Who is Minding our Cities’ Money?

Many cities are seeking better rates of return for their long-term-investment portfolios via 'prudent' investing and 'diversification' of their holdings to include riskier assets. Some of these cities also are hiring companies to do their investing for them. Meanwhile, the public is in the dark about how this is turning out. What could possibly go wrong?
Rosemary Frei
May 11, 2023

Wiggins and Dash weren’t panting to listen to me when I told them about this article.

Maybe that’s because the dogs just want to know, ‘Where’s the beef?’ [We’re trying to get them onto a mostly plant-based diet, but they still take meat over mung beans just about every time.]

Here it is: many cities across North America are moving their multi-million- or -billion-dollar long-term-investment portfolios away from low-risk holdings such as government bonds to a broad range of other investments such as derivatives and infrastructure funding. These could provide higher returns – but they could lose money instead. And some cities also are giving companies control of their portfolios.

These changes are being done in the name of facilitating more ‘diversification’ to improve rates of return and ‘prudent’ investment to reduce risk.

For example, here in Toronto, the city’s Investment Board was created in early 2017; it is responsible for the city’s approximately $5 billion in long-term investments. It was formed as a result of 2015 amendments to Ontario law that had just started to come into effect. The amendments authorized the City of Toronto to, among other things, establish an investment board and use the ‘prudent investor’ approach to manage risk.

(The Ontario government made further amendments in May 2017; these allow all other cities in the province to follow suit if they wish. The changes came fully into effect on January 1, 2019.)

One of the six members of Toronto’s Investment Board is Heather Fraser. She is the City of Toronto’s Chief Financial Officer and Treasurer. The other five members are current or retired public- or private-sector investment managers.

The City of Toronto’s long-term investment portfolio has two main parts. One is the $3.2-billion ‘Long-term Fund.’ It is used in part to pay the city’s operations and costs over the long term, by feeding into the city’s ‘reserve funds.

The other main part is the $1.8-billion ‘Sinking Fund.’ Its function is to pay back the city’s debts including money owed to buyers of City of Toronto bonds.

Over the years since it was created, Toronto's Investment Board members have okayed the hiring of at least six companies to manage the Long-term and Sinking Funds.

(An additional approximately $680 million is still being managed by City of Toronto finance staff; this money is in short-term investment funds.)

Three of those companies are headquartered in the US or Europe. One of the US-based companies, the large multinational Aon, is the official investment consultant for Toronto’s Investment Board. Since early 2018 Aon has assisted the board by, among many other things, overseeing the hiring and supervising of the other investment-management companies.

Yet despite the work of these hired guns, between July 2019 and the end of December 2022 the Long-term Fund and the Sinking Fund had gross returns on investment of just 0.6% and -1.8%, respectively (see the table on page 2 of this City of Toronto report).

That translates into a weighted average return of -0.26% over that period. By virtually any truly objective measure, that is not a good result.

And meanwhile, the city’s financial reserves are poised to take a dizzying dive.


But it is not Wiggins’ and Dash’s fault for closing their eyes about this.

As far as I can determine the general public is in the same position.

That's because the press are not delving much, if at all, into what Toronto’s Investment Board has been doing.

Neither are politicians. That includes the dozens proposing ways to put Toronto on a course to prosperity and peace if they are elected mayor of this city next month.


And that is just the tip of the iceberg.

For example, that -0.26% return is the gross weighted average rate of return.

Gross rates of return do not take into account expenses such as the fees – for example those charged by the rapidly growing number of investment-management consultants being hired by the City of Toronto. Yet only the gross rates of return from the city’s Long-term and Sinking Funds are disclosed to the public.

The net return also should be disclosed to the public. The net return subtracts from the gross return such things as investment-management companies’ fees and other expenses. Therefore it gives a more accurate indication of whether an investment portfolio is going up or down in value, and by how much.

I asked Randy LeClair about this. Randy is one of the main liaisons between Toronto’s Investment Board and the rest of the city’s municipal government. He is Director of Capital Markets in the City of Toronto’s Corporate Finance Division.

Randy responded that gross returns are used instead of net returns because gross returns are comparable to benchmark indexes. He said this is the preferred method for measuring institutional investment managers’ performance.

(Note that the investment-management companies hired under the watch of the Investment Board each select benchmarks that, perhaps not coincidentally, usually have lower rates of return than the portion of the city’s Long-term or Sinking Funds they are managing. That makes the city's funds look like they are doing well in comparison.)

Randy added in his emailed response that, “Net return data is not available and has not been required by the Board.” [Bolding added by me.]

I also asked Randy whether more accurate information is publicly available about the management companies’ fees other than just the estimated annual fees’ (see for example the ‘Estimated Annual Fee (bps)’ in the table on page 6 of Aon’s overview of the Q3 2022 performance of the city’s long-term investment funds and the estimated ‘Fees’ in the table on page 8 of Aon’s overview of the Q4 2022 performance of those funds).

The answer is no. Randy wrote that, “The actual payments are reviewed (confidentially) by the Board on an annual basis to ensure they align with the ‘estimated’ amount.”


At the board’s most recent meeting, on March 9, 2023, the members did express concern about the rapidly worsening state of global financial markets. They voted to review the approach to long-term investing, and to ask some of the city’s finance-department staff to prepare a report about it for the next meeting of the board, on June 19, 2023.

(The minutes from the March 2023 meeting have not been posted yet. But I know what took place because I watched the meeting live online. The city does not publicly post recordings of the Investment Board meetings. Prior to the pandemic the meetings were conducted in person and were not videotaped [except by me when I attended the meetings]. When the pandemic started, the meetings switched to Webex.)

It seems extremely unlikely, though, that the board members will consider no longer using companies to manage the city’s long-term-investment portfolio, or going back to mostly very-low-risk holdings such as government bonds.

Maybe that’s because the push for all this comes from higher places. For example, as noted above, it was the Ontario government that created the legal framework for the roll-out of municipal investment boards across the province.

And the same thing is happening in many other jurisdictions.

For example, Alberta and Nova Scotia were the first provinces in Canada to make the shift. They passed legislation in 2010 and 2014, respectively, to allow their municipalities to, among other things, use the ‘prudent’ investment approach.

I did a quick look online to see if this also is happening in the US. I found that the State of Florida passed a similar law fairly recently (using the term the 'Prudent Person Rule’). And Texas did too, way back in 1995. It is a good bet that other states also have followed suit. I don't know whether this is also happening in other parts of the planet such as South America and Europe.


Let’s hope this mass adoption of the ‘prudent investor’ approach, often accompanied by companies doing the investing, is for the best.

But I have an uneasy feeling about the huge gap between, on the one hand, the implications of these shifts and, on the other, the lack of attention to them by the media and politicians. Particularly when, for example here in Toronto, things are not turning out well for the public purse.

Perhaps the vast majority of us, including Wiggins and Dash, are being kept in the dark deliberately?

After obtaining an MSc in molecular biology from the Faculty of Medicine at the University of Calgary, Rosemary Frei became a freelance writer. For the next 22 years she was a medical writer and journalist. She pivoted again in early 2016 to full-time, independent activism and investigative journalism. Her website is RosemaryFrei.ca.

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