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DOCUME NT RESUME
00600 - [A0751322] (Restricted)
The Investment Decisionmaking Process in Two New York
PublicEmployee Retirement Plans. B-164292; HRD-77-41. February
16,1977. 2 pp. + appendices (69 pp.).
Report to Sen. Harrison A. Williams, Jr., Chairman,
SenateCommittee on Labor and Public Welfare; Sen. Jacob K.
Javits,Ranking Minority Member; by Elmer B. Staats,
ComptrollerGeneral.
Issue Area: Income Security Programs: Programs tc
ProtectWorkers' Income (1306).
Contact: Human Resources Div.Budget Fuction: Income Security:
General Retirement and
Disability Insurance (601).organization Concerned: Department of
Labor.Congressional Relevance: Senate Committee on Labor and
Public
Welfare.Authority: Administrative Code for the City of New York,
title
B. chap. 20. New York Laws of 1920, chap. 741. New YorkState
Laws of 1917, chap. 303. Retirement and SocialSecurity Law of New
York State* Employee Retirement IncomeSecurity Act of 1974.
Information on the investment decisionmaking process ofthe New
York State Employees' Retirement System and theTeachers' Retiresent
System of the City of New York was obtainedfrom summary data and
interviews with cognizant officials. Theinformation obtained was
not verified and the adequacy ofprocedures and practices followed
by the plans was notevaluated. Findings/Conclusions: The New York
State Employees'Retirement System is the largest of three
State-administeredretirement plans for employees of the State and
localgovernments. This plan covers about 552,000 active
members,compared with the 259,000 members covered by the two
otherplans. As of March 31, 1975, this plan had about $6.1 billion
inassets, compared with $5.6 billion for the other plans. TheState
comptroller is responsible for the management andoperations of the
plan, including the investment of plan assets.He draws on a variety
of staff resources and outside investmentadvisors to administer the
plan and manage the investmentprogram. The Teachers' Retirement
System of the City of New Yorkis the second largest of five
retirement plans in the city. Asof June 30, 1975, it hal over
83,000 active members and assetstotaling about $3 billion. The
other four plans had about257,000 active members and assets of
about $5 billion. This planis managed and controlled by a board of
trustees. (SC)
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°) wRPES'Zl I)trt - F'eb N* r'easejd Ot!tCVa the
Oeverr-nAccouitutg Cff· o asis o sqecific a;l z-
) [b~p)Ty tme Office ot 6;u a, eCD REPORT TO UTH '
SENATE COMMITTEE ON, LABOR AND PUBLIC WELFARE
- I BY THE COMPTROLLER GENERALI.,' :' OF THE UNITED STATES
The InvestmentDecisionmaking ProcessIn Two New York
PublicEmployee Retirement PlansThis report is the last in a series
of sevenstudies requested by the committee.
It contains case studies on the New YorkState Employees'
Retirement System and theTeachers' Retirement System of the City
ofNew York, giving details of the structure andoperations of the
plans.
HRD-77-41
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COMPTROLLER GENERAL OF THE UNITED STATESWASHINGTON. D.C.
2046
B-164292
To the Chairman andRanking Minority Member
Committee on Labor andPublic Welfare
United States Senate
In response to your June 14, 1976, letter, we made aseries of
case studies of fiduciary standards and conductof public employee
pension plans maintained by State and localgovernments in New York,
New Jersey, Georgia, Tennessee,Colorado, Michigan, and
Virginia.
In New York, we studied the New York State Employees'Retirement
System and the Teachers' Retirement System of theCity of New York.
Case studies of these plans are includedas appendixes I and II.
Case studies for the other six Stateswere previously provided to
you.
Based on discussions with your office, we developed aframework
for the case studies to provide the informationneeded to help the
Committee fulfill its statutory obligationsto study governmental
retirement plais. The Employee Retire-ment Income Security Act of
1974 directed the Committee toundertake such studies and provided
that the results shouldbe reported to the Senate.
It was agreed with your office that we would obtaininformation
on the investment decisionmaking process fromsummary data and
interviews with cognizant officials. Wedid not verify the
information obtained, and we are not com-menting on the adequacy of
procedures and practices followedby the plans.
The New York State Employees' Retirement System is thelargest of
three State-administered retirement plans for em-ployees of the
State and local governments. This plan coversabout 552,000 active
members, compared with the 259,000 mem-bers covered by the two
other plans. As of March 31, 1975,this plan had about $6.1 billion
in assets, compared with$5.6 billion for the other plans.
The State comptroller is responsible for the managementand
operations of the plan, including the investment of planassets. For
management and investment purposes, the plan's
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B-164292
assets have been combined with assets of the New York
StatePolicemen's and Firemen's Retirement System and the
Statepublic employees' group life insurance plan. The
combinedassets, referred to as the common retirement fund,
totaledabout $8.3 billion on March 31, 1976. The comptroller
isassisted in managing the common retirement fund by
ad-isorycommittees established under State law. He draws on a
vari-ety of staff resources and outside investment advisors
toadminister the plan and manage the investment program.
The Teachers' Retirement System of the City of New Yorkis the
second largest of five retirement plans in the city.As of June 30,
1975, it had over 83,000 active members andassets totaling about $3
billion. The other four plans hadAbout 257,003 active members and
assets of about $5 billion.
This plan, established in accordance with State andcity
statutes, is managed and controlled by a board oftrustees. The
board appointed the Comptroller of tho City ofNew York and hired 10
outside investing firms to help it in-vest plan funds. The board
uses employees of a city depart-ment to handle the plan's daily
administrative operations.
The investment decisionmaking processes are discussed indetail
in the case studies. As directed by your office, wehave prepared
this report without waiting for formal writtencomments from plan
officials. However, we gave plan officialsan opportunity to comment
on the case studies, and we have in-cluded their comments where
appropriate. We nave requestedformal written comments, which we
will send to you when wereceive them.
Comptroller Generalof the United States
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APPENDIX I
CASE STUDY
ON THE
NEW YORK STATE EMPLOYEES'
RETIREMENT SYSTEM
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C o n t e n t s
Pae
CHAPTER
1 BACKGROUND 5Membership requirements 5Funding 6Benefits 6
Cost-of-living annuity adjustments 7
2 FRAMEWORK FOR MANAGING INVESTMENTS 8Organizational structure
8
State comptroller 9Investment Advisory Committee 9Mortgage
Advisory Committee 9Department of Audit and Control 10Independent
advisors 11
Making and implementing investmentpolicy 11
Investment policies 12Implementing investment policy 13
Management and control of pensionplan assets 16
Money management techniques 16Monitoring investmentperformance
17
Disclosure statements 18Audit and disclosure of investment
activities 18Scope of audits 18Reports issued on retirement
plan activities 19
3 INVESTMENT EXPERIENCE 21Annual rate of return 21Pension plan
assets 22Funds in non-interest-bearing accounts 22Operating costs
23
Schedule
1 Common Retirement Fund (including theNew York State Employees'
RetirementSystem) comparative statement of assetsas of March 31,
1971, 1972, 1973, 1974,1975, and 1976 25
2 Schedule of benefits 26
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CHAPTER 1
BACKGROUND
The New York State Employees' Retirement System (here-after
referred to as the Plan) was established by Chapter 741of the New
York Laws of 1920. Under this legislation, onlyState employees were
entitled to membership. Amendments toChapter 741, however,
authorized extension of Plan coverageto employees of the State's
political subdivisions, publicand quasi-public organizations, and
certain New York Citylibraries.
As of June 30, 1976, the Plan had about 552,000 activemembers
and paid about $26.5 million monthly to its 111,545retirees and
beneficiaries. As of March 31, 1975, the Planhad assets valued at
about $6.1 billion. The Plan is thelargest retirement system in the
State and the largestState retirement system in the country.
The Plan is one of three State-administered retirementplans. The
others are the (1) New York State Policemen'sand Firemen's
Retirement System and (2) New York State Teach-ers' Retirement
System. According to the latest availableinformation, these plans,
as of June 30, 1976, had about32,000 and 227,000 active members,
respectively, and at theend of the plans' fiscal year ended March
31, 1975, h.i1 as-sets totaling about $900 million and $4.7
billion, respec-tively.
The Plan's management and investment activities arecombined with
the (1) New York State Policemen's and Fire-men's Retirement System
and (2) New York Saite Public Employ-ees' Group Life Insurance
Plan. The assets of the threeplans are combined in an investment
pool referred to as theCommon Retirement Fund. A staff of State
employees managesthe fund's daily investment activities.
MEMBERSHIP-REQUIREMENTS
Membership in the Plan is mandatory for all personswho entered
or reentered the service of the State or partic-ipating political
subdivisions on or after July 1, 1948, withcertain exceptions. The
exceptions, among otners, include(1) teachers or instructors,
policemen, and firemen, who areeligible for membership in other
retirement systems, and (2)persons in positions that pay less than
$1,500 a year.
Active membership in the Plan ceases upon the member'sdeath or
retirement or the member's voluntary withdrawal
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of all or part of his accumulated contributions. Membershipis
also terminated when service amoints to less than 5 yearsin any
period of 10 consecutive years. However, membershipshall not be
terminated if, during the 10-year period, themember had at least 5
years of past service and served asan employee of the Federal
Government, the United Nations,or another international
organization.
FUNDING
The Pi-,, is primarily funded through contributions
fromemployers and income from investments. Originally, both
em-ployees and employers had to contribute to the Plan.
