Bill 68’s Recent Changes to Municipal Investment Powers Part II: The Regulation Cometh

Last year, the Ontario Legislature introduced Bill 68, entitled Modernizing Ontario's Municipal Legislation Act, 2017 (“Bill 68”). Bill 68 amended the provisions of the Municipal Act, 2001 (the “Act”) that govern a municipality’s ability to make investments. Now, as a result of Bill 68, a municipality can make an investment under section 418 or 418.1 of the Act.[1]

Although Bill 68 received Royal Assent on May 30, 2017, section 418.1 was not set to come into force until a date proclaimed by the Lieutenant Governor of Ontario (Bill 68, s 83(2)). It was presumed that it would come into force once the regulations pursuant to section 418.1 were complete.

On February 27, 2018, the Ontario Legislature filed Ontario Regulation 43/18, entitled Eligible Investments, Related Financial Agreements and Prudent Investment (“O. Reg. 43/18”). O. Reg. 43/18 amended the rules and requirements for investing previously set out by Ontario Regulation 438/97, entitled Eligible Investments and Related Financial Agreements (“the Regulation”).

O. Reg. 43/18 made some minor changes to Part I of the Regulation. However, the major changes came with the addition of Part II, which sets out the rules and requirements to invest under section 418.1 of the Act.

Section 418.1 of the Act and O. Reg. 43/18 were proclaimed into force on March 1, 2018.

What’s Changed: Part I of the Regulation

Part I of the Regulation applies to investments made under section 418 of the Act (the Regulation, s 14).

Section 418 of the Act relates to a municipality’s investing powers unless a municipality passes an irrevocable by-law that states the municipality is investing pursuant to section 418.1 of the Act (the Act, s 418.1(1.1), (2)).

It is important to note that a municipality may not pass a by-law to invest under section 418.1 of the Act until January 1, 2019 (the Regulation, s 26(1)).

Part I of the Regulation has remained largely the same after the amendments made by O. Reg. 43/18. However, a few significant changes were made. These include the following:  

1. changing minimum security ratings;
2. creating restrictions on investments issued by credit unions;
3. removing set time limits; and
4. expanding the list of parties with which a municipality may invest.

Lower Minimum Security Ratings 

The securities a municipality may invest in under section 418 of the Act are those prescribed in section 2, subparagraphs (1) to (12), of the Regulation.

Prescribed securities generally consist of debt securities, which include a bond, debenture, promissory note, share or other evidence of indebtedness (“Debt Securities”); or other types of securities, which include deposit notes, certificates of deposit or investment, acceptances or similar instruments (“Other Securities”).

The Regulation establishes minimum ratings that Debt Securities and Other Securities must meet to be eligible for municipal investment.

The amendments made by O. Reg. 43/18 lowered the minimum security ratings for Debt Securities issued by a corporation (the Regulation, s 3(4.1)).

The minimum security ratings were also lowered for Debt and Other Securities issued by a bank listed in Schedule I, II or III to the Bank Act (Canada), SC, 1991, Chapter 46, and loan and trust corporation registered under the Loan and Trust Corporations Act, RSO, 1990, Chapter L 25 (the Regulation, s 3(2)).[2]

Lowering the minimum security ratings expands the prescribed securities in which a municipality may invest.

Securities Issued by Credit Unions

O. Reg. 43/18 introduced new restrictions for investments made in Debt Securities and Other Securities issued by a credit union or league to which the Credit Unions and Caisses Populaires Act, 1994, SO, 1994 Chapter 11 applies (a “Credit Union”) (the Regulation, s 3(6.1.3)).

Now, a municipality is restricted from making further investments in Other Securities issued by a Credit Union if its total investments in these securities, and those prescribed in subparagraph 3(iii), exceed $250,000 (the Regulation, s 3(2.0.1)).

A municipality may be excused from this restriction if it meets the requirements of the exception outlined in subparagraph 3(2.0.1) of the Regulation.

Additional requirements were introduced by O. Reg. 43/18 for investments in Debt Securities issued by a Credit Union.

The Regulation now states that a municipality may only invest in Debt Securities issued by a Credit Union if the Credit Union issues an audited financial statement or written certification that contains certain financial indicators (the Regulation, s 3(2.0.5)).

If the Credit Union fails to meet these requirements, the municipality will be required to sell the Debt Securities issued by the Credit Union (the Regulation, s 3(6.1.3)).

These amendments restrict a municipality’s ability to invest with Credit Unions.

Time Limit Changes

The Regulation provides for greater flexibility to a municipality in the event that it must sell its prescribed securities.

Previously, a municipality had to sell a security within 180 days of the date it fell below the required minimum rating.

O. Reg. 43/18 amended the Regulation to remove the 180 day period established for selling a prescribed security (the Regulation, s 3(6), (11)).

Now, if a municipality is required to sell a prescribed security, it must create a plan and timeline, and sell the security according to that plan. It does not necessarily need to be sold within 180 days.

Expansion of Parties with which a Municipality may Investment

The parties with which a municipality may invest are listed in subparagraph 4.1(2) of the Regulation.

The amendments made by O. Reg. 43/18  expand the parties with which a municipality may invest to include:

1. Local Authority Services;
2. CHUMS Financing Corporation;
3. Association of Municipalities of Ontario; and
4. Municipal Finance Officers’ Association of Ontario (the Regulation, s 4.1(2)).

Conclusion

Generally speaking, Part I of the Regulation remains largely the same after the regulatory amendments. More flexibility was granted, but not much else. The more significant changes, however, were reserved for Part II of the Regulation, as discussed below.

