NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A9643A
SPONSOR: Farrell (MS) TITLE OF BILL: An act to amend the retirement and social security
law, in relation to investments by public pension funds
PURPOSE: This bill increases the portion of public pension fund
assets that may be invested.
SUMMARY OF PROVISIONS:
Section 1 amends paragraph 1 of subdivision 9 of section 177 of the
Retirement and Social Security Law to increase from 25% to 30% the
portion of a public pension fund's assets that may be invested.
Section 2 provides for an immediate effective date.
DISCUSSION: In order to maximize risk-adjusted returns and meet its
actuarial targets, the New York City Retirement Systems (NYCRS) has
increased its exposure to alternative investment classes over time. This
action was in keeping with the evolution of capital markets and in line
with the actions of other large government pension funds. As the invest-
ment advisors and trustees look forward to the market challenges that
lay ahead, they see the need to increase the basket clause limit from
25% to, 30%. This limit will allow for a superior risk-adjusted portfo-
lio and for additional flexibility to reduce portfolio volatility while
maintaining superior returns. In addition, this change would better
equip the funds' advisors and trustees to tactically manage the invest-
ments to take advantage of market trends, react to market shocks and
avoid potentially costly rebalances or unwinds at inopportune times.
The basket clause has been increased multiple times. The original basket
clause limit was established at 5% in 1982. The law was amended in 1987
to increase the limit to 7.5%, in 1997 to 15%, and in 2006 to 25%. With
each increase, public pension funds have been in a better position to
manage volatility. The current 25% limitation on basket clause invest-
ments provides a relatively small allocation to non-legal list invest-
ments through the 25% basket clause allocation.
RATIONALE FOR THE CHANGE: As discussed below, volatility and illi-
quidity prevent NYCRS from using the entire allocation. As a result,
investments that could provide diversification - such as certain high
yield bonds, bonds denominated in foreign currencies, various commod-
ities, and other investments - are not available to NYCRS.
The current twenty five percent limitation on basket investments has
become problematic given current low expected market returns.
Under the current 25% cap, most of the investments allocated to the
basket are illiquid, long-term private equity partnerships. In addition,
NYCRS' international investments, to the extent they exceed the 5%
permitted by the legal list, must be counted against the basket cap. The
private equity investments involve a long-term commitment for NYCRS to
make additional investments, and the timing of these investments is
subject to ever-changing market conditions and is difficult to forecast.
NYCRS must account for both the actual value of private equity invest-
ments as well as future contractual commitments to provide capital when
measuring compliance with the 25% basket clause allocation.
The portion of the NYCRS portfolios allocated to public equities is much
more volatile than the investments allocated to the basket. As a result,
a swing in public markets can push NYCRS dangerously close to the
investment cap with no new investments.
Expansion of the basket to 30% is critical in providing public pension
advisors and trustees greater ability to mitigate market volatility and
structure superior risk-adjusted portfolios. Increasing a fund's ability
to invest according to the expanded standard will result in increased
flexibility, thereby enabling trustees to monitor investments closely
without restricting their ability to respond effectively to changing
market conditions.
CONCLUSION: In sum, NYCRS is prevented from creating an optimal
investment portfolio. The current 25% limitation on the basket clause
investments prevents NYCRS from investing in a number of attractive
asset classes and strategies.