However,during the past 16 years--to provide increased take-home
payto employees--the employers could elect continued
membershipparticipation for their employees under a Plan program
thatdoes not require any contributions by the employees or underone
that permits reduced employee contributions.
During June 1976 about 2,500 of the Plan's 552,0N0 mem-bers were
required to contribute to the pension programs.About 10,200 other
members were making voluntary contribu-tions. The contribution
rates vary from 6.01 to 12.82 per-cent, based on the member's age,
sex, and occupation. Forexample, a male enrolling at age 21
contribute, 7.24 percentof his salary, whereas a female of the same
age contributes9.09 percent.
New pension legislation was enacted by the State legis-lature
during the 1976 session. The chief feature of thelegislation was
that a member who joined or rejoined thePlan on or after July 1,
1976, would have to contribute 3 per-cent of gross salary to the
Plan. The only exceptions wereemployees under the federally
sponsored Comprehensive Employ-ment and Training Act of 1973, as
amended (29 U.S.C. 801).
BENEFITS
The Plan provides its members with retirement income
andfinancial protection in the event of disability or
death.Generally, the benefits available to members depend on
whetherthey had joined or rejoined the Plan (1) before July 1,
1973,(2) between July 1, 1973, and June 30, 1976, or (3) afterJune
30, 1976. The enrollment dates differ to comply withthe various
provisions of law in effect during these periods.
The Plan offers a broad range of benefit programs. Allprograms
provide normal retirement benefits, death and dis-ability benefits,
deferred retirement benefits, and optionalmethods of benefit
payment. Benefits under the programs
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differ depending on the qualifying age or years of service,the
date of membership, and whether the members are contrib-utory or
noncontributory. The program available to membersis selected by the
employer and is either a contributory,noncontributory, or special
program.
Because of the complexity and variety of options offeredto
members, we have included excerpts from the Plan's Fifty-Fifth
Annual Report, which describes each of the benefitsavailable. This
is included as schedule 2 on page 26.
Cost-of-living asnuity adjustments
Legislation enacted in 1976 provides for escalating
ordeescalating service retirement, disability, and survivorbenefits
annually at a rate equal to the lesser of 3 percent,or the actual
increase or decrease in the cost-of-livingindex. Benefits, however,
cannot be deescalated below thebenefits initially payable. The law
applies only to memberswho joined after June 30, 1976, and has no
provisions forcost-of-living adjustments before July 1, 1976.
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ChAPTER 2
FRAMEWORK FO? MANAGING INVESTMENTS
The State comptroller is designated by New York lawas
administrator of the Plan and the trustee of the CommonRetirement
Fund. The comptroller, as heaJ of the State'sDepartment of Audit
and Control, draws on a variety of staffresources, advisory
committees, and professional investmentinstitutions to administer
the Plan and manage the investmentprogram.
ORGANIZATIONAL STRUCTURE
The following structure is used to manage and controlPlan
activities.
,* .. .........COMPtROLLER -- -. -- ,
INVESTMENT MORTGAGEADVISORY ADVISORY
COMMITTEE COMMITTEE
DEPARTMENTOF
AUDIT AND CONTROL
DIVISION OF INDEPENDENT DIVISIONINVESTMENTS AND ADVISORS OF
CASH MANAGEMENT RETIREMENT
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State comrtroller
The State comptroller is administrative head of thePlan, trustee
of the Common Retirement Fund, and appointingofficer of the
advisory committees. He is authorized bylaw to invest available
funds for each retirement systemand hold such investments in his
name as trustee. Lrgisla-tion also authorizes him to use any other
technical and ad-ministrative assistance he needs.
Two committees--the Investment Advisory Committee andthe
Mortgage Advisory Committee--help the comptroller managethe Common
Retirement Fund. The comptroller, as head of theDepartment of Audit
and Control, exercises administrativecontrol over the Plan and its
investment program. He is theState's chief fiscal officer and is
elected by the public fora 4-year term.
Investment Advisory Committee
The State law which established the Investrent AdvisoryCommittee
provides that the committee shall (1) advise thecomptroller on
investment policies relating to the moneysof the Common Retirement
Fund and (2) periodically reviewthe fund's investment portfolio and
make any recommendationsdeemed necessary.
Each committee member is required by law to be exper-ienced in
the field of investments and to have served as asenior officer or
member of the board of an insurance com-pany, banking corporation,
or other financial or investmentorganization authorized to do
business in the State. Thecommittee must consist of at least seven
members appointed bythe comptroller for 4-year terms. The committee
presentlyhas nine members, who serve without compensation.
Mortgage Advisory Committee
A 1960 State law states that the comptroller shall ap-point a
separate Mortgage Advisory Committee, with the adviceand consent of
the Investment Advisory Committee, to reviewproposed mortgages and
real estate investments by t'le CommonRetirement Fund.
The comptroller has appointed 19 members to the commit-tee; they
also serve witnout compensation. The law does notspecify an
experience requirement for committee members. APlan official said
that the law does not pr3vide for a specificterm of office for
committee members a-id that members may bereplaced at the
comptroller's discretion.
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Department of Audit and Control
This department is primarily responsible for the
Plan'sadministration, including the investment of Plan assets.
Thecomptroller, as department head, has delegated this
responsi-bility to two divisions within the department, the
Divisionof Retirement and the Division of Investments and Cash
Manage-ment.
Division of Retirement
The Division of Retirement is responsible for the over-all
administration of tiie Plan and the Policemen's and Fire-men's
Retirement System and the Public Employees' Group LifeInsurance
Plan. Specifically, the division:
--Maintains the accounts for the Common RetirementFund, collects
and accounts for the interest incomeard dividends earnc" on
investments weld for the fund,a services the mortgages held as
investments.
-- Calculates rates of return for various segmentsof the
portfolio and determines the long-rangerate of return used in
calculating Plan liabilities.
-- Executes transactions related to the acquisitionand
disposition of mortgages as investments forthe Common Retirement
Fund and manages any realproperty acquired in the fund's name.
The deputy comptroller is in charge of the Division
ofRetirement. He is assisted in the administration of thetwo
systems by an executive director and in his other dutiesby various
bureaus under his direction, such as the AccountingBureau, the
Actuarial Bureau, and the Office of Real EstateInvestments. The
division employs about 535 people. All em-ployees, except the
deputy comptroller, the director of theOffice of Real Estate
Investments, and the Counsel, are underthe State's Civil Service
System. A Plan official said per-sons holding these positions are
appointed by the comptroller.According to the deputy comptroller,
there are no specificjob requirements for his position.
Division of Investmentsand Cash Management
The Division of Investments and Cash Management is re-sponsible
for administering the investment program for theCommon Retirement
Fund, except for mortgage investments.This includes buying and
selling securities, determining
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whether certain stock investments are authorized, and
safe-guarding securities. The deputy comptroller told us thatthe
division director is a civ 4l service employee. A Plan of-ficial
estimated that this division employs about 15 people,all of whom
are civil service employees.
Independent -advisors
The comptroller has contracted with five professionalinvestment
institutions to serve as independent advisors forthe day-to-day
common stock transactions of the Common Re-tirement Fund. According
to a Plan official, these five in-dependent advisors are banks.
Four of them are headquarteredin New York City and one is
headquartered in Boston. He alsosaid that one of the local
ad-visors also serves as the Plan'sbond advisor.
The deputy comptroller told us that the comptrollerselects these
advisors. The latest three advisors selectedwere selected by the
comptroller, based on the advice of anactuarial firm, which
considered the investment experienceof 15 companies.
MAKING AND IMPLEMENTINGINVESTMENT POLICY
According to Plan officials, the overall investmentpolicy is
established by the comptroller and the InvestmentAdvisory
Committee. The Director, Division of Investmentsand Cash
Management, works closely with them in developingthe policy.
The Plan may make no investment unless it is in accord-ance with
the limitations set forth by State legislation.No limitations were
established on the amount of funds thatmay be invested in Federal,
State, and municipal obligations,including mortgages guaranteed by
Federal agencies. Legisla-tion does, however, establish the
following limitations forinvestments of the Common Retirement
Fund:
-- No more than 30 percent of the fund may be investedin
conventional mortgages, no more than 5 percentmay be invested in
any conventional mortgage, andno investment of less than $250,000
may be made ina mortgage.
-- No more than 10 percent of the fund may be investedin any
conventional mortgage guaranteed by a State bankor trust
company.
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-- No more than 6 percent of the fund in any yearor more than 35
percent of the total fund may beinvested in stocks of corporations
in which invest-ments are permitted under applicable State
laws.
-- No more than 1.5 percent of the fund may be investedin the
stock of any corporation, nor may the fundown more than 3 percent
of the total outstandingshares o` any corporation.
--No more than 30 percent of the fund may be investedin bonds or
other obligations of railroad or utilitycorporations in which
investments are permitted underapplicable State laws. Additionally,
no more than(1) 5 percent may be invested in equipment trust
cer-tificates, (2) 2.5 percent may be invested in obliga-tions of
any AAA-rated corporation, (3) 2 percent inany AA corporation, or
(4) 1.5 percent in any A cor-poration.
The law specifies that all investments must have arating of A or
above assigned by a recognized rating agency,such as Standard and
Poor's or Moody's.
Investment policies
The investment objectives of the Common Retirement Fundare
consistent with the "prudent man rule"; that is, invest-ment in
securities that would be acquired by prudent men ofdiscretion and
intelligence in such matters who are seekinga reasonable income and
the preservation of their capital.The objectives are to
-- safeguard the principal from any imprudent risk;
-- obtain the maximum yield consistent with thesafety of
principal;
--provide for the growth of principal through along-term program
of high-grade stock investments;and
-- develop a portfolio which will emphasize quality,flexibility,
diversity, and marketability.