 

What’s New: Part II of the Regulation

For section 418.1 of the Act to apply, a municipality must pass an irrevocable by-law (the Act, s 418.1(2)). Section 418.1 will become effective on the date the by-law passes (the Act, s 418.1(4)).

Once a by-law is passed, a municipality will only be able to invest pursuant to section 418.1 of the Act. It will not be able to make an investment pursuant to section 418 (the Act, s. 418(1.1)).

Although a municipality may not pass a by-law under section 418.1(2) of the Act until January 1, 2019, it may still engage in certain acts prescribed by the Regulation. Accordingly, the changes made by O. Reg. 43/18 are important to review. 

O. Reg. 43/18 made significant changes to the Regulation by adding Part II.

Part II of the Regulation applies to investments made under section 418.1 of the Act (the Regulation, s 14). It sets out:

1. the eligibility criteria for investing under section 418.1 of the Act;
2. the structure for investing under section 418.1 of the Act; and
3. how a municipality may withdraw from an investment made under section 418.1 of the Act.

Eligibility Criteria

A municipality must meet certain criteria before it can invest under section 418.1 of the Act. It must satisfy one of the following requirements:

1. the municipality must either have a minimum of $100,000,000 in money and investments it does not immediately require or $50,000,000 in net financial assets[3] (the Regulation, s 15(1));
2. the municipality must have entered into an agreement to invest through a Joint Investment Board (a “JIB”) with one or more municipality. In this case, all of the municipalities must have a combined total of at least $100,000,000 in assets that they do not immediately require (the Regulation, s 15(2)); or  
3. the municipality must have entered into an agreement to invest through an IB or JIB with the following parties:

i.          the IB or JIB; and

ii.          any other municipalities investing through the IB or JIB.

In this case, the IB or JIB must have been established by another municipality before the day the municipality passes a by-law to invest under section 418.1 of the Act (the Regulation, s 15(3)).

A municipality may invest alone or with other municipalities under section 418.1 of the Act.

Despite this apparent freedom, subparagraph 15(1) of the Regulation restricts which municipalities may invest alone by creating a high minimum threshold that a municipality must meet to be able to make an investment alone under section 418.1 of the Act. 

Alternatively, greater flexibility and opportunity is provided for a municipality to invest with other municipalities. For example, a municipality may invest with other municipalities under subparagraph 15(3) without having to prove that it owns any assets worth any specific value.

If a municipality cannot satisfy one of the eligibility criteria set out above, it cannot pass an irrevocable by-law under section 418.1(2) of the Act (the Act, s 418.1(3)). In this case, the municipality will have to continue to make investments under section 418 of the Act.

Structure for Investing

A municipality’s investments made under section 418.1 of the Act are governed and made by an Investment Board (a “IB”) or Joint Investment Board (a “JIB”).

An IB is a municipal service board that is established by a municipality under section 196 of the Act (the Regulation, s 13). Whereas a JIB is a municipal service board that is established by two or more municipalities under section 202 of the Act (the Regulation, s 13).

An IB and JIB are municipal service boards. However, they are independent from the municipality. An officer, employee or member of council of the municipality may not be a member on an IB or JIB (the Regulation, s 17(4)).

The IB or JIB must be given full control and management over the municipality’s investments. This is effected by delegating the municipality’s investment powers and duties under section 418.1 of the Act to the IB or JIB (the Regulation, s 17(1), (2), (3)).

The IB and JIB must adopt and comply with an investment policy and plan (the Regulation, s 18(1), s 19(1)). It must also keep the municipality updated regarding the performance of its investments by producing an investment report (the Regulation, s 20(1)).

Apart from these guidelines, and those further prescribed in the Regulation, the IB or JIB have a significant amount of independence to invest on behalf of the municipality. It may invest on behalf of the municipality as a prudent investor would in any security (the Act, s 418.1(8)). This provides a broad range of investment opportunities for a municipality to diversify their investments.  

Although the IB or JIB has power over the municipality’s investments, it may authorize an agent to exercise its functions so long as doing so is consistent with the prudent investor standard (the Regulation, s 22(1)).

The municipality’s treasurer monitors the IB or JIB. In the event that an investment made by a JIB or IB is inconsistent with the investment plan or policy, the treasurer must report it to the municipality within 30 days of becoming aware of the inconsistency (the Regulation, s 21).

Withdrawing from an Investment

Part II also sets out the criteria that must be met to withdraw from an investment under section 418.1.

The requirements for withdrawal are dependent on whether the municipality has established a JIB or IB.

In either case, a municipality may withdraw from an investment arrangement by meeting the requirements prescribed in the Regulation.

Conclusion

Section 418.1 permits a municipality to invest as a prudent investor would. However, the largest impediment that the Regulation creates to investing under section 418.1 of the Act is the eligibility criteria. A municipality must own a significant amount of moneys and assets that it does not immediately require to invest alone under section 418.1 of the Act.

The Regulation has also created greater opportunity for municipalities to join together to make investments under section 418.1 of the Act.

Once a municipality meets the eligibility criteria, its investments will be done by a municipal service board that is independent of the municipality.

The amendments made by the Regulation still provide significant flexibility for municipalities to invest under section 418.1 of the Act. It will be interesting to see how many municipalities pass a by-law this coming January to invest using the prudent investor standard.   

About the Authors

Eric Davis is a partner at Miller Thomson’s Waterloo Office. He is a Certified Specialist in Municipal Law: Local Government/Land Use Planning and Development and an executive member of the Ontario Bar Association’s Municipal Law Section.

Brittany Thompson is an articling student at Miller Thomson’s Waterloo office.

[1] For a detailed explanation of the changes made by section 418.1 to the Act, please refer to our previous article entitled Bill 68’s Recent Changes to Municipal Investment Powers.