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, 2009, the Town of Markham’s Income Earned on Investments was $9.92 million, compared to a budget of $8.2 million, representing a $1.72 million favourable variance.

The 2009 budget assumes an average general fund portfolio balance of $200.0 million to be invested at an average rate of return of 4.10%. Both the actual average portfolio balance and the average rate of return were higher than budgeted levels. The details of these two factors will be discussed below.

Interest Rate

The Prime Rate was 3.25% at the beginning of 2009. By April, it had dropped to 2.25% and remained at that level through the end of the year.

In 2009, the Town’s investments had an average interest rate of 4.16%, 6 basis points higher than budget. Furthermore, through active bond trading, the Town realized $1,381,000 of Capital Gains, thereby increasing the actual rate of return to 4.83%; 73 points higher than the 4.10% budgeted rate. The difference in the rate of return accounts for a favourable variance of $1,494,000.

Portfolio Balance

The budgeted average portfolio balance for 2009 was $200.0 million. The actual average general fund portfolio balance (including cash balances) for 2009 was $205.5 million, resulting in $5.5 million more that was available for investment purposes. The higher portfolio balance accounts for a favourable variance of $224,000.

Portfolio Composition

All investments made in 2009 adhered to the Town of Markham investment policy. At December 31, 2009, 66% of the Town’s portfolio was comprised of government issued securities. 34% of the portfolio was made up of instruments issued by Schedule A Banks. All of these levels are within the targets established in the Town’s Investment Policy. (Exhibit 1).

The December 31, 2009 investment portfolio was comprised of the following instruments: Bonds 47%, Treasury Bills 29%, Accrual Notes 17%, and GICs 7% (Exhibit 2).

At December 31, 2009, the Town’s portfolio balance for all funds was $340.1 million (including bank balances). DCA investments represented $65.5 million of this amount. The Town’s portfolio (all funds excluding DCA) of $274.6 million was broken down into the following investment terms (Exhibit 3):

2009 2008

Under 1 month 29.9% 14.1%

1 month to 3 months 8.4% 29.4%

3 months to 1 year 2.6% 16.8%

Over 1 year 59.1% 39.6%

Weighted average investment term 1,537.1 days 1,214.6 days

Weighted average days to maturity 1,237.4 days 849.6 days

Since December 31, 2008, the weighted average days to maturity has increased from 849 days to 1,237days in an attempt to lock into more favourable long term interest rates that materialized during the first half of 2009.

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 2009 was 0.36% (source: Bank of Canada). Non-DCA Fund money market investments held by the Town of Markham in 2009 (including bank balances) had an average return of 1.13%. Therefore, the Town’s money market investments outperformed 3-month T-Bills by 77 basis points. See Exhibit 4 for all Money Market securities held by the Town of Markham in 2009.

Bond Market Performance

2009 marks the eighth year of the Town’s bond strategy. The 2009 highlights of the program are as follows:

26 bonds were purchased with a face value of $68.7 million
12 bonds were sold with a combined face value of $28.0 million
$1.38 million of Capital Gains were realized

At December 31, 2009, the Town held 51 bonds (down from 59 in 2008) in the general fund portfolio. The amortized value of these bonds at year-end was $125.2 million (a decrease of $20.3 million over 2008). The market value of these bonds at December 31, 2009 was $130.3 million. This translates into $5.1 million of unrealized gains.

In 2008, the Town purchased a large amount of bank bonds to take advantage of the large interest rate spread (compared to government bonds) caused by market fear of the credit crisis. As the fear in the market dissipated in 2009, the Town was able to sell a portion of the bank bonds at a significant profit ($1.38 million in capital gains). As well, the Town still holds a number of these bonds which contributed to the $5.1 million in unrealized gains. See Appendix 5 for all 2009 bond transactions.

In November, 2009, Council granted approval to establish a Capital Gains Reserve to be funded through surpluses in the Capital Gains account. As the budget for Capital Gains is $200,000/year, up to $1.18 million can be transferred to the Capital Gains Reserve to offset fluctuations in returns in future years. The exact amount of this transfer will be brought forward to Council in the Year End Results of Operations report later in the first quarter of 2010.

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	$205,453,000	$9,918,000	4.83%
Reserve Funds/Varley Trust	$119,008,000	$1,344,000	1.13%
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	$75,600,000	$1,401,000	1.85%

Outlook

Interest Rates continue to remain at historic lows. However, with indications that the economy is recovering well, rates are expected to increase this year. As a result, the Town will look for opportunities to sell bonds while prices remain high, especially in the 2010-2014 maturity time frame. The yield curve out in the 8-12 years range still represents the best value and will be targeted for purchases while the yield curve remains steep.

Although rates have been low for a sustained period of time, the Town is still well positioned to weather the current environment. At the beginning of 2010, the Town’s bond and long term accrual investments were approximately $173 million, with almost 90% of that amount locked in until at least 2012 at attractive rates.

The Investment Income budget for 2010 is $9.2 million (an increase of $1 million from 2009). This is comprised of an estimated $222.2 million general portfolio balance invested at an average rate of 4.14%.

Interest Rate

Portfolio Balance

Money Market Performance

Bond Market Performance

Exhibit 4 – 2009 Money Market Investments