According to a Plan official, no specific rate of
returnobjectives have been established for investments.
Before 1959, the portfolio consisted entirely of U.S.Government
and other governmental obligations, mortgages,
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and tax-exempt bonds. Legislation enacted in 1959
permittedinvestments in corporate obligations, railroad
equipmenttrust certificates, and conditional sales notes.
FurtheLlegislation in 1960 permitted investments in
conventionalmortgages; common stock; and Canadian Government,
province,or city obligations. This expansion of investment
optionsis reflected in the changing composition of the Plan's
port-folio.
The Director, Division of Investments and Cash Manage-ment, said
the current investment policy for the Common Re-tirement Fund
favors investments in bonds, especially 10-yearshort maturity and
tax-exempt bonds and high quality mortgagesthat guarantee
10-percent return. He said the Plan does notmake loans to the
State. However, employees may borrow fromthe Plan based on their
contributions. Investment policiesare reviewed and revised at
quarterly meetings.
Implementing investment policy
The implementation of investment policy for the majorareas of
investments--stocks, bonds, mortgages, and short-term
investments--is discussed below.
Stocks
According to Plan officials, the five independent ad-visors
recommend investments to the comptroller. The comp-troller consults
with the director, Division of Investmentsand Cash Management, to
determine whether the recommendationsfall within the legislative
limitations. Once approved, atransaction is made by an independent
advisor through a bro-kerage firm of his choice. Brokerage firms do
not deal di-rectly with Plan personnel. The independent advisor
submitsconfirmation of purchase or sale to the Division of
Invest-ments and Cash Management, which in turn disburses or
col-lects funds. According to a Plan official, each of the
fiveindependent advisors is given a monthly dollar allocationand
assigned part of the stock portfolio to manage.
Bonds
The deputy comptroller said one of the independent ad-visors
makes recommendations to the comptroller on bond port-folio
investments. Many recommendations involve bond swaps--the trading
of low-yielding bonds for bonds with better re-turns. Actual
transactions are carried out by the Divisionof Investments and Cash
Manaaement.
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Mortgages
The Division of Retirement is responsible for the mort-gage
investment program. The deputy comptroller said thatrecommendations
for mortgage investments originate withinthe division and are
submitted to the comptroller and theMortgage Advisory Committee for
review. Unlike the Invest-ment Advisory Committee, which only
advises, the MortgageAdvisory Committee actually participates in
the decisionmak-ing process. The committee, by law, must approve a
proposedmortgage or real estate investment before it can be
made.Once a mortgage investment decision is made, the divisionis
responsible for executing the transaction, making onsiteproperty
inspections, and collecting delinquent payments.The division also
collects escrow moneys, pays taxes andinsurance, and identifies
delinquent payments.
Short-term irvestments
The Division of Investments and Cash Management issolely
responsible for short-term investments. All cash re-ceipts
throughout the year are invested in short-term securi-ties, such as
Treasury bills and certificates, to produceearnings before the cash
is invested in long-term securities.The division director and three
division investment officers,who serve as advisors, handle the
short-term investments.All decisions regarding these transactions
are made by thedirector.
Investments are restricted only by legislation. To carryout the
short-term investment program, the division relies ona cash flow
projection prepared by the Division of Retirement.This projection
and the role it plays will be discussed inthe section beginning on
page 16.
Experience of- investmentdecisionmaking staff
Each member of the Investment Advisory Committee is re-quired by
law to be experienced in the investment field andto have served as
a senior officer or member of the board ofan insurance company,
banking corporation, or other financialor investment organization
authorized to do business in theState. Although there are no
experience requirements statedin the law for members of the
Mortgage Advisory Committee,all 19 members are senior officers or
board members of banks,insurance companies, or realty
corporations.
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The deputy comptroller said that the director, Divisionof
Investments and Cash Management, is a civil service em-ployee and
that there are no job requirements for this posi-tion. The current
incumbent, who has been the divisiondirector since 1946, holds a
master's degree in public admin-istration.
Initially, an independent advisor was engaged to managethe bond
portfolio. In 1960, when common stocks became partof the Comimolt
Retirement Fund, the advisor was also selectedto manage tl.e stock
portfolio. As the portfolio grew, anotheradvisor was engaged. Each
was allocated part of the portfolioto manage. As the stock
portfolio continued to grow, Plan of-ficials felt that more
competition among advisors would bene-fit the portfolio.
A consulting firm was engaged to review the
investmentperformance of various financial institutions and provide
areport to the comptroller on which he could base the selec-tion of
additional stock advisors. The firm reviewed theperformance of 15
companies with broad stock investment exper-ience. The report
included comparisons of the investment re-sults achieved by the
various institutions, along with illus-trations of the general
stock market performance based on theStandard and Poor's Composite
Stock Index tnd the Dow JonesAverage. The comparisons were based on
total investment per-forman-e. The report also included the
institutions' feeschedules.
The consulting firm suggested that the following factorsbe
considered in selecting advisors:
--Ability of the financial institution to manage largecommon
stock investment programs.
--Size of the financial institution, in terms of bothassets
managed and depth of staff.
--Expense charges tL be levied by the financial
insti-tution.
-- Depth of research and investment policy of the finan-cial
institution.
The report highlighted the 15 institutions reviewed
andrecommended 6 of them. Three of the institutions were thenchosen
as additional independent advisors. According to aPlan official,
some of the independent advisors have sincebeen replaced because of
poor performance or high fees.
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Selection of brokers
The deputy comptroller said the Plan does not selector deal
directly with brokers. The five independent advisorsdo the
selecting.
MANAGEMENT AND CONTROLOF PENSION PLAN ASSETS
The Plan has developed an automated investment informa-tion
system to provide for complete accounting of investmenttransactions
and income. The Accounting Bureau of the Divi-sion of Retirement is
responsible for opeiiting this systei.,.The automated system
facilitates the collection, editing,and analysis of the large
volume of data generated and thetimely and comprehensive review of
the investment program byproviding updated reports on all long-term
stock and bondtransactions. The reports generated are discussed on
page20.
The comptroller, by law, uses the services of a New YorkCity
bank as fiscal agent to help the State carry out controlprocedures.
The fiscal agent is responsible for transferringand storing all
securities. Negotiable securities--mostlyshort-term--are maintained
with the fiscal agent. Where prac-tical, securities, which are not
readily negotiable, are reg-istered in the name of the comptroller
as trustee of the Com-mon Retirement Fund. Physical custody of such
securities isthe responsibility of the Division of Investments and
CashManagement.
The director of that division told us that no specificcontrols
have been established to prevent "soft dollar" ar-rangements--the
receipt of research from broker-dealers inexchange for commission
business--or loans to other bank cus-tomers or broker-dealers who
direct trade to their own firms.He sald the Plan is dealing with
reputable firms whose trans-actions are governed by Securities and
Exchange Commissionregulations.
Money management techniques
The deputy comptroller said that to make sure that in-coming
cash is invested immediately, the director, Divisionof Investments
and Cash Management, develops a cash flow planfor anticipated cash
receipts. The Division of Retirementis responsible for providing
investment income data for cashmanagement purposes. The Division of
Retirement prepares acash flow projection report which lists
contributions, invest-ment income, benefit payments, and other
payments anticipated
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for the coming year as well as the amount available for
in-vestment. The director, Division of Investments and
CashManagement, said that he is notified by the depository bankof
the daily account balance. The forecasted available fundsare
invested immediately in short-term investments, mortgages,and
stocks.
According to the director Division of Investments andCash
Management, adherence to the statutory limitations isthe best way
of obtaining optimum return on and security ofinvestments. To
upgrade the portfolio wherever possible, asystem of security
exchanges has been implemented throughwhich bonds are exchanged for
higher yielding obligations.The law spells out the restrictions on
this type of transac-tion.
Further, various controls have been set up to obtainoptimum
return on and safety of pension assets. For example,an investment
may be made only within the limits authorizedby law for the
category of securities involved. The director,Division of
Investments and Cash Management, said that he hasa staff of
investment officers who make sure that stocks andbonds purchased
meet the quality restrictions of the law andthat statutory limits
are not exceeded.
Monitoring investment performance
The Division of Investments and Cash Management and theActuarial
Bureau of the Division of Retirement are jointlyresponsible for
evaluating the performance of the independentadvisors. The Plan's
actuary said that the evaluation tech-nique used considers many
factors when computing rates of re-turn. He said that it provides
complete investment results byconsidering not only the income
earned from interest or divi-dends, but also changes in market
value of assets, which arisefrom both realized and unrealized gains
and losses. The tech-nique also includes (1) expression of
investment results asannual rates of return, (2) recognition of
cash flow--thelength of time that funds were invested, (3)
consideration ofsufficiently long periods of time to obtain
meaningful re-su'ts, and (4) selection of time periods to
illustrate resultsobtained during different periods and under
different marketconditions.
According to the actuary, the technique has been com-puterized
and reports are prepared monthly. Meetings are heldperiodically
with each independent advisor to discuss its per-formance and to
compare it with the other four advisors. As aresult, two advisors
have been recently discharged because ofpoor performance. The
actuary further stated that the bond
17
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advisor is not monitored because the Plan uses only one, thusno
comparison can be made.
