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February 1, 1999
To:Audit Committee
From:City Auditor
Subject:Investment Policy Compliance
Recommendations:
It is recommended that:
- monthly reporting procedures be put in place by City Finance staff relating to the investing
of City Funds. Such reporting procedures to include details of all investments held and
maturity dates of such investments. The review of monthly reports be conducted by staff
independent of the investment function and include an analysis as to whether or not the
City's investment policies and procedures are complied with. Evidence of the review be
documented in writing. Immediate and appropriate action be taken for all instances of non
compliance;
- City Finance staff seek legal advice and clarification relating to the scope of the Council
approved policy entitled "Investment Policy and Procedures" and determine whether or not
such policy applies to Agencies, Boards and Commissions. If it is determined that the
policy does apply to these entities, management of the City Finance Department forward
the policy to staff of all Agencies, Boards and Commissions for which the policy is deemed
to be applicable. All applicable Agencies, Boards and Commissions be advised that they
are required to comply with such policy;
- where practical, consideration be given to the consolidation of Agencies, Boards and
Commissions investing activities by the City Finance staff. In addition, the decision on
whether to consolidate should consider whether or not the services of outside professional
investment managers are utilized, the practicality based on dollar amounts and the average
length of terms investments are held, the types of investments allowed under legislation
and the degree of control exercised by the City over the Agencies, Boards and
Commissions;
- a reporting procedure be put in place by City Finance staff relating to the investing
activities of those Agencies, Boards and Commissions for which the policy is deemed
applicable. The reporting procedure be consistent with those recommendations as outlined
under Recommendation 1;
- consolidated financial reporting of all City investments be reported to Council on a more
regular basis than once a year;
- Management take immediate action to ensure compliance with policy limits on maximum
amounts and durations of specific investments;
- the document approved by Council entitled "Investment Policy and Procedures" be
finalized, particularly in terms of addressing key management administrative procedures;
- performance benchmarks for investment returns be set for those funds administered by the
City without an established performance benchmark;
- the investment policy and procedures manual be amended and updated to include the York
Employees' Pension and Benefit Fund. Clarification be sought in regards to the
responsibility for the investment of the assets of this fund, and
- appropriate staff be requested to provide a complete and updated reconciliation of all
investment balances at the City. This information be submitted to senior staff for their
review and approval. Evidence of approval be documented in writing. Specific deadlines
be set for the preparation of such reconciliations. Reconciliation of the investment portfolio
to the general ledger be performed on a monthly basis for all investment funds.
Background:
The Investment Policy and Procedures manual approved by Council in January 1998 requires
that the "Treasurer of the City shall establish an annual process of independent review by the
City's Auditor. This review will provide assurance of compliance with governing legislation,
this investment policy and procedures established by the Treasurer of the City."
This report complies with the direction of Council and includes other observations noted
during the course of the review.
Comments:
This review has been conducted as of December 31, 1998 in order to coincide with the final
year end of the City.
As at December 31, 1998 the City's investment portfolio being managed by the City's Finance
Department, consisted of approximately $2,498,000,000. The composition of the portfolio is
included as Appendix I, attached to this report.
Investments managed externally by Agencies, Boards and Commissions amounting to a
further $365,000,000 are included on the attached Appendix 2.
In addition to those issues relating to compliance, our review also noted certain accounting
deficiencies. We have included our observations and recommendations relating to these
deficiencies in our report.
- A monthly summary of the investment portfolios is not produced on a regular basis. Such a
report be prepared and forwarded to the Treasurer or her designate for review and approval.
As part of the review process, procedures be initiated to determine compliance with the
investment policy approved by Council. Explanations be obtained for any investments
which are not in accordance with the policy and appropriate action taken to ensure
compliance.
- The investment policy approved by Council outlines the specific scope of the policy. The
policy indicates that it "applies to all investments made on behalf of the City and its
Boards, Agencies and Commissions including but not limited to operating funds, reserves,
reserve funds, trust funds, sinking funds and any new fund created by the City unless
specifically exempted."
The policy, as stated, does not specifically include the investing activities of the Agencies,
Boards and Commissions. The policy in fact applies only to investments which the City is
handling for these entities and does not include investments being made independently by
local Boards. This particular issue requires clarification and should be addressed immediately.
- Many of the City's Agencies, Boards and Commissions invest their own surplus funds.
Certain of these Agencies, Boards and Commissions engage the services of outside
professional investment management and have formalized investment policies or
guidelines defined under specific legislation. In order to maximize interest earnings,
management consider the consolidation of the investing activity for Agencies, Boards and
Commissions. The decision to consolidate should consider whether or not the services of
outside professional investment managers are utilized, the practicality based on dollar
amounts and the average length of terms investments are held, the types of investments
allowed under legislation and the degree of control exercised by the City over the
Agencies, Boards and Commissions.
- There is no reporting process in place relating to the review of the investment portfolios of
Agencies, Boards and Commissions. If it is determined that the Treasurer of the City is
responsible for investment portfolios of Agencies, Boards and Commissions, City Finance
Department is not in a position to determine whether these investment portfolios are in
accordance with the Council approved policy. A mandatory regular reporting process be
initiated and controlled by the City Finance Department. Where applicable all reports be
reviewed and approved by City Finance staff in order to ensure that Agencies, Boards and
Commissions are in compliance with the Council approved policy. Immediate and
appropriate action be taken for all instances of non-compliance.
