New York bill to hike alternatives allocations clears Legislature

The New York State Legislature approved a bill that would allow large public pension funds to increase their alternative investment allocations to 35%, from the current 25% limit.

The state's General Assembly approved the legislation by a 139-10 vote on Tuesday, following the Senate's 56-5 May 23 vote in favor. The bill now goes to Gov. Kathy Hochul for her signature.

State law outlines a series of approved investments, known as a "legal list," covering 75% of pension funds' asset allocations. Any investment not mentioned in the law belongs to the "basket clause," the nickname for various asset categories such as private equity and hedge funds that aren't mentioned in the "legal list" as part of Section 177 of the state's Retirement and Social Security Law. The legal list includes public equities, certain conventional mortgages, bonds, certain co-investments in mortgages, certain real estate investments, mutual funds and collective investment trusts, among other investments.

The basket clause bill approved by the Legislature affects the state's largest pension funds: the $279.7 billion New York State Common Retirement Fund, Albany; the $263.2 billion New York City Retirement Systems; and the $146.9 billion New York State Teachers' Retirement System, Albany.

"At a time of economic uncertainty, this legislation will provide the flexibility our pension systems need to appropriately diversify their portfolios and maximize risk-adjusted returns," New York City Comptroller Brad Lander, the fiduciary for the five pension funds in the New York City pension system, said in an email Wednesday.

Representatives of New York State Common Retirement Fund and the New York State Teachers' Retirement System declined to comment.

This isn't the first time a basket clause bill was approved by the legislature and sent to New York's governor. In 2014, a bill expanding the basket clause to 30% of pension fund assets was vetoed by then-Gov. Andrew Cuomo.

"The existing statutory limits on the investment of public pension funds are carefully designed to achieve the appropriate balance between promoting growth and limiting risk," Mr. Cuomo said in his veto message. "This bill would undermine that balance by potentially exposing hard-earned pension savings to the increased risk and higher fees frequently associated with the class of investment assets permissible under this bill."

In 2014, as in 2022, the New York City Retirement Systems advocated greater flexibility in asset allocation. "The current 25% limit on alternative investments prevents the city pension funds from creating an optimal investment portfolio," a spokesman for then-City Comptroller Scott Stringer, said at the time. The comptroller is the fiduciary for the five pension funds in the city's pension system.

Eight years later, Mr. Lander presented the same message. The current law "fails to reflect the realities of the modern investment world and hampers our ability to prudently diversify our portfolio, maximize our risk-adjusted returns, and save money in the long term," Mr. Lander said in February testimony before a joint State Senate-General Assembly hearing on the state's propose fiscal 2023 budget.