Disclosure statem'ents
Plan officials said disclosure statements are not re-quired from
the comptroller or anyone else in the Plan. Nodisclosure statements
have been filed. The State's PublicOfficers Law cites ethical
standards for employees and publicofficials. Beyond the general
requirements imposed on allpublic employees, the law places special
responsibilitieson Plan employees. The law states that, except as
provided,neither the comptroller nor any person employed by the
Planshall
-- have any interest in the gains or profits ofany investment of
the Plan, or receive anypay or emolument for his services;
--borrow for himself or as an agent or partner ofothers any of
its funds or deposits or ir anymanner use the funds except to make
current andnecessary payments authorized by the comptroller;or
--become an endorser, surety, or an obliyor inany manner of
moneys loaned by or borrowed fromsuch funds.
The deputy comptroller was unaware of procedures fordisclosure
statements followed by the banks handling theportfolio. The Plan
has received no disclosure statementsfrom the banks.
AUDIT AND DISCLOSURE OFINVESTMENT ACTIVITIES
Investment procedures and controls are subject to bothinternal
and external audits. Auditors of the comptroller'soffice, who are
independent of the operating divisions respon-sible for the
investment program, make internal audits. Stateregulatory agencies
and certified public accountants make ex-ternal audits.
Scope of audits
Legislation requires that the Plan be subject to thesupervision
of the superintendent of insurance, in accordancewith the
provisions of the State insurance law. In this con-nection, the
State's Insurance Department audits the Planevery 5 years. Its
latest report, which covered the 5-year
18
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period from April 1966 to March 1971, dealt with the
history,management, membership benefits, assets, and financial
con-dition of the Plan.
The deputy comptroller, Division of Retirement, saidthere is no
legal requirement for an annual audit of thePlan's operations by a
certified public accounting firm.However, certified public
accountants do take an annualinventory of securities, including an
examination of vaultcontrols ant. other custodial and safekeeping
procedures re-quired by State law for all State-owned
securities.
The latest available report covered the year endedDecember 31,
1974. The accountants inspected or accountedfor securities and
other investments owned by the State andheld and administered by
the comptroller or the State'sCommissioner of Taxation and Finance,
including the CommonRetirement Fund. A Plan official said the
accountants re-concile their count with vault records and Division
of Re-tirement records.
The comptroller has instituted a regular system of in-ternal
audits. A central internal audit staff audits alldivisions of the
Department of Audit and Control. Internalaudits of the Division of
Investments and Cash Managementinclude review and evaluation of the
(1) accounting and se-curity aspects of investment operations, (2)
results of oper-ations for selected periods, (3) effectiveness of
internalcontrol systems, (4) interim reconciliations of State
recordswith a physical count of securities, and (5) performance
ofthe fiscal agent. Internal audits also seek to make certainthat
the investment function is adequately reviewed and eval-uated.
According to the deputy comptroller the internal auditsare not
made on any formal basis at the Division of Retire-ment, nor is
there a formal reporting system. No reports ofinternal audits of
the Division of Retirement were published.He also said that the
audit by the State Insurance Departmentis the only formal, complete
audit of the Plan's operation.
Reports issued onretirement plan activities
The comptroller issues an annual report on Plan opera-tions. The
report includes a list of the entire investmentportfolio and the
actuarial report. It also includes th'amount of assets by type of
investment, rates of return hvtype of asset for various years, and
rates of return for in-vestments acquired in the current year. The
annual report
19
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is sent to each public retirement system in the country,each
participating employer, public hospitals and libraries,retirement
information representatives of the Plan, and theNew York State
Exchange Library.
The Division of Retirement's Accounting Bureau preparesan annual
financial report. This report, which is sent tothe comptroller,
consists of detailed financial statementsof the Plan. The Plan and
the Common Retirement Fund are alsorequired by law to report to the
State Insurance Department.This department requires detailed
schedules showing invest-ments head at yearend and investment
transactions that oc-curred during the year.
The Department of Audit and Control publishes a monthlypamphlet
of State financial data. The pamphlet includes dataon the Common
Retirement Fund and the Plan along with a sum-mary of investments,
by type and rate of return of each type,as well as membership and
benefit information.
The automated investment information system providesdetailed
lists and records covering all phases of investmentactivity
concerning long-term bond and stock investments.These records
provide a detailed account of purchases, sales,maturities, receipt
of interest or dividend payments, andrelated information. The
records are usually in the formof printouts and are not published.
From these accountingrecords, internal reports are prepared that
provide compari-sons, analyses of performance, and historical
records of in-vestment activity to be used for investment
management.
20
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CHAPTER 3
INVESTMENT EXPERIENCE
ANNUAL RATE OF RETURN
The following table shows the annual rate of return forcommon
stock and fixed dollar investments (primarily bondsand mortgages)
for fitful years 1971-75, as shown in the?lan's annual reports.
Except for fiscal year 1971, the an-nual reports did not present an
overall rate of return onPlan investments.
Percent returnFiscal Common Fixed dollaryear stock
investments
1971 - a/4.851972 10.50 5.231973 8.80 5.301974 .90 5.901975
-1.70 6.30
a/Represents rate of return for all investment assets,
includ-ing stocks. At the end of fiscal year 1971, stocks
ac-counted for 16.6 percent of total Ilvestments.
The actuary said thet ;he rate of return for commonstock is
computed according to the method used for performancemonitoring.
This computation includes income from dividends,unrealized gains
and losses from appreciation or depreciation,and realized gain; and
losses from the sale of assets. Theyield included the changes in
market values from November 28,1960, to the end of each fiscal
year. The rate of returnfor total fixed dollar investments is
obtained by dividingthe income earned during the year by the
average asset valuefor the year. Neither realized nor unrealized
gains andlosses are considered in -his computation.
According to the Plan's actuary, the rate of return forcommon
stock could be computed considering only income andexcluding gains
and losses. However, computing the rate ofreturn for fixed dollar
investments including realized andunrealized gains and losses would
be very time consuming be-cause it would require writing a computer
program and accumu-lating raw data which might not be
available.
21
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PENSION PLAN ASSETS
The values of assets held in the Common Retirement Fund,listed
in the annual reports as of March 31 for fiscal years1971-76, were
as follows:
Fiscalyear Amount
1971 $4,596,908,2241972 5,376,646,2081973 6,091,833,5191974
6,472,094,2791975 7,139,770,2001976 8,292,245,439
A comparison of the assets by category for the 6-year periodis
shown in schedule 1 on page 25. During that period,about 82 to 86
percent of the assets were invested in stocks,bonds, and
mortgages.
FUNDS IN -NON-INTEREST-BEARING ACCOUNTS
Four ncn-interest-bearing checking accounts are main-tained for
the Plan and the Common Retirement Fund. A regularaccount and an
escrow account are maintained for the fund. Apension account for
paying benefits and payroll expenses anda revolving fund account
for such payments as withdrawals ofcontributions and loans to
members are maintained for thePlan. We analyzed the accounts of the
Common Retirement Fundand the Plan for the months October 1975 to
March 1976. Thefollowing table shows the average daily balances and
monthlyexpenditures from the four non-interest-bearing accounts.
Theaverage daily balance was computed by totaling the daily
bal-ances and dividing the total by the number of days in themonth,
excluding weekends and-holidays.
Common Retirement FundRegular account _ Escrow account
gverage Monthly Average Mont-hydaily expendi- daily expendi-
Month balance tures balance tures
October $2,064,299 $559,767,681 $23,440 $6,554,073November
259,313 198,791,151 15,028 2,381,263December 1,596,216 592,400,508
18,237 2,297,771January 1,116,824 178,017,420 26,262
7,374,907February 1,387,445 409,368,358 32,351 1,297,720March
1,186,740 350,303,273 39,776 2,029,104
22
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PlanPension payroi l account Revovilng fundAverage Monthly
Average Monthlydairy expendi- daily expendi-
Month balance tures balance tures
October -$3,263,066 $27,662,137 -$1,196,521 $10,223,614November
-4,272,035 26,627,606 -1,312,467 8,883,046December -2,855,990
26,687,075 -1,290,605 7,841,480January -3,306,029 27,624,098
-1,276,203 6,099,145February -4,228,175 27,449,609 -1,177,843
5,887,429March -3,157,314 28,729,604 -1,254,720 7,684,032
The director of the Accounting Bureau did not believethe
balances in the Common Retirement Fund accounts were un-reasonable
considering the amount of expenditures.
The director also told us that, for the Plan accounts,a "managed
overdraft policy" is followed. Under this policy,frequent deposits
are made in amounts sufficient to coverchecks presented to the
banks for payment. As a result ofthe policy, the amount of cash
recorded in the books of ac-count will frequently be negative--as
illustrated in theabove table--while the checking accounts will not
show anyoverdrafts.
Our review of the balances recorded in the pension pay-roll
account showed that during about the first half of eachmonth a
negative cash balance is recorded, but during therest of the month
the cash balance generally showed zero oran insignificant amount.
Our review of the balances recordedin the revolving fund account
showed that the account gener-ally has negative balance, except on
the last working day ofthe month, when a positive amount is shown.
According tothe director. at the end of the month a deposit is made
tobring the book balance up to about $50,000.
OPERATING COSTS
By law, operating costs can be paid only out of theCommon
Retirement Fund revolving fund. Disbursements aremade directly from
the fund. The director of the AccountingBureau said that charges
are prorated aqainst each partici-pating syst-em. A Plan official
told us that operating costsincluded salaries, rent, supplies, and
utilities. They donot include fees paid to advisors, which are paid
outof investment proceeds.
