Tuesday, March 24, 2015

MD of Pincher Creek to sell bonds to cover cash flow needs

Chris Davis

On the recommendation of MD of Pincher Creek No. 9 Director of Finance and Administration Mat Bonertz, the MD has decided to liquidate its Bank of Montreal Nesbit Burns bonds, worth more than $4 million, "to ensure the MD has adequate cash on hand to operate through May 31, 2015".  According to Bonertz, the Nesbit Burns bonds represent approximately a third of the MD's investment portfolio, and have been underperforming.

According to a report by Bonertz submitted to council at their March 10 meeting, "In the fall of 2014 an analysis of the M.D.'s cash flow requirements through May of 2015 was presented to Council, after which the decision was made to activate a $5,000,000.00 overdraft protection on our bank account to cover off our cash requirements until 2015 tax revenue started coming in. It now appears the $5,000,000.00 limit will not be sufficient to cover off our expenses until May 2015. As of February 28th, 2015 we have used $3.1 million of the $5 million overdraft limit. March debenture and requisition payments will be approximately $750,000.00. The biggest driving factor not anticipated last fall is the cash being required to fund ongoing flood repair work from 2010, 2013 and 2014. The Province has advanced us the maximum funds they can until they have received and processed the paperwork on any completed projects. The 2010 projects are now 100% complete and the 2013 projects re now 95 percent complete with the paperwork expected to be submitted to the Province sometime in the next 2-3 weeks. The 2014 projects are still being compiled and the completed ones will be submitted as soon as they are ready. As of December 31st, 2014 we were owed $800,000.00 from the disaster recovery program (includes a few 2010 projects now completed, 2013 and 2014 Projects). If received in time this $800,000.00 would certainly help our cash flow shortage but still won't be enough. The Cottonwood Bridge project from 2013 is now well into the construction phase and will require 1.2 to 1.5 million in progress payments by May 31, 2015 ($526,500.00 spent to date not including engineering).

Bonertz recommended against short term borrowing to cover the anticipated shortfall. "As previously mentioned to Council our cash shortage that has been growing over the last few years is because of using our operating cash to fund capital projects rather than cashing in the long term investments that were set aside to fund the projects. This was done intentionally, as the low interest rates were working in our favor. The M.D. has invested in bonds with Bank of Montreal Nesbit Burns that had a market value of $4,176,873.86 at January 31st, 2015. These investments have not performed near as well as the C.I.B.C.Wood Gundy investments have the last couple of years. I believe it would be prudent to liquidate the Nesbit Burns bond investments at this time to solidify our cash position thus getting us through May 31st, 2015. Once provincial disaster recovery funds have been received and our cash flow is stabilized, consideration can be given to replacing the investments and with whom. Policies are also in the making that will put some structure to our investment practices going into the future."

Councillor Garry Marchuk said he would like to see the provincial funding for projects, once received, go back into investments. He asked for an addendum to that effect.

CAO Wendy Kay said that cashing in less than the full Nesbit Burns portfolio wouldn't help the long term picture. "It's not going to help our cash flow to the end of the year.  It would just give us perhaps even a month and a half of being a balance of zero in our account and we would end up back in that overdraft situation.”

Councillor Fred Schoening suggested that borrowing money might be preferable if the interest for borrowing was greater than the interest received from the bonds. Bonertz replied "Our bond investments as a whole have been doing that, the Nesbit Burns side of it, which is about a third of our investments, has not been holding up its end". Schoening agreed that if that was a case he agreed that liquidating the Nesbit Burns bonds was the way to go, with the caveat that "We have a responsibility as councillors to make sure that money goes back into reserves (editor note: meaning investments) if it can do that," agreeing with councillor Marchuk's earlier statement to that effect. "I would like to see something incorporated into that motion saying that," added Marchuk. CAO Kay countered that suggestion, saying the money was originally put into bonds to cover the projects in question and that once the project funding was received from the province it should go toward covering the MD's budget going forward.

Council voted to accept the original recommendation, with councillors Schoening and Marchuk opposed.

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