Council has learned that the City of Kelowna’s returns on its overall investment portfolio decreased in 2021 compared to prior years.
“This is due to older investments with higher rates of return having matured and being replaced with newer investments with lower rates of return,” said Kevin Hughes, financial planning manager.
Hughes told council that the city uses a laddered strategy and balanced approach for investment holdings and duration. The strategy has meant that investments mature at a smooth and predictable rate.
“During 2021, the COVID-19 pandemic continued to create many challenges for the local, provincial and national economies,” he said. “In addition, British Columbia experienced significant wildfires and flooding, which combined with the pandemic impacts resulted in unprecedented supply chain challenges.”
Hughes pointed out that the Consumer Price Index (CPI) increased from 0.7 per cent in 2020 to 4.8 per cent in 2021. The Bank of Canada (BoC) expects the CPI to be close to five per cent for the first half of 2022, with expectations it may drop to three per cent by the end of the year. As well, the BoC kept the overnight interest rate at 0.25 per cent throughout 2021. The overnight rate was increased this month, for the first time since the start of the pandemic, to 0.5 per cent. The rate is expected to continue to increase during 2022.
“The interest rates that the City of Kelowna receives on its investments are primarily determined by the national and international economic climates,” he added.
Hughes’ report to council stated that under the BC Community Charter, local governments are restricted in the investments that they may choose. It’s meant to ensure the City has invested the majority of its funds in provincial and corporate bonds, as well as guaranteed investments from banks and credit unions.
Since the start of the COVID-19 pandemic, short-term and long-term interest rates have been at historically low levels.
The City of Kelowna portfolio had a fund value of $623.1 million as of Dec. 31, 2021. The investment returns from these funds are used toward the city’s operating and capital programs and help fund programs and renew assets.
Hughes said investment objectives for 2022 include continued monitoring of the economic climate to safeguard and diversify city financial assets.