All participating employers are required to make an an-nual
contribution to cover the Plan's operating costs. This
23
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contribution, which is determined separately from the
retire-ment contribution, is computed by dividing the current
year'soperating costs by the total current annual payroll of
allparticipating employers. The resulting percentage is appliedto
each employer's total payroll to arrive at the
employer'scontribution.
The following table shows the Plan's operating costsand
contributions for fiscal years 1971-76.
Operating costsFiscal Operating as a percentyear costs
Contributions of contributions
1971 $5,678,654 $377,692,671 1.501972 6,404,986 508,202,479
1.261973 6,993,963 565,309,199 1.241974 7,117,816 640,384,213
1.111975 8,474,707 701,242,201 1.211976 9,008,122 802,641,410
1.12
24
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SCHEDULE 1 SCHEDULE 1
cl 1 IN 1 N N
0% - 0% 0 0% I n Ii - N 0 0% % 1 In 0% 11 0
01 Ino ~ c 0 I0% 0% 0% 0 0 % 0 j
0 'C n % 0 0% In 10 0 %
- rr % - N C
N1 ~ n In 0 r N
ol w ~ ~ ~ i
w ii
lo.8 1~~~0% N0]N
'0 o10 N 1 0% 0% 0 N .
IC - 0 I 0 U In 0% IO 0 N I 0% 0% N 0 I
10 ~ 41 I - N N -. Oo ~ 0% N I IC N %
N In 0
S -0% 0 0 1 0% N, 0% N
IC
.C 1.1 I . - . . . . II£ N 0 0% 0% In N 0% 0% 0 I 0 !0 0% 0% N
0% In - N 0 0 % 0%!
1% 0 N n I 0 N = 0 N 0
* 0% - 0% 0 -, In 0% 0 In NY 0
14 14
0% 4. 0% .1 C
0 0 I
= -a h o IN N N 001010 0. N( g m N0 0%I 0% N - % 0 I I 0
rl ~ ~ S~ 0% -- 0% -
0 N 0 u 1. 0 CIN D NYV C
0% 0 .1 -1 N In N Nj0% C
- . . . ~ 1 1 -1· CI0 0 N In 0
N - N 0%3 InI 01 0% In 0% N j V
01 11. 0 4,n3 0 I ~ ( C( N 0% 0% In 0 - N % 01 0( 41E
0~ I .. . COaa C CJ~/ C0, 0 'I % 0% In 0 N 0111-4 C :F N a 0
o'·
0 II 0 na N a O I l 0% % 0% 0% 0% Nn 0I InI N N 0
- 0· - % O % N 0 01( CN C) 00110 0% .1 N - N N 4- ON 4
0 n N I N N % 1 0 % Ol. -.
0 N *10 N N I CInIL 01 I
-
SCHEDULE 2 SCHEDULE 2
SCHEDULE OF BENEFITS
[Extracts from the 55th Annual Report, The NewYork State
Employees' Retirement System (ERS),The New York State Policemen's
and Firemen'sRetirement System (PFRS), and The New York StatePublic
Employees' Group Life Insurance Plan,fiscal year ended March 31,
1975.]
Legislation enacted in 1973 substantially revised certainaspects
of the Retirement Systems. A new class of members wascreated--those
who entered or re-entered the Systems afterJune 30, 1973. Existing
benefits were modified, when appli-cable to new members of ERS. In
one instance, death benefits,a new formula was mandated for new
members of ERS and PFRS.
The normal retirement aqe for Post-July 1, 1973 membersis 62,
unless they are in a plan which uses years of serviceas its only
criterion. Retirement is permitted members betweenage 55 and 62 but
with a reduction in benefits according tothe following formula:
1) One-half of 1% per month for each of the firsttwenty-four
full months that retirement predatesage 62.
2) One-quarter of 1% per month for each full month
thatretirement predates age 60. In no event is retire-ment allowed
before age 55.
Retirement benefits for Post-July 1, 1973 members, exceptany
attributable to their own contrib.tions, are subject to alimit. The
maximum benefit for ERS m .hers, computed withoutoptional
modification, may not exceed 60% of the first $12,000of final
average salary and 50% of any final average salary inexcess of
$12,000. For policemen and firemen, the maximumbenefit equals the
amount payable upon completion of 30 yearsof service.
Other limitations applicable to this group are noted,where
appropriate, throughout this summary.
Service Retirement Allowances and Employee Contributions
1. Contributory Plans [See GAO note.]
GAO note: The various retirement options included in
thisschedule are referred to as Dlans. Within the casestudy, we
zeferred to these plans as programs inorder to minimize confusion
with the term "Plan"which we used in referring to the New York
StateEmployees' Retirement System.
26
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SCHEDULE 2 SCHEDULE 2
If a member's employer has not elected a non-contributoryplan,
the employee has a choice between the Age 55 Planand the Age 60
Plan (unless the employee is covered by aspecial plan.)
A. Age 60 Plan
Pre-July 1, 1973 members may retire at or after age60,
regardless of length of service, with a pensionof 1/140th of final
average salary for each year ofmember service plus 1/70th of final
average salaryfor each year of prior service (to a maximum of
35years) plus an annuity purchased by member contribu-tions.
The same benefit formula applies to Post-July 1, 1973members but
these members must meet the criteria men-tioned in the introductory
paragraphs.
This plan requires member contributions, the rate ofcontribution
being based on occupation, sex, and ageat entry into membership.
These contributions arelower than those for the other contributory
plan.
B. Age 55 Plan
Pre-July 1, 1973 members may retire at or after age55,
regardless of length of service, with a pensionof 1/120th of final
average salary for each year ofmember service plus 1/60th of final
average salaryfor each year of prior service (to a maximum of
35years) plus an annuity purchased by member contribu-tions. The
same benefit formula applies to Post-July 1, 1973 members but these
members must meet thecriteria mentioned in the introductory
paragraphs.The contribution rates for this plan are greater
thanthose for the Age 60 Plan.
C. Increased-Take-Home-Pay Provision
For most of the members covered by contributory plans,the
required contributions have been reduced by the de-cision of the
employer to make contributions to a re-serve for
Increased-Take-Home-Pay (ITHP). If an em-ployer makes subn I"HP
contributions, they replacepart or all of the riember's own
contributions. Tothat extent, a reserve is established which
accumu-lates with regular interest and is used to provideadditional
income to the member at the time of retire-ment.
27
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SCHEDULE 2 SCHEDULE 2
Since April 1, 1960 employers could elect to make
ITHPcontributions eaual to 5% of the member's gross sal-ary.
Beginning April 1, 1964, employers could electto provide either a
5% or 8% ITHP contribution. As ofApril 1, 1965, employers could
elect the 5% or 8% ITHPcontribution, or a fully non-contributory
plan. Thefully non-contributory ITHP plan was closed to newelection
as of July 1, 1966.
z. Non-Contributory Plan
There are four non-contributory retirement plans: Employ-ees
enrolled in any one of these plans are not required tocontribute.
Pre-July 1, 1973 members may retre at orafter age 55. Post-July 1,
1973 members must mtet thecriteria mentioned in the introductory
paragraphs.
A. Non-Contributory Plan (1/60th Plan)
At retirement, a member will receive a pension equalto 1/60th of
final average salary for each year ofmember service rendered after
April 1, 1960. plus1/120th of final average salary for each year of
mem-ber service rendered before April 1, 1960, plus anannuity from
any accumulated contributions left ondeposit with the System. Each
year of prior service(up to a maximum of 35 years) will increase
the pen-sion by 1/60th of final average salary.
B. Non-Contributory Plan with GuaranteedBenefits (Improved
1/60th Plan)
A member will receive at retirement a pension equal to1/60th of
final average salary for each year of serv-ice since April 1, 1960
plus a pension that will pro-duce, when added to the annuity
purchasable by re-quired member contributions, a retirement
allowance cf1/60th of final average salary for each year of
serv-ice between April 1, 1938 and April 1, 1960. All mem-ber
contributions since April 1, 1960 and those inexcess of the
contributions required under the Age 60Plan for the years between
1938 and 1960 will, if leftin the System, purchase additional
annuity. Servicebefore April 1, 1938 is credited in the same manner
onthe Improved 1/60th Plan as it is on the 1/60th Plan.Each year of
prior service (to a maximum of 35 years)will increase the pension
portion of %-c :etirementallowance by 1/60th of final average
6aiary.
28
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SCHEDULE 2 SCHEDULE 2
C. Career Plan (25 Years)
A member retiring with at least 25 years of totalservice (member
service plus prior service) willreceive a retirement allowance of
1/50th of finalaverage salary for each of the first 25 years
ofservice plus 1/60th of final average salary foreach year in
excess of 25, provided that requiredcontributions are on deposit.
Members retiringwith fewer than 25 years of service will receivethe
Improved 1/60th Plan benefit.
D. New Career Plan (20 Years)
A member retiring with 20 or more years of totalservice (member
service plus prior service) willreceive a retirement allowance of
1/50th of finalaverage salary for each year of service,
providedthat required contributions are on deposit. Formembers who
retire with fewer than 20 years oftotal service, the retirement
allowance is calcu-lated according to the terms of the
Improved1/60th Plan.
3. Special Plans
A. 25 Year Plans
A variety of 25 year plans are offered to policemen,firemen,
sheriffs and correction officers. Generally,members may retire with
25 years of service, regard-less of age, or at age 60, with a
retirement allowanceof 1/50th of final average salary for each year
ofservice (to a maximum of 25 years). Allowances arefunded by
employer and member contributions. Membercontributions may be
replaced (to the extent of 5% or8% of pay) by ITHP contributions,
or the employer mayprovide the plan on a non-contributory
basis.
