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Public Act 307
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Public Act 307

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Changes in Pension Investment Act Finalized!

MAPERS can take great pride in its role initiating and shepherding legislation which updates and improves the public pension act, PA 314 of 1965. The legislation, HB 5754, has now been signed into law by Governor John Engler, as PA 307 of 2000. The new law, which took immediate effect, had a number of sponsors, but we owe a special "thanks" to the first two names on the bill, Representative Jerry Vander Roest ( R-Galesburg) and Representative Eileen DeHart (D-Westland), the chair and minority vice chair of the House Senior Health, Security and Retirement Committee. MAPERS worked in tandem on the legislation with the Bureau of Investments of the State Department of Treasury, which invests the state-operated pension funds for state employees, school employees, judges, and state police.

The most significant change in law is the increase in the domestic stock limitation from 65 to 70%. The domestic stock limitation had last increased in 1996, when it was raised from 60 to 65%. However, this increase was done concurrently with a change in valuation methods which had resulted in some systems actually having to sell off holdings that had been purchased at lower prices and had escalated in value. The change is also consistent with a national trend to increase asset allocations in equities.

For the state's largest plans, another significant change was an increase in the asset limitation for Section 20d, the "Basket Clause." This change was particularly sought by the State Treasurer, whose asset limit was increased by the new law from 15 to 20%. Investment fiduciaries of systems with assets of $1,000,000,000 or more had their asset limit increase from 10 to 15%. Many larger systems are using this clause to add private equities to their portfolios as a means of further diversifying their assets to satisfy prudent investment standards and to achieve a higher long term rate of return.

The new law makes a number of other changes, some of which are relatively technical:

  • Amends the definition of "national rating services" to include any nationally recognized statistical rating organization determined by the State Treasurer;
  • Permits investment fiduciaries to meet either the standards under the federal Investment Advisors Act or the Michigan Uniform Securities Act, rather than having to meet both;
  • Limits application of the MacBride Principles to direct stock investments so that there is no confusion regarding a system's responsibilities when stocks are held in vehicles such as mutual funds;
  • Permits American Depository Receipts (ADR's) to be classified as either domestic stocks or foreign stocks;
  • Eliminates the provision in the statue which allows municipal systems with assets over $100 million to provide guarantees of public purpose transactions;
  • Permits investments in publicly traded Real Estate Investment Trusts (REITs) to be counted as either real estate investments or domestic stocks for the purpose of determining asset allocations;
  • Makes the technical correction in Section 20c (1) of inserting investment companies as allowable investments in pooled fund; and
  • Permits investment fiduciaries to invest securities lending collateral in securities grade din the top 4 grades as determined by at least one national rating service or as determined by the fiduciary to be of comparable quality if the security is unrated. Under previous law, the Act had required loans to be secured by collateral invested in investment grade securities as determined by two national rating services. The purpose of this change was to bring state law into conformity with industry standards for securities lending agreement language.

If you were one of the MAPERS members who contacted your legislator regarding this legislation, thank you for your assistance in helping pass legislation which should give public pension investment fiduciaries the changes needed to do the best possible job for their systems!

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