- The latest internal report on the market evaluation and performance of the investment
portfolio was performed as of June 1998. A regulation under the Municipal Act requires
that the Treasurer of the municipality is to prepare and provide to Council each year or
more frequently if specified by Council, an investment report. The regulation outlines the
minimum requirements of the content of the report. It is our understanding that the
Treasury and Financial Services Division plan to provide such a report to Council in March
1999.
The Government Finance Officers Association sample investment policy outlines a number of
recommended best practices related to reporting and in particular, recommends that an
investment report be prepared quarterly. We suggest that at least in the short term,
management consider the preparation of such a report on a more regular basis than just once a
year.
In accordance with the Municipal Act the investment report to Council "shall contain:
- a statement about the performance of the portfolio of investments of the
municipality during the period covered by the report;
- a description of the estimated proportion of the total investments that are invested in
its own long-term and short-term securities to the total investments of the
municipality and a description of the change, if any, in that estimated proportion
since the previous year's report;
- 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;
- 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; and
- such other information that the Council may require or that, in the opinion of the
Treasurer, should be included."
6. The investment policy and procedures document specifically itemizes approved
investments for both internally and externally managed funds. The policy lists both the
maximum amount that can be invested in a specific investment as well as specific limits on
the duration of the investment. Our review of documentation indicated non compliance with
these policies. For example:
- Metro Pension, Homes for the Aged
Federal Guarantees:Policy maximum = 10%Actual = 25%
Schedule 1 Banks:Policy maximum = 15%Actual = 25%
Ontario Hydro:Policy term limit 10 yearsActual 20 years
Canadian Municipalities
rated A:Policy maximum = 1%Actual = 5%
Management should take immediate action in regards to the above to ensure compliance with
the policy.
7. The Investment Policy document is incomplete. Section 5 of the Policy entitled "Investment
Procedures" includes a narrative that such procedures are "to be formulated." This particular
section should address key aspects of the investment management process including such
areas as:
- quarterly and year end reporting procedures;
- review and approval procedures;
- interest allocation procedures;
- procedures on the control and management of computerized systems, and
- procedures governing the use of on-line market databases.
It is important that these policies be completed as soon as possible.
8. The investment policy and procedures document makes reference to performance
measurement criteria for each of its individual investment funds. However, no performance
benchmark has been determined for the City of Toronto Atmospheric Funds, the Keele Valley
Post Site Closure Trust Fund and the balance of other trust funds administered by the City of
Toronto. This matter should be addressed as soon as possible.
9. The investment policy includes a listing of all investment funds under the jurisdiction of the
City. Absent from the listing is the York Employees' Pension and Benefit Fund. As of
December 31, 1997 this Fund had in excess of $70,000,000 in investments and over
$12,000,000 in investment income. There is uncertainty regarding responsibility for the
investment of these funds.
10. A regular and complete monthly reconciliation of investments held by the City to the
City's accounting records is not being conducted. For certain reconciliations we have
identified a number of unreconciled differences, one of which is in excess of $5 million. The
resolution of this item has been an issue since early 1998. Management should set as a priority
the reconciliation of all investment funds. We have discussed this matter with staff throughout
the year and we have been informed that staff have recently reconciled the difference. As of
the date of this report, we have not been provided with this reconciliation.
Conclusion:
Our review indicated a number of concerns that require immediate action. In particular, there
is uncertainty by staff at both the City and the Agencies, Boards and Commissions as to
whether or not the Council approved policy applies to the Agencies, Boards and
Commissions. This issue requires clarification, although in our view, we see no reason why
the policy should not apply to most, if not all, City owned and controlled entities.
Regular reconciliation processes are also not being conducted for all investment accounts. In
order to ensure the accuracy of the accounting records, as well as the accuracy of third party
information, this matter requires urgent attention.
Contact Name and Telephone Number:
Steve Harris, Senior Audit Manager, 392-8460
Jeffrey Griffiths
City Auditor
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APPENDIX 1
City of Toronto
Investment Portfolio
Investments Managed by City Finance Staff
December 31, 1998
City's Own Funds$1,625,065,000
Toronto Transit Commission2,821,000
Metro Pension Funds20,704,000
Police Benefit Fund6,345,000
Sinking Funds808,611,000
City of Toronto Atmospheric Funds16,530,000
Toronto Trust Funds9,011,000
Homes for the Aged6,600,000
Scarborough Trust Funds1,800,000
Public Utilities Commission250,000
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$2,497,737,000
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APPENDIX 2
City of Toronto
Investment Portfolio
Investments Managed Externally
December 31, 1998
City of Toronto Parking Authority$39,354,000
Toronto Economic Development Corporation21,870,000
Cityhome / Metro Housing77,100,000
Hummingbird Centre2,500,000
St. Lawrence Centre for the Arts1,467,000
City of Toronto Library Board2,370,000
City of Toronto Historical Board546,000
Toronto Hydro Electrical Commission218,000,000
Community Centres and Arenas1,275,000
BIA's and Other ABC's (estimated)1,000,000
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$365,482,000
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