20 Year Plans
These Plans are offered to officers and members ofcertain police
and fire departments. A member re-ceives a retirement allowance
equal to 1/40th of finalaverage salary for each yeat of service (to
a maximumof 20 years). Allowances are funded by employer andmember
contributions. Members contributions may bereplaced (to the extent
of 5% or 8% of pay) by ITHPcontributions, or the employer may
provide the planon a non-contributory basis.
29
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SCHEDULE 2 SCHEDULE 2
20 Year Plan for New York State Police
Upon the completion of 20 years of total service, aNew York
State Trooper may retire and receive a re-tirement allowance of
1/40th of final average salaryfor each year of service. Troopers
retiring withmore than 20 years of service, but not more than
30,will receive an additic.al benefit of 1/60th of finalaverage
salary for each year of service in excess of20. With certain
exceptions, no credit is allowed forservice beyond 30 years. Most
members must retire onDecember 31st of the year in which they
attain age 55.
4. Vested Retirement Benefit
The vested retirement benefit is available to a member whois not
eligible to retire but leaves service after render-ing 10 years,
including a minimum of five years of memberservice. For Post-July
1, 1973 members, the five years ofmember service must follow after
July 1, 1973. Memberswho "vest" their retirement allowance must
leave any Le-quired contributions on deposit. Upon attaining age
55,60 or 52, depending on the plan by which they were coveredwhen
they left service, they must submit applications forretirement. The
vested retirement allowance is generallycomputed in accordance with
the provisions of the planthey were covered by when last in
service.
Disability Retirements
1. Ordinary Disability Retirement
This benefit becomes available after the member has rend-ered 10
years of total service, if he or she is incapaci-tated for the
performance of duty. The benefit is meantto be 1/60th of final
average salary for each year ofservice. Certain factors, however,
may reduce the amount.The minimum allowance, ayain with certaini
exceptions, is1/3rd of final average salary.
2. Accidental Disability Retirement
This benefit is available to a member, regardless oflength of
service, if he or she is incapacitated forthe performance of duty
as the result of an accidentwhich occurred in the performance of
duty, and not asthe result of the member's negligence, and if
themember applies for the benefit prior to attainingage 60.
30
-
SCHEDULE 2 SCHEDULE 2
The allowance for Pre-July 1, 1973 members consists
of a pension which is equal to 3/4ths of final aver-age salary,
plus an annuity provided out of the mem-ber's accumulated
contributions, if any. For Post-July 1, 1973 members, the allowance
is eaual to 60%
of the first $12,000, of final average salary and 50%of any
final average salary over $12,000, plus an an-
nuity provided out of the member's accumulated contri-butions,
if any. The pension is subject to reductionon account of Workmen's
Compensation awards.
Supplemental Retirement Allowances
Supplemental payments relate to the first $8,000 of an
eligible member's unmodified allowance and are made to all
service retirees who retired before January 1, 1969 and who
attained age 62 on or before May 31, 1972 and to all
disabil-
ity retirees regardless of age. Supplemental allowances are
not payable to benficiaries or designated annuitants.
The supplemental retirement allowances are subject to
renewal by the Legislature each year. The 1975
legislationprovided for continuation of the cost-of-living
supplementswhich were already being paid.
Death Benefits
1. Ordinary Death Benefits for Pre-July 1, 1973 Members
This benefit is paid upon the death, before retire-
ment, of a member who meets the eligibility require-ments as set
forth in the Law. With some exceptions,the benefit payable on
account of a member who, atthe time of death, would have been
eligible for a
service retirement benefit is one of the benefits out-lined
below or an amount based on the pension reserve
that would have been established had the member re-tired on the
date of death, whicheve:r is larger. In
most cases, such reserves are limited so as to excludethe
additional benefits contained in retirement plans
enacted since 1967.
The first $50,000 of a member's ordinary death benefit(excluding
return of the member's contributions with
interest) is paid in the form of group term life in-surance.
A. Contributorv Plan Benefit
The benefit is equal to one month's salary foreach year of
service during the first 12 years
31
-
SCHEDULE 2 SCHEDULE 2
of service, plus an additional benefit of onemonth's salary for
each additional two years ofservice. The maximum ordinary death
benefit istwo year's salary. In addition, the member'saccumulated
contributions are returned. Both theaccumulated contributions and
the ordinary deathbenefit are payable to the beneficiary either ina
lump sum or in the form of an annuity.
B. Non-Contributory Plan Benefit
A special death benefit for members under theterms of the
non-contributory retirement planprovides for one month's salary for
each yearof service up to 36 years.
C. Guaranteed (Minimum) Benefit
New York State employees and members whose em-ployer have
elected this benefit are coveredby a "guaranteed" (minimum)
ordinary death bene-fit of three times annual salary raised to
thenext multiple of $1,000, but not to exceed$20,000. New York
State Police and State employ-ees who are members of the Security
Services Unitare also covered by a minimum ordinary death bene-fit
of three times annual salary raised to thenext multiple of $1,000
but with no limitation.
2. Ordinary Death Benefits for New Members(Post-July 1,
1973)
New members must elect, at the time they first becomta member of
the Systems, either of the following bene-fits:
1) An ordinary death benefit of one month's salaryper year of
service up to a maximum of threeyears' salary after 36 years of
service with analternative formula ("death gamble") applicableto
those who die in service after attaining nor-mal retirement age;
or
2) A benefit ot one year's salary per year of serviceup to a
maximum of three years' salary subject tothe following
limitations:
32
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SCHEDULE 2 SCHEDULE 2
Age when LastBecame a Member Maximum Benefit
52 2-1/2 x salary53 2 x salary54 1-1/2 x salary
55-64 1 x salary65 & Over $1,000
While in service, the benefit is reduced by 10%yearly after
attainment of age 61. Upon retire-ment, the benefit is reduced to
50% the firstyear, 25% the second year and 10% thereafter.In no
case is the benefit ever reduced jelow10% of the benefit in force
at either age 60 orthe date of retirement if that preceded age
60.
3. Accidental Death Brnefits
This benefit is payable upon the death of a member asthe result
of an accident which occurred in the per-formance of duty. This
benefit is payable to thewidow until remarriage, or if there is no
widow orchild, to a dependent parent.
The accidential death benefit is a pension equal toone-half of
final average salary. It is subject toreduction by Wc-kmen's
Compensation benefits. In ad-
dition, any acr :,;ulated contributions are paid to
thedesignated beneficiary.
If the accidentds death benefit payments, includingpayments made
or to be made under the Workmen's Com-pensation Law, are less than
the amount which wouldhave been payable as an ordinary death
benefit, the
difference is paid to the beneficiary or to the mem-ber's
estate.
Options
At the time of retirement, a member may elect to receivethe
retirement allowarice in any one of several forms. Eachform is
known as an option.
Once payment of the retirement allowance has started,
thepensioner may not change the option. Following is a
briefdescription of each of the options:
Option 0 (Single Life Allowance):
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SCHEDULE 2 SCHEDULE 2
The Single Life Allowance is also known as Option Zero.It
provides the maximum retirment allc'wance to thepensioner and is
payable for life. All payments ceaseat the pensioner's death and no
Payments aze madc to anybeneficiary.
Option 1/2 (Cash Refund - Contributions):
Under Option 1/2, pensioners are assured that their ac-cumulated
contributions will be returned in full eitherto them or to their
beneficiaries. If the pensionershould die before the annuity
portion of the retirementallowance has amounted to the pensioner's
accumulatedcontributions at the time of retirement, the
balancethereof would be paid to the beneficiary in a lump sum.The
beneficiary may elect to receive this lump sum in theform of a life
annuity or a reduced life annuity. Thepensioner has the privilege
of changing the beneficiaryat any time. Because of the assurance
provided by thisoption, the annuity portion of the retirement
allowanceis less than it would be under Option 0. The
pensionportion is the same as it would be under Option 0.
Option 1 (Cash Refund - Annuity Value): (available toPre-July i,
1973 members only)
Under Option 1, pensioners are assured that both
theiraccumulated contributions and the reserve established bythe
employer will be paid to them or their beneficiaries.If the
pensioner should die before the retirement allow-ance has amounted
to the pensioner's accumulated contribu-tions plus the reserve
established by the employer at thetime of retirement, the balance
would be paid to the bene-ficiary in a lump sum. The beneficiary
may elect to re-ceive this lump sum in the form of a life annuity
or areduced life annuity. The pensioner has the privilege
ofchanging the beneficiary at any time. Because of the as-surance
provideu by this option, the retirement allowanceis less than it
would be under Option 0.
Option 2 (Joint Allowance - Full):
Under Option 2, the pensioner will receive an allowancefor life
and if the beneficiary is alive at the time ofthe pensioner's
death, the beneficiary will receive thesame retirement allowance
for the remainder of his or herlifetime. In this case, the
beneficiary cannot be changed.Because two persons are involved
instead of one, the re-tirement allowance will be less than it
would be under Op-tion 0.
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SCHHEDULE 2 SCHEDULE 2
Option 3 (Join' Allowance - Half):
Under Option 3, the conditions are exactly the same asunder
Option 2, except that the beneficiary will receiveone-half of the
retirement allowance which the pensionerhad been receiving.
Additional Options for New Members
Five Year Certain
Under this option, payment is made to a pensioner for lifewith a
guarantee that, even in the event of death, pay-ments will continue
for five years after retirement.
