The City of Moose Jaw could acquire an additional $3 million with the sale of investment bonds and interest generated from reinvesting that money into other portfolios.
During its recent regular meeting, city council voted 6-1 to authorize the investment committee and investment manager to sell bonds at a premium and reinvest the funds generated into higher interest Guaranteed Investment Certificates (GICs), with no investment management costs applied to any proceeds or actions required to complete the transactions.
Coun. Brian Swanson was opposed.
Council discussion
“To me it’s a no-brainer. We’re not taking on any additional risk …,” said Coun. Dawn Luhning. “It’s just an opportunity to realize significant gain.”
“When I read it, I was jumping out of my skin,” echoed Mayor Fraser Tolmie.
This move overcomes criticisms that council has received about this area, he added. It’s a good thing to earn up to $3 million in such a short period, especially since this money could go to ever-increasing capital costs. Applying the money to infrastructure also reduces the tax burden on residents.
“I think it a fantastic thing. I’m really happy with the people who are on (the committee),” said Coun. Heather Eby, adding she appreciated the contributions that Luhning and Coun. Scott McMann have made to the investment committee.
“We an infinite organization,” she added. “Our investments need to be forever. We don’t have an end date. When we’re making these decisions, it not just about what is happening in 2019 or 2024. It’s forever.”
Background
The municipality has more than $64.4 million in its bond portfolio for long-term reserves, with annual yields from 2.50 per cent to 6.09 per cent. The investments have maturity dates that start this year and go until 2024.
Reinvesting bonds that are near maturity would generate about $2.432 million for the municipality that would disappear if held to maturity, according to a city administration report. By reinvesting that money into term deposits, it would generate another $653,000 in interest, for a total of $3.085 million.
The investment committee and investment manager identified two opportunities to gain additional interest revenue if some of the current bonds were redeemed and reinvested into GICs, the report said.
One opportunity would allow the municipality to retain an existing premium over the current face value of the bonds. The coupon bonds have a market value that is higher than their maturity value and the municipality can secure that increased value or price premium by selling the bonds before they mature.
The other opportunity would allow the municipality to increase the yield to maturity, which is the total return provided by a bond held to maturity. The city maintains high quality investments that pay a higher interest rate until their maturity through this reinvestment into GICs.
Two variables could affect how much the municipality earns from this move, the report said. One is the trade date, which would affect the bid price of each bond and would be different than the market value when the bonds were first reviewed. Changes to interest rates could also affect the GIC rates and net gain on yield to maturity.
The next regular council meeting is Monday, May 27.
