institutions, brokers, intermediaries, and advisors with which the local government will do business
• Diversifying the investment portfolio so that potential losses on individual securities will be minimized wherever possible

Interest rate risk

Interest rate risk is loss due to the decline in the market value of securities from changes in interest rates, and can be minimized by staggering maturity dates and product types.

Liquidity

The investment portfolio of a local government must remain liquid enough to meet all the operating and capital requirements that can be reasonably anticipated. This can be achieve by structuring investments such that maturities coincide with cash needs of the local government. Given that not all cash needs can be anticipated, investment portfolios should consist largely of securities with active resale markets.

Return

Investment portfolios should be designed to earn a fair return by maximizing opportunities through budgetary and economic cycles, taking into account the liquidity needs and investment constraints.