Investment of Public Funds - Greater Return, if You Know Where to Look for It

Financial Institutions Law Alert

 

This alert is another entry in our series on the topic of the investment of public and public pension funds, though this time we offer more of a silver lining. The investment of public funds and public pension funds are wrapped in layers of legislation. From the state level to the local level, from a compliance perspective, investment is ripe for misstep. In some instances, however, despite restrictive limitations on investment vehicles, the statutes provide options for greater return if you know where to look for them.

Regulation of public employee retirement funds varies from state to state. The overarching theme is the protection of principal while trying to gain the most out of every dollar. Legislation in most states provides a standard for investment – a prudent person standard – along with a selection of investment options that have been deemed “safe” for public funds. Many states, however, offer a carve out from the more draconian “safe” investments and give the public entity discretion to broaden their options for return.

For example, in Connecticut the statutes limit the investment of municipal funds to a narrow group of investments – basically US Government and Agency obligations and municipal bonds. The statute, however, offers an escape hatch for pension and retirement funds. In that regard, municipalities may “by ordinance [] establish pension, retirement, or other postemployment health and life benefit systems for their officers and employees.” CGS §7-450(a). Additionally, “[n]otwithstanding any limitations on the investment of municipal funds set forth in section 7-400, funds held in any such trust may be invested in accordance with the terms of the pension, retirement or other postemployment health and life benefit plan.” CGS §7-450(b). These key documents – authorizing ordinances and pension or retirement plan documents – shape the way the public pension funds can be invested.

Another example is in Florida, where various statutes provide for the establishment of local public pensions. The Florida Protection of Public Employee Retirement Benefits Act establishes minimum standards for the operation and funding of public employee retirement systems funded, in whole or in part, by public funds. F.S. §112.611. The requirements for municipal investment policies are detailed in §112.661, which in turn provides that all investments not otherwise authorized by law or ordinance are subject to the investment limitations of §215.47 (“Investments, authorized securities”) subsections (1)-(6), (8), (9), (11) and (17). §112.661(5). Again, the local ordinance is the key to how the retirement plan may be invested, as it allows a municipality to work around the statute.

Many states provide “ground floors” for investment, though upon careful review of the laws, many states allow for broader investment authority if you know where to look for it. Careful drafting of local ordinances can provide relief from the limitations of the state statutes.