PERS Allowed to Take Higher Risks

While you were sleeping the Governor and Legislature gave PERS authority to make higher risk investments with retirement funds.

House Bill 990, introduced by the vice chairman of the House Appropriations Committee, Mac Huddleston of Pontotoc, and co-sponsored by committee chairman Herb Frierson of Poplarville, passed the House 82 to 3 and the Senate 52 to 0 and was signed into law by Governor Phil Bryant on March 21st.

The PERS Board requested this bill “to reflect the current investment environment.”

What this means is that the lay board will rely more heavily on its “professional investment advisors” to manage risk as they chase higher investment returns.

What changed?

PERS may now invest in “non-agency” residential and mortgage-backed securities and collateralized mortgage obligations that are not guaranteed or backed by any government agency; asset-backed securities such as car loans, credit card receivables, etc.; and bank loans, usually packages of commercial loans. Previously, PERS was limited to fully guaranteed or highly rated securities. Now, there is no reference to guarantees, ratings, or any indication of credit risk for these newly authorized investments.

PERS may now utilize “foreign currency as an investment vehicle” to effectuate or hedge transactions for foreign stocks. The old language for hedging foreign transactions was more restrictive.

PERS may now purchase revenue bonds or notes issued by any state or any size city or county in the U.S. Previously, PERS was limited to general obligation bonds and notes that had the full faith and credit of the issuing entity behind them. Also, any city or county issuer had to have a population 25,000 or more and have not defaulted on interest or principal payments for at least 10 years. These limitations were removed.

The bill also removed requirements that U.S. corporate bonds and taxable municipal bonds and foreign corporate bonds and government securities have credit ratings. Ratings reveal the credit risk associated with the investment, e.g., lowly rated bonds are called junk bonds.

The bill eliminated provisions that PERS protect its bank deposits by requiring banks to post securities covering the deposited amounts. Every city, county, and other public entity is required to so collateralize their deposits that exceed federal insurance limits.

The bill even removed deposit collateralization requirements for foreign bank deposits.

Given PERS’ challenges, it’s not too surprising that the Legislature and Governor authorized new investment opportunities. What is surprising is their willingness to eliminate risk safeguards from the statute. With the exception of short-term corporate obligations, the only investment risk safeguard remaining in the statute is language telling PERS to act as “a prudent investor.”

This is the same PERS, now, that opposed legislation to add board members with private sector financial experience.

Sure looks like an all-in bet to me.

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