Cities as Prudent Investors: New Rules for Investment by Ontario Municipalities

This paper is part of the IMFG Perspectives Papers series. For a full list of papers, please visit http://bit.ly/2ylAa2D.This paper describes how the current municipal investment regime in Ontario works and its future direction and challenges. Financial investments are an important part of the fiscal tools available to Canadian municipalities. A well-executed investment strategy can provide a source of income to municipalities, helping them prepare for future budgetary pressures and revenue fluctuations. Current regulations in Ontario, designed to shield local governments from excessive risk-taking, allow investments only in a limited number of financial instruments deemed creditworthy and relatively liquid – mostly fixed-income debt obligations issued by public-sector entities and financial institutions. However, this limiting approach is about to change. In 2015, the Province amended Ontario Regulation 610/06, which sets the rules for investments by the City of Toronto, replacing the long-standing list of authorized investments with the “prudent investor” standard. The standard does not place hard limits on what Toronto can do, requiring instead that, when making investments, it exercise the care, skill, diligence, and judgement of a prudent investor. The Modernizing Ontario’s Municipal Legislation Act, 2017, amended the Municipal Act, 2001, to extend the same standard to other municipalities that meet a set of requirements still under study by provincial officials. Under the new system, financial investments may become an important source of income for Ontario municipalities, and may even transform how infrastructure investments and other expenditures are funded in the future. However, the change may also bring some risks that must be carefully considered. The key issue for the new municipal investment regime will be setting up the proper governance mechanisms for monitoring and controlling investments at the decision-making or implementation levels.Institute on Municipal Finance and Governanc