Investment Policy Compliance

The Audit Committee recommends that:

(1)monthly reporting procedures be put in place by the Chief Financial Officer and Treasurer, or her designate, 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 the Chief Financial Officer and Treasurer, or her designate, 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;

(2)the Chief Financial Officer and Treasurer, or her designate, 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, the Chief Financial Officer and Treasurer, or her designate, 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;

(3)where practical, consideration be given to the consolidation of Agencies, Boards and Commissions investing activities by the Chief Financial Officer and Treasurer, or her designate. 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;

(4)a reporting procedure be put in place by the Chief Financial Officer and Treasurer, or her designate, 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;

(5)consolidated financial reporting of all City investments be reported to Council on a quarterly basis;

(6)the Chief Financial Officer and Treasurer, or her designate, take immediate action to ensure compliance with policy limits on maximum amounts and durations of specific investments;

(7)the document approved by Council entitled "Investment Policy and Procedures" be finalized, particularly in terms of addressing key management administrative procedures;

(8)performance benchmarks for investment returns be set for those funds administered by the City without an established performance benchmark;

(9)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

(10)the Chief Financial Officer and Treasurer, or her designate, 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.

The Audit Committee reports, for the information of Council having:

(1)requested the City Auditor to report to the Audit Committee on any comments he may have with respect to the performance benchmarks, as set out in Recommendation No. (8) above;

(2)requested that the report from the City Solicitor requested in Recommendation No. (2) be submitted to the Audit Committee and the A.B.C. Reduction Task Force as soon as possible;

(3)subject to the opinion of the City Solicitor, requested the City Auditor to report to the Audit Committee on the status of the Agencies, Boards and Commissions with respect to Investment Policy Compliance; and

(4)forwarded the reports (February 1, 1999) from the City Auditor and (March 31, 1999) from the Chief Financial Officer and Treasurer to the A.B.C. Reduction Task Force for information.

The Audit Committee submits the following report (February 1, 1999) from the City Auditor:

Recommendations:

It is recommended that:

(1)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;

(2)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;

(3)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;

(4)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;

(5)consolidated financial reporting of all City investments be reported to Council on a more regular basis than once a year;

(6)Management take immediate action to ensure compliance with policy limits on maximum amounts and durations of specific investments;

(7)the document approved by Council entitled "Investment Policy and Procedures" be finalized, particularly in terms of addressing key management administrative procedures;

(8)performance benchmarks for investment returns be set for those funds administered by the City without an established performance benchmark;

(9)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

(10)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.

1.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.

2.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.

3.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

4.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.

5.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%

-Metro Pension

Schedule 1 Banks:Policy maximum = 15%Actual = 25%

-Toronto Group

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

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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

______________

$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

______________

$365,482,000

______________

The Toronto Community Council also submits the following report (March 31, 1999) from the Chief Financial Officer and Treasurer:

Purpose:

To respond to the issues and the recommendations contained in the report "Investment Policy Compliance", from the City Auditor, dated February 1, 1999.

Funding Sources, Financial Implications and Impact Statement:

N/A

Recommendations:

It is recommended that this report be considered with the City Auditor's report and received as information.

Council Reference/Background/History:

N/A

Comments and/or Discussion and/or Justification:

Staff from the Finance and Audit Departments met on February 9, 1999 to receive and discuss a draft of the "Investment Policy Report". The Finance Department's response to the recommendations contained in the report is being presented to the Audit Committee so that they can be considered with the City Auditor's "Investment Policy Report".

The City's cash management and investment program was one of the first functions to be amalgamated on January 1, 1998 and has been successful in achieving its performance objectives by combining seven investment portfolios to manage the City's capital market operations and funding obligations. The Finance Department continues to manage a combined investment portfolio in excess of $2.5 billion and generating combined investment income of $150 million, including the City's sinking funds. Various improvements and efficiencies has resulted in estimated annual savings of $2 million by eliminating the requirement of some of the former municipalities to issue promissory notes to fund temporary cash shortfalls.