Ten Year Certain
Payments are made to the pensioner for life with the as-surance
that, even in the event of death, payments willcontinue for ten
years after retirement.
[GAO note: In interpreting the preceding benefits, the
fol-lowing definitions are used.]
Accumulated Contributions - The total contributions madeby a
member, with interest.
Annuity - That part of the retirement allowance derivedfrom a
member's accumulated contributions.
Beneficiary - A person receiving a payment or paymentsfrom the
System by reason of the membership of a spouse orother person.
Designated Annuitant - A beneficary who chooses to re-ceive a
benefit as an annuity rather than a lump sum payment.
Employer - The State or other public agency participatingin the
System.
Final Average Salary - For pre-July 1, 1973 members, thehighest
average annual compensation earned during any threeconsecutive
years of member service. For post-July 1, 1973members, the highest
average annual compensation earned duringany three consecutive
years. Where an employer has so elected,the final average salary
may be based on the final year ofmember service.
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SCHEDULE 2 SCHEDULE 2
Member Service - Service rendered in the employ of theState, or
a participating public agency, while eligible formembership.
Non-Contributory - The member is not reauired to makeany
contribution.
Option - One of the several forms in which a retirementallowance
may be paid.
Pension - That part of the retirement allowance derivedfrom
contributions made by the employer.
Pensioner - A member of the System who has been retiredand is
receiving a retirement allowance.
Prior Service - Service rendered to a participatingemployer
before that employer elected to participate in theSystem.
Retirement Allowance - The monthly payment for life con-sisting
of the pension, the annuity, if any and the ITHP pen-sion, if
any.
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APPENDIX II
CASE STUDY
ON
THE TEACHERS' RETIREMENT SYSTEM
OF THE
CITY OF NEW YORK
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C o n t e n t s
Page
CHAPTER
1 BACKGROUND 41Membership requirements 41Funding 42Benefits
43
Supplemental retirementallowances 43
Cost-of-living annuity adjustments 43
2 FRAMEWORK FOR MANAGING INVESTMENTS 44Organizational. structure
44
Teachers' Retirement Board 45Office of the Executive Director
45Chief accountant 46Comptroller of the City ofNew York 46
Investment Advisory Committee 46Investina agents 46Investment
advisor 47
Making and implementing investmentpolicy 47
Investment policy 48Implementing investment policy 51
Management and control of pensionplan assets 53Money management
techniques 53Monitoring investment
performance 54Disclosure statements 55
Audit and disclosure ofinvestment activities 55Scope of audit
56Reports issued on pension
plan activities 56
3 INVESTMENT EXPERIENCE 58Annual rate of return 58Pension plan
assets 59Funds in non-interest-bearing accounts 59Operating costs
60
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Schedule Page
1 The Teachers' Retirement System of theCity of New York,
comparative statementof assets as of June 30, 1971, 1972,1973,
1974, and 1975 62
2 Schedule of benefits 63
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CHAPTER 1
BACKGROUND
The Teachers' Retirement System of the City of New
York(hereafter referred to as the Plan) was established onAugust 1,
1917, under the authority of Chapter 303 of theNew York State Laws
of 1917. The Plan is governed by Title B,Chapter 20, of the
Administrative Code for the City of NewYork; the Retirement and
Social Security Law of New YorkState; and New York insurance and
banking laws.
The Plan is one of five retirement plans for city employ-ees. As
of June 30, 1975, the Plan was the second largestcity retirement
plan with about 83,000 active members and as-sets totaling about $3
billion. The other four city plans hadabout 257,000 active members
and assets of about $5 billion.As of that date, the Plan was paying
about $18 million monthlyto its 25,652 retirees and
beneficiaries.
Management and investment of the Pi .'s assets are sepa-rated
into three programs--a fixed annuity program, a variableannuity
program, and a tax-deferred e inuity program. The pur-pose of each
of these programs is described in chapter 2, inthe section on
investment policy.
The Plan is managed and coi: rolled by a board of trust-ees. To
assist it, the board has appointed the comptrollerof the city of
New York to mananiE funds of the fixed annuityprogram and has hired
10 outside investing firms to managethe funds of the variable
annuity program. The comptrollerand the outside investing firms
coinvest the funds of the tax-deferred annuity program.
MEMBERSHIP REQUIREMENTS
Membership requirements are established by the
city'sAdministrative Code. Plan members include the following
em-ployees of the city's boards of education and higher
educationinstitutions:
-- Full-time teachers, instructors, and professors ofpublic
schools and colleges.
--Part-time lecturers of municipal colleges.
--Supervisory and administrative teaching personnelof public
schools and colleges, such as super-intendents, associate and
assistant superintendents,principals, vice principals, and
department heads.
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Generally, membership is (1) mandatory for regular am-ployees in
a teaching or other related position in the city'spublic schools
and colleges and (2) optional for part-timecollege lecturers. Since
1967, public college faculty mem-bers have had the option of
jcining the Teachers' Insuranceand Annuity Association, a privately
operated nationwideretirement system.
FUNDING
Funds needed to finance the Plan come from earnings
oninvestments and contributions by employees and the
city'semploying boards of education and higher education
institu-tions. The Plan's enabling legislation requires that
allemployees contribute through payroll deductions.
Members'contributions are based on a percentage of their gross
sal-ary. The contribution rate is actuarially determined, basedon
the member's age on commencing employment, sex, years ofservice,
and the type of pension program selected--eitherthe 20-year pension
option or the age-o55-increased-benefitsoption. Under both options,
separate rate tables are main-tained for males and females. For
example, under the 20-yearpension option, a male at age 25 with 1
year of prior servicecontributes 5.05 percent, whereas a female
under the sameonditions contributes 5.45 percent. Moreover, the
minimum
rates at age 46 with no prior service are 2.70 percent formales
and 3.15 percent for females.
At each member's option, contributions are reduced by(1) the
city's contribution for increased take-home pay,described below,
and (2) the member's required Federal SocialSecurity
contribution.
Since July 1, 1960, the city has contributed a portionof each
employee's required contribution, in order to in-crease the
member's take-home pay without increasing hisgross salary. The
city's portion of the member's requiredcontribution, which has
varied between 2.5 to 8 percent from1960 to 1975, is currently 2.5
percent.
In addition, the city contributes annually to the fixedannuity
program an actuarially determined amount which pro-vides all
benefits that are not included in the annuitiespaid from members'
contributions, such as group term lifeinsurance. The city also
contributes to the fixed annuityprogram (1) amounts that will
amortize various unfunded ac-crued liabilities over periods
established by law and (2)an amount which will, over the next 20
years, amortize in-vestment losses in accordance with legislation.
The citymakes increased-take-home pay contributiors to the
variable
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annuity program. The city makes no contributions to the
tax-deferred annuity program but guarantees the benefit paymentsto
retired members.
Before July 1, 1971, all the city's contributions to thePlan
were paid in the year the liability was incurred. Ef-fective on
that date, however, legislation deferred paymentof the city's
contributions so that they can be paid 2 yearsafter the liability
is incurred.
BENEFITS
The Plan offers a variety of benefits, including
normalretirement benefits, disability retirement and death
benefits,and deferred retirement benefits. Because of the
complexityof the benefits, we have included excerpts from the
Plan'sFifty-Seventh Annual Report, which describes each of the
bene-fits available. This is included as schedule 2 on page 63.
In addition, the Plan offers supplemental retirement al-lowances
and cost-of-living increases.
Supplemental retirement allowances
Teachers who retired before October 1, 1968, with atleast 10
years of credited service are entitled to a supple-mental
retirement allowance. This supplement is based onthe year of
retirement and the years of service. For example,teachers who
retired in 1955 receive a 58.8-percent supplementto their monthly
benefits, whereas those who retired in 1967receive a 9.8-percent
supplement.
State laws of 1973 liberalized the allowances so thatbenefits
are now based on the first $8,000 of annual pensionand the 1969
Consumer Price Index and are payable to thosepensioners who had
attained age 62 on or after October 1,1968, and had retired before
January 1, 1968. The law re-quires that the computation be
developed by the city actuaryand certified to the comptroller. A
separate fund, financedby the city and under the control of the
comptroller, isused to pay the supplemental allowances.
Cost-of-living annuity adjustments
Under State law, the increase or decrease of normalretirement,
disability, and survivor benefits is providedannually at a rate
equal to the lesser of 3 percent or theactual increase or decrease
in the cost-of-living index.Benefits cannot be decreased below the
benefits initiallypaid.
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CHAPTER 2
FRAMEWORK FOR MANAGING INVESTMENTS
The city's Administrative Code places responsibility forthe
administration and proper operation of the Plan under
thetrusteeship of a Teachers' Retirement Board. To assist it,the
board has appointed an executive director to handle theday-to-day
administrative activities. The board has also con-tracted with 10
investing agents and appointed the comptrollerof the city of New
York to handle Plan investments. An out-side investment consulting
firm has also been hired to monitorthe performance of the investing
agents.
ORGANIZATIONAL STRUCTURE
The following chart shows the structure established tomanage and
control Plan activities.
TEACHERS'RETIREMENT BOARD
COMPTROLLER INVESTING INVESTMENT OFFICE OF THEOF THE CITY AGENTS
ADVISOR EXECUTIVE
OF NEW YORK DIRECTOR
iNVESTMENT CHIEFADVISORY ACCOUNTANT
COMMITTEE
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Teachers' Retirement Board
The board is responsible for managing the Plan and isgranted the
powers and privileges of a corporation. Boardmembers are trustees
of Plan funds, subject to conditionsand limitations imposed by law,
as discussed in the sectionbteginning on page 47. The board has the
power to hold, pu. -chase, sell, assign, transfer, and dispose of
the Plan'ssecurities and investments. City law authorizes the
boardto hire investing agents to provide investment advice
andmanage portions of the Plan's assets. (Investment activi-ties of
the agents are described in the section beginningon p. 48.)
