Pursuant to Regulation 74/97 Section 8, the Municipal Act requires the Treasurer to “prepare and provide to the Council, each year or more frequently as specified by Council, an investment report”.

The investment report shall contain,

(a) a statement about the performance of the portfolio of investments of the municipality during the period covered by the report;

(b) a description of the estimated portion of the total investments of a municipality that are invested in its own long-term and short-term securities to the total investment of the municipality and a description of the change, if any, in that estimated proportion since the previous year’s report;

(c) 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;

(d) 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;

(e) such other information that the Council may require or that, in the opinion of the Treasurer, should be included.

BACKGROUND:

For the year ending December 31, 2006, the Town of Markham’s Income Earned on Investments was $7.16 million, compared to a budget of $7.08 million, representing a $77,000 favourable variance.

The 2006 budget assumes an average general fund portfolio balance of $177 million to be invested at an average rate of return of 4.00%. The actual average portfolio balance was below the budgeted levels while the average rate of return was higher than budgeted levels. The details of these two factors will be discussed below.

Interest Rate

At the beginning of 2006, the Bank Rate was 3.50%. During the first five months of 2006, this rate steadily increased to 4.50%. The Bank Rate remained at 4.50% for the remainder of the year. In 2006, the Town’s investments had an average interest rate of 4.27%, 27 basis points higher than budget. Furthermore, through active bond trading, the Town has realized $208,000 of Capital Gains, thereby increasing the actual rate of return to 4.40%; 40 points higher than the 4.00% budgeted rate. The difference in the rate of return accounts for a favourable variance of $651,000.

Portfolio Balance

The budgeted average portfolio balance for 2006 was $177 million. The actual average general fund portfolio balance (including cash balances) for 2006 was $163 million, resulting in $14 million less that was available for investment purposes. The lower portfolio balance accounts for an unfavourable variance of $574,000.

Portfolio Composition

All investments made in 2006 adhered to the Town of Markham investment policy. At December 31, 2006, 37% of the Town’s portfolio was comprised of government issued securities. 54% of the portfolio was made up of instruments issued by Schedule A Banks, while the remaining 9% was made up of instruments issued by Schedule B Banks. All of these levels are within the targets established in the Town’s Investment Policy (Exhibit 1).

The December 31, 2006 general investment portfolio was comprised of the following instruments: Banker’s Acceptances 32%, Bonds 43%, Banker’s Deposit Notes 9%, Certificates of Deposit 9%, and T-Bills/Provincial Promissory Notes 7% (Exhibit 2).

At December 31, 2006, the Town’s portfolio balance for all funds was $288.4 million. DCA investments represented $82.4 million of this amount. The Town’s portfolio (all funds excluding DCA) of $206.0 million was broken down into the following investment terms (Exhibit 3):

Under 1 month 12.9%

1 month to 3 months 26.3%

3 months to 1 year 34.8%

Over 1 year 25.8%

Weighted average investment term 743.0 days

Weighted average days to maturity 459.2 days

Money Market Performance

The Town of Markham uses the 3-month T-bill rates to gauge the performance of investments in the money market. The average 3-month T-bill rate for 2006 was 4.03% (source: Bank of Canada). Non-DCA Fund money market investments held by the Town of Markham in 2006 had an average return of 4.07%. Therefore, the Town’s money market investments outperformed 3-month T-Bills by 4 basis points. See Exhibit 4 for all Money Market securities held by the Town of Markham in 2006.

Bond Market Performance

2006 marks the fifth year of the bond trading strategy. The 2006 highlights of the program are as follows:

20 bonds were purchased with a face value of $45.4 million
3 bonds were sold with a combined face value of $8.0 million
$208,000 of Capital Gains were realized

At December 31, 2006, the Town held 57 bonds in the general fund portfolio. The amortized value of these bonds at year-end was $111.4 million. The market value of these bonds at December 31, 2006 was $111.0 million. This translates into $378,000 of unrealized losses. The reason of the unrealized loss is that during the last two years while bond yields have been low, the strategy was to purchase more short term municipal and structured bonds (i.e. callable set up bonds). While these bonds have higher average yields, they are also far less liquid and therefore have lower market values. However since these bonds were purchased as part of a buy-and-hold strategy, the unrealized loss is simply a function of the market value at year end See Appendix 5 for all 2006 bond transactions.

The strategy in the first quarter of 2006 was to sell some short term bonds with high yields to take advantage of increasing short term rates. For the last 3 quarters, the long bond yields have slowly declined to a point where the yield curve is now inverted (i.e. 10 year bonds have a lower yield than 1 year bonds). As a result, the strategy during this period was to try and maximize return on investment by capitalizing on higher rates of return with structured bonds (i.e. step up bonds that can be called by the issuer at certain dates but have much higher yields to reflect this feature). Any non-structured bond purchases have been kept in the 3-6 year time frame. Forecasts for next year indicate that bond yields may continue to drop. As a result, the strategy has been to continue to increase the Town’s bond holdings and hold off on taking Capital Gains until 2007.

Reserve Funds and Other Interest

The following table outlines the interest on investments for all major Town funds and reserves.

	Average Balance	Interest Earned	Average Rate
General Portfolio	$162,755,000	$7,080,000	4.40%
Reserve Funds/Varley Trust	$102,029,000	$4,142,000	4.06%
Powerstream Promissory Note	$67,866,000	$3,787,000	5.58%
MEC/District Energy Loans	$16,800,000	$785,000	4.67%
Development Charges Reserve	$70,523,000	$2,894,000	4.10%

Outlook

The interest rate forecast for 2007 is that rates are expected to remain unchanged for at least the first quarter. Based on the slightly inverted yield curve (currently, six month Canada bonds are yielding 4.12%, 5 year Canada bonds are at 4.03% and 10 year bonds are at 4.12%), it is expected that rates will probably drop 25 basis points around mid-year. As a result, the forecast for investment income in 2007 will remain unchanged from the 2006 level of $7.1 million.

Interest Rate

Portfolio Balance

Money Market Performance

Bond Market Performance

Exhibit 4 – 2006 Money Market Investments