Presented below are the Finance Department's comments that correspond to the recommendations contained in the City Auditor's report:

1.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;

Monthly reporting procedures have been implemented as of February 1999. Treasury Section staff prepare these reports on a daily basis in order to ensure compliance with the investment polices and to provide guidance when transactions are executed. The Treasury Manager and Senior Investment Analyst review these reports on a daily basis.

2.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 entitles, 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;

A legal opinion from the City Solicitor has recently been requested to interpret the relevant legislation as it relates to the application of the City's investment policy to the ABC's. The Council adopted investment policy states that it should apply to the ABC's but it should be understood that the City's investment of their excess funds is being performed on a voluntary basis when an ABC has requested this service. It has not been imposed on any ABC who may have established alternative arrangements and it was not assumed that the City's investment policy would apply to independent investment managers.

3.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;

Based upon the outcome of the legal opinion, consideration will be given to the consolidation of the investments of those ABC's not currently covered. However, it should be recognized that the ABC's can generally operate under the Trustees' Act which is more permissive than the Municipal Act. Therefore, they can choose to be more aggressive in their investment activities as they may also have different objectives, time horizons and risk tolerance than the City is allowed under the Municipal Act.

4.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;

Reports are prepared daily to monitor the investment portfolios of the ABC's who have placed their funds with the City. Otherwise, it is not considered appropriate for the ABC's who have external managers to report their activities to the City unless it is demonstrated that the City Treasurer has the legal authority to request these reports.

5.Consolidated financial reporting of all City investments be reported to Council on a more regular basis than once a year;

Ontario Regulation 438-97 under the Municipal Act requires an annual report unless Council requests a more frequent report. A shorter time horizon for a report on performance measurement would, in our opinion, not be meaningful to Council. Therefore, we would not recommend more frequent reporting to Council.

6.Management take immediate action to ensure compliance with policy limits on maximum amounts and durations of specific investments;

While the approved investment policy sets limits and parameters, it should be understood that the Investment Manager must have the ability to manage the funds by being able to exercise some judgement and discretion when it is deemed to be warranted. It states in the Investment Policies and Procedures report that the Treasurer may deviate from the requirement to match maturities to forecasted liabilities if there is a reasonable basis for this action.

It also states that the maximum amounts and maximum percentages of the portfolio for each issuer and sector may be established from time to time by the Treasurer. For example, if we identify an opportunity to invest with one of the five major banks for a short period and receive an additional return but the transaction places us over the limit for a few days, it is expected that the Investment Manager would exercise his or her judgement and assess the relative risk of this decision. Otherwise, the investment process could become so mechanical and unresponsive to financial market conditions that opportunities to enhance investment returns with minimal risk would be foregone.

7.The document approved by Council entitled "Investment Policy and Procedures" be finalized, particularly in terms of addressing key management administrative procedures;

This item is in progress and will be completed by the end of April 1999.

8.Performance benchmarks for investment returns be set for those funds administered by the City without an established performance benchmark;

Since these funds are being invested on behalf the various groups, the performance objectives should be established in conjunction with these groups who would have their own investment objectives and targets.

9.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;

The York Employees' Pension and Benefit Fund retains an external investment manager and the City does not invest funds on their behalf. We will be entering into discussions with the Trustees of the Fund to assess the benefits of having the City assist them in their investment program. Although the other City Pension Funds (Toronto Civic Employees, Firefighters, Metro Civic Employees and Police) employ external investment managers, the City invests their short-term cash positions according to the approved investment policy and their instructions pertaining to term-to-maturity.

10.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.

The reconciliation process is being performed on a monthly basis since the issue has been resolved between the Accounting and Treasury and Financial Services Divisions. Although there was a difference in the balances during 1998 due to the amalgamation of 7 investment portfolios, this has been eliminated in January 1999.

Contact Names:

Len Brittain, Director, Treasury and Financial Services Division, 392-5380

E-mail: lbrittai@toronto.ca

Martin Willschick, Manager, Treasury, 392-8072