The board consists of seven members, including thecomptroller of
the city of New York and the president ofthe city's board of
education. The comptroller, electedthrough citywide vote, serves
for 4 years. The presidentof the board of education is elected by
fellow members,who are in turn appointed by the city's mayor and
boroughpresidents. Of the remaining five members, two are
ap-pointed by the mayor and three are elected by Plan membersand
are themselves Plan members. Of the two appointed boardmembers, one
must be a member of the board of education(other than the
president). The other need not have anyspecial qualifications. The
appointed board members serveuntil a successor is appointed and the
elected board mem-bers serve 3-year terms.
Each board member serves without compensation, exceptfor such
necessary expenses as travel and printing incurredin serving or the
board.
Office of the Executive Director
This office is responsible for the daily
administrativeoperations of the Plan. The office prepares operating
bud-gets; maintains financial records, including members'
con--tribution records; and pays benefits.
An executive director is appointed by the board and isthe board
secretary and chief administrator of the Plan. Theexecutive
director is authorized, within budgetary limits, tohire necessary
staff other than the chief accvlntpnt. Theexecutive director
represents the board in meetings withmembers, city departments, and
State and Federal authorities.
This office employs about 90 persons. They are city em-ployees
selected in accordance with the cicy's civil servicesystem.
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Chief accountant
The chief accountant is in charge of the Plan's
generalaccounting work and the members' annuity savings
accounts,ana also serves as the budget officer. He is
responsible'or preparing and certifying the accuracy of the annual
con-solidated financial statements, which show the assets,
lia-bilities, and operations of the funds of the fixed,
variable,and tax-defeired annuity programs.
The chief accountant, who is appointed by the board,is directly
responsible to the executive director for theproper performance of
his du ies. His reports are submittedto the board through the
executive director. Although thereare no qualifications
requirements for the chief accountant,the executive director said
that the incumbent is a certifiedpublic accountant.
Comptroller of t? ~city of New York
The comptroller is by law an ex officio member of theboard and
custodian of Plan funds. The comptroller isauthorized, subject to
the board's approval, to invest thefunds of the fixed annuity
program and the fixed portionof the tax-deferred annuity program.
(These programs arediscussed in the section beginning on p.
48.)
City legislation permits the Plan to delegate its in-vestment
powers to the comptroller. According to a Plan of-ficial, since
1917 the board--through a resolution which hasbeen renewed every 3
months--has authorized the comptrollerto invest the funds of the
fixed annuity program and thefixed portion of the tax-deferred
annuity program.
Investment Advisory Committee
The comptroller has established an Investment AdvisoryCommittee
to advise and assist him in the management of pen-sion funds. The
committee is made up of six officials prin-cipally from the banking
and insurance fields. This committeemeets about four times a year
to review the general economicsituation, including the bond and
stock markets, and examinesecurity purchases and sales.
Investing agents
The board has contracted with 10 investing agents tomanage the
funds of the variable annuity program and thevariable portion of
the tax-deferred annuity program. The
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10 agents consist of 5 local arnks, 3 local and 1 out-of-State
broker dealer, and 1 out-,f-State insurance company.These firms
adopt their own investment philosophy withinthe guidelines of the
law and policies of the board. Theprograms and the investment
activities of the 10 investingagents are described in the section
beginning on the follow-ing page.
Investment advisor
The board has contracted with a local advisory firm tomonitor
the activities of the investing agents and provideinvestment
advice. Its responsibilities are described inthe section beginning
on page 53.
MAKING AND IMPLEMENTINGINVESTMENT POLICY
The city's Administrative Code gives the board authorityto
invest and manage the Plan's assets and responsibility
forestablishing and implementing investment policies. However,the
investment of Plan funds is subject to the New York StateBanking
Law and the Retirement and Social Security Law.
The Administrative Code states that the assets of thevariable
fund may be invested in stocks which are permissibleinvestments for
domestic life insurance companies or savingsbanks. The investments
are subject to the following l'-ita-tions:
-- No more than 5 percent of the Plan's assets shall beinvested
in the stocks of any corporation and itssubsidiaries.
-- No more than 2 percent of the total issue and out-standing
stocks of any corporation and its subsidiar-ies shall be owned by
the Plan.
The Retirement and Social Security law sets the follow-ing
limitations on mortgages, stocks, and corporate obliga-t ions.
--No more than 30 percent of the Plan's assets may beinvested in
conventional mortgages, no more than5 percent may be invested in
any mortgage, and noinvestment of less than $250,000 may be made in
amortgage.
-- No more than 10 percent of the Plan's assets may beinvested
in any conventional mortgage guaranteed bya State bank or trust
company.
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-- No more than 6 percent of the fund in any year ormore than 35
percent of the total fund may be in-vested in stocks of
corporations in which invest-ments are permitted under applicable
State laws.
-- No more than 1.5 percent of the fixed annuity fundsmay be
invested in the stock of any corporation, normay the Plan own more
than 3 oercent of the totaloutstanding shares of any
corporation.
In addition, the -xecutive director said that the Planmakes
loans to members against their contribution accounts.The Plan does
not make loans to State or city officials orgovernments. However,
with the board's prior approval, bonds,notes, and other obligations
of State and city governmentsmay be purchased. Such purchases from
funds of the fixed an-nuity program are discussed in the following
section.
Investment policy
The board establishes the Plan's investment policy. In-vestment
recommendations made by the comptroller and the 10investing agents
who manage the three annuity programs mustbe approved by the board
before implementation. The boardhas established the following
investment guidelines for thefixed, variable, and tax-deferred
annuity programs.
Fixed annuity program
The purpose of this program is to provide members with afixed
dollar annuity upon retirement. The executive directorsaid that the
important investment consideration for the fixedannuity funds is
safety of investment--a return of 4 percentis guaranteed by the
'.ty. If the Plan's investment portfolioearns less than 4 percent
per year, the city makes up the dif-ference. Earnings exceeding 4
percent go to the city. Planearnings have exceeded 4 percent since
June 30, 1964. (Seech. 3 for further information on the annual rate
of return.)
The comptroller is authorized, subject to prior approvalof the
board, to invest the fix-d annuity funds in any in-vestments
authorized by law. The comptroller can invest in(1) obligations of
the United States, local governments, andCanada, (2) bonds, notes,
mortgages, and other indebtedness ofcorporations, (3) public
utility obligations, and (4) stocksof corporations. According to a
Plan official, there is norequirement that a certain portion of the
fixed annuity fund'sassets be invested in local businesses, or
State or city ob-liqations.
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The board must approve tax-exempt bonds, such as Stateor local
obligations, before the comptroller can buy them.Purchases of
long-term bonds are restricted to at least an"A" rating by major
rating agencies such as Moody's or Stand-ard and Poor's. Although
the comptroller is authorized tobuy corporate stock, subject to the
board's approval, theexecutive director said that the comptroller
has made ita practice not to purchase any common stock for the
fixedannuity plan.
During fiscal year 1976, the investment of fixed annuityprogram
funds in New York City obligations increased substan-tially. The
increase was reflected primarily in the purchaseof bonds of the
State's Municipal Assistance Corporation forthe city of New York
and New York City bonds. These pur-chases resulted from a November
26, 1975, agreement signedby the Municipal Assistance Corporation,
11 local commercialbanks, the city's four sinking funds, and the
city's fiveretirement systems. The Plan agreed to buy $860 million
ofthese obligations, and the other four retirement systemsagreed to
buy $1.64 billion over a 3-year period.
Investments in city obligations have increased by
$447million--from $165 million on June 30, 1975, to $612 millionon
May 31, 1976. As of May 31, 1976, the investment in cityobligations
represented about 31 percent of the fixed annuityplan portfolio of
about $2 billion.
Variable annuity program
The purpose of the variable annuity program is to protectthe
members' retirement income against increases in the costof living
by providing a variable retirement benefit basedupon the
performance of the portfolio. The investment philo-sophy is to
achieve the best rate of return without endanger-ing capital. The
combination of earned income and capitalgrowth is expected to
increase each member's invested dollarsover a long period.
The board has the authority to invest funds and hasselected
outside investing agents .o manage the funds. Theinvesting agents
selected have invested in common stock,preferred stock, convertible
bonds, and short-term notes.Over 85 percent of the variable annuity
program portfoliois in common stocks.
The board established the following conditions forthe investment
of variable annuity program funds.
--Securities purchased must be in domestic or compar-able
Canadian companies.
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-- Securities purchased--except for securities of banks,trust
companies, and insurance companies--must belisted on a national
security exchange.
-- Companies in which funds are invested must have earnedat
least 4 percent on the par or stated value of theirstock in each of
the last 7 fiscal years.
--A company in which funds are invested must have hadaverage
earnings--before income taxes--during thelast 5 fiscal years, at
least eaual to 1-1/2 timesthe total of the company's fixed costs,
maximumcontingent interest, and preferred dividends. Also,the
company must have had earnings during one of thelast 2 fiscal years
at least equal to 1-1/2 times thetotal of the company's fixed
costs, maximum contingentinterest, and preferred dividends.
Investments not meeting the requirements, however, canbe
purchased provided that the aggregate cost of the invest-ments does
not exceed 10 percent of