Rhino's Ramblings - Half Empty Or Half Full Of It?
By Robert Thomas Opinion-Commentary
It is the biggest question I heard over the previous week and that is what is happening to the reserves of the City of Moose Jaw and is it a good thing?
It all came out of council watchers and the news the City of Moose Jaw has gained $2.2 million from the sales of its bonds and an added $700,000 from interest over a five year period through re-investing the bonds into Guaranteed Investment Certificates (GICs).
In the eyes of one side it looks like the City of Moose Jaw has just hit the proverbial jackpot while on the other side it looks like we are heading down a road where a prudent investment strategy has been overruled by greed and look out as risk increases we are heading into a potential storm.
When you heard the $2.2 million windfall announced at council this past week what you heard was really not two sides but rather three sides of what to do with the funds just realized but in order to hear you had to listen carefully and read between the lines.
In the Investment Committtee it is obvious from what was said at Council there are actually three different opinions on what to do with the windfall.
You had Councillor Scott McMann who said there had been some discussion at least between the Council members on the Investment Committee to use the $2.2 million towards capital infrastructure such as in the Cast Iron Water Main Replacement Program. A program which seemingly needs to accelerate its annual meters replaced or repaired in order to more quickly see benefits from less water main breaks and a resultant cash savings on repairs.
Another side in the investment committee was one taken by finance director Brian Acker who stated “The reality is the GICs are resaleable and the intent would be to re-sell them into mid-term and long-term pools at which you would see a significantly higher return (than the GICs).”
Then you had Councillor Dawn Luhinng state, after Councillor Brian Swanson mentioned the City nearing its provincially approved debt level, she would consider using some of the windfall towards that debt. But at the same time the investments were being looked after by a committee who were being advised by top professionals with the intent to have a balanced approach to lessen the risk while at the same time having the opportunity to create better gains for the City.
As a small aside the same qualified and trained people Councillor Luhning opposed in Executive Committee, a money manager, when discussion was about the formation of the Investment Committee and its review. The reason given was the cost to the City.
It all seems like the set up for a big debate into what to do with the windfall with the Council in the end likely to make the final decision.
The $2.2 million windfall was created by an analysis by the money manager at no cost to the City who recommended the City sell its higher interst bonds at a premium and then re-invest the funds for a greater rate of return in the end.
But not pointed out was the obvious that the sale in the end could very well help the money manager as there is an undercurrent of the GICs are saleable and can be re-invested. That re-investment would come from the money manager. In a roundabout way an argument could be made the move away from premium blue chip bonds may have come for free but it does give the money manager a liquid cash flow to go out and invest.
And this is where Councillor Swanson got into the discussion. It was a voice of caution that the move into equities and stocks was a risky one and one which the City should not be looking at if they want to prudently manage the City’s or let’s face it - taxpayer’s money.
I will admit the people I heard from when it came to concerns raised about the City’s evolving investment strategy came from supporters of Councillor Swanson and Luhning in the past civic election and many of them are concerned. Concerned to the point they are not likely to vote for Councillor Luhning in the next civic election.
For many people who supported these two councillors in their re-election bids the risk is too great. Now whether that plays into votes in the next civic election is something still to be seen as who really knows if either will try to be re-hired in 2020.
But back to the topic and that is what should be done with the windfall and where is the City likely to receive a better return?
Well it is in one area a money manager or investment strategist is unlikely to consider as it would generate little in the way of returns and not put much money in the investment manager’s employer’s pocket and that is to re-invest the money back into the City. Simply put loan the City its own money and then replace it with payments carrying interest and the savings from less repair costs it could help realize. Savings outside of the money manager’s expertise and scope.
Why not do what Councillor McMann has suggested and that is use the $2.2 million for the cast iron water main replacement program but loan it to yourself?
And instead of using it to help pay for the $6 million annually spent on cast iron replacement add it to the program. Do not give in to the calls for tax relief or alternatively an increase of services when utilizing the funds.
An additional almost 30 - 50 percent rate of replacement in one year may not seem like much in the overall cast iron water main replacement program but it does get us to the ultimate goal where the return on investment reduces the $2 million plus annually spent on water main repairs. The equilibrium where savings are felt due to decreased repairs was forecast this Spring as five years away. Reducing that time span is crucial and something risky investments cannot bring and that is less cost to the City.
By simply loaning the funds to the City or financing ourselves with the $2.2 million it may well pay just as much interest as any stock might plus additionally the risk is virtually eliminated. When added to the overall savings on repairs I truthfully wonder if this is not a better route. The thing is I have yet to see any kind of report generated on it.
The great thing about replacing more cast iron with the funds would be reduced repairs to the system. Notice how I do not say it would eliminate repair costs in the section replaced because there has already been a couple of water main breaks in PVC piping which has a 100 to 200 year projected lifespan depending on its date of manufacture. With Councillor Luhing stating the investments for the City are long term and likely into perpetuity I would think this 200 year investment of lowered costs would be something the Investment Committee should carefully look at and discuss.
There is a wider focus than just simply the money and stock markets.
Now is my suggestion simplified when it comes to this $2.2 million windfall - of course it is - but quite truthfully what is the rate of return of loaning the funds to ourselves when added to the reduced costs?
One thing brought up during the short point and counterpoint between Councillors Swanson and Luhning was the need to reduce or better maintain the debt level.
If an individual wants to maintain a high debt load as well as bank or invest for the future one thing they often do if they are serious is to cut back. You may forego that really fancy daily cup of coffee or something really frilly to save for your future as well as meet your necessary immediate needs. The thing is it is easier to do on a personal level than when you are an elected representative in government at any level.
There is an underlying factor most people would not have to face and that is the issue of cutting back on public services. In order to take a look at the ultimate goal and that is reducing the costs to the City a person needs to at the same time perhaps look at efficiencies or cut back on some of the services already provided or do like other municipalities did such as Toronto and that is to increase user fees on civic facilities.
A tough move but one which both Councillors Luhining and Swanson have advocated for before. A move which not one member of Council seems prepared to do as for two years in a row Budget Committee has met behind closed doors and came out with no cuts being made. This is a paralysis an individual with discipline could easily avoid in their personal affairs but in government well it is not so easy.
They are also political and civic factors no investment manager or money manager I am guessing can adequately advise the City about. Their expertise is largely devoted to the financial markets and nothing more than that.
By taking a good look at the Royal Bank of Canada’s historic rate of returns for mutual funds it all appears to be on the upswing churning out returns of five percent or more but there is also a cautionary tale here and that it is the data is only a 10 year snapshot and for some funds such as Canadian reseources there are losses of 34.1 percent over the past year. Other Canadian equity funds were in positive territory until the last 30 days when some showed losses over three percent on investments.
A couple of aggressive funds are losing over five percent while the conservative investment fund is just over one percent in the last 30 days. So the risk is still real. There has to have been some people who actively invested in those Canadian funds who are now losing money, it is just not the City of Moose Jaw - yet.
So in the end what do you truly have?
You truthfully have multiple visions of what to do with the windfall leaving us the final question - which vision is not only the right one but which one is the most prudent for the City of Moose Jaw?
For many people I speak to they do not like the risk as they are seeing it as something the City should not get into while a younger generation sees it as worth it hoping to see an immediate positive result something ironically Councillor Luhning said the City is not working towards but rather a long term or perpetual investment strategy.
What is to be ultimately decided may well turn into a great debate but one thing for certain it has more than a few avid Council watchers talking about it.