As Amended by House Commettee
Session of 1997
HOUSE BILL No. 2542
By Committee on Appropriations
3-21
10
AN ACT concerning the Kansas public employees
retirement system;
11 relating to real
estate investment standards; amending K.S.A.
1996
12 1997 Supp.
74-4921 and repealing the existing section.
13
14 Be it enacted by the Legislature of the
State of Kansas:
15 Section 1. K.S.A.
1996 1997 Supp. 74-4921 is hereby amended
to
16 read as follows: 74-4921. (1) There is
hereby created in the state treasury
17 the Kansas public employees retirement
fund. All employee and em-
18 ployer contributions shall be deposited in
the state treasury to be credited
19 to the Kansas public employees retirement
fund. The fund is a trust fund
20 and shall be used solely for the exclusive
purpose of providing benefits
21 to members and member beneficiaries and
defraying reasonable expenses
22 of administering the fund. Investment
income of the fund shall be added
23 or credited to the fund as provided by law.
All benefits payable under the
24 system, refund of contributions and
overpayments, purchases or invest-
25 ments under the law and expenses in
connection with the system unless
26 otherwise provided by law shall be paid
from the fund. The director of
27 accounts and reports is authorized to draw
warrants on the state treasurer
28 and against such fund upon the filing in
the director's office of proper
29 vouchers executed by the chairperson or the
executive secretary of the
30 board. As an alternative, payments from the
fund may be made by credits
31 to the accounts of recipients of payments
in banks, savