The Empire State may be striking back at the laws that govern its pension investment. A bill proposed in the New York State Senate would alter the rules governing pension investment and free the state to, among other things, increase its pensions’ private equity allocations.
State Senator Joseph Robach proposed State Senate bill S3894 at the end of March. Robach is a Republican who represents New York’s 56th Senate district (Rochester) and chairs the State Senate’s Civil Service & Pensions Committee. The legislation was proposed at the request of New York State Comptroller Alan Hevesi.
If passed into law, the bill would eliminate New York State Common Retirement Fund’s 15% alternative investment cap. As a result of the cap the fund has been unable to take advantage of better alternative investment returns, including those in private equity. In a memorandum accompanying the proposed bill, the Comptroller notes that the fund was forced to reduce its private equity commitments in 2002 or risk violating its allocation cap as public equities fell in value. According to the bill, in the five years between 1999 and 2003, the Common Retirement Fund (CRF) would have generated between $4 billion and $5 billion more in returns had it been able to allocate more to alternative investments.
In the past, the CRF’s alternative asset cap has been moved up instead of eliminated, from 5% to 7.5% in 1987 and to its current 15% in 1997. “It has been the Comptroller’s position that we should not have caps but go by the principal of the prudent investor,” says John Chartier, a spokesman for Comptroller Hevesi. “We’re asking that these caps be removed and the investment managers be allowed to make decisions.” The Comptroller’s memorandum supporting the bill calls New York State’s current approach “outdated” and cites examples of other large pension plans, most of which either use the prudent investor standard or have less restrictive legal lists than the CRF (see chart).
New York State joins other states in moving towards a standard method of pension fund alternative investment management of using outside managers and less rigid allocation rules Late last month, Mississippi’s governor signed into law a bill that allows the $16 billion Public Employees Retirement System of Mississippi to invest in alternative assets. The New Jersey State Investment Council approved a plan to invest 13% of its $66 billion in assets into alternative investments. The plan would allocate five percent, or about $3.3 billion, of its assets going to private equity. On April 5th, New Mexico Governor Bill Richardson signed into law legislation that allows the state’s three pension funds, the $6.7 billion New Mexico Educational Retirement Board (ERB), the $10 billion Public Employees Retirement Association (PERA) and $12 billion State Investment Council (SIC), to invest more freely in alternative assets, including private equity (see Buyouts, April 18, 2005).
The bill is still in its early stages and as of April 18 had advanced to its third reading after going through the Civil Service & Pensions Committee. A companion bill will have to pass in the State Assembly before being sent to New York’s Governor. A spokesman from Governor George Pataki’s office declined to comment on the bill.
The CRF has $119 billion under management and is a limited partner in funds managed by Apollo Management, Blackstone Capital Partners, HarbourVest Partners, J.P. Morgan, Lexington Partners, Menlo Ventures, Sprout Capital and Warburg Pincus.