This bill has been amended

Bill S7331-2013

Increases the portion of public pension fund assets that may be invested according to the prudent investor standard

Increases the portion of public pension fund assets that may be invested according to the prudent investor standard.



  • May 29, 2014: 2ND REPORT CAL.
  • May 28, 2014: 1ST REPORT CAL.995




VOTE: COMMITTEE VOTE: - Civil Service and Pensions - May 28, 2014
Ayes (8): Golden, Lanza, Martins, Ritchie, Savino, Maziarz, Addabbo, Dilan
Ayes W/R (3): Hannon, Sanders, Perkins



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.


Section 1 amends paragraph 1 of subdivision 9 of section 177 of the Retirement and Social Security Law to increase from 25% to 35% 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 investment 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 35%. This limit will allow for a superior risk-adjusted portfolio 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 investments 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 investments provides a relatively small allocation to non-legal list investments through the 25% basket clause allocation.

RATIONALE FOR THE CHANGE: As discussed below, volatility and illiquidity 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 commodities, 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 10% 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 investments 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 35% 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.




STATE OF NEW YORK ________________________________________________________________________ 7331 IN SENATE May 13, 2014 ___________
Introduced by Sen. DeFRANCISCO -- read twice and ordered printed, and when printed to be committed to the Committee on Civil Service and Pensions AN ACT to amend the retirement and social security law, in relation to investments by public pension funds THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: Section 1. Paragraph (a) of subdivision 9 of section 177 of the retirement and social security law, as amended by chapter 22 of the laws of 2006, is amended to read as follows: (a) the investments by a fund made pursuant to this subdivision shall not at any time exceed [twenty-five] THIRTY-FIVE per centum of the assets of such fund; S 2. This act shall take effect immediately. FISCAL NOTE.--Pursuant to Legislative Law, Section 50: PROVISIONS OF PROPOSED LEGISLATION: With respect to the New York City Retirement Systems ("NYCRS"), this proposed legislation would amend Retirement and Social Security Law ("RSSL") Section 177.9(a) to permit an increase to 35% the percentage of assets that may be held in "Basket Clause" investments (i.e., investments not explicitly identified as permissible elsewhere in New York State law). This 35% limit compares with a limit of 25% under current law. FINANCIAL IMPACT - EMPLOYER CONTRIBUTIONS: With respect to the NYCRS, the enactment of this proposed legislation would not, in and of itself, result in any change in employer contributions. The ultimate cost of a Retirement Program is the benefits it pays. The financing of that ultimate cost is provided by contributions and invest- ment income. Investment income depends upon the amounts of assets of the Fund and the rate of return received on those assets. The rate of return depends primarily upon the asset allocation policy of the Fund. To the extent that the NYCRS increase their investments in the securi- ties authorized by this proposed legislation and those securities produce greater (lesser) rates of return than the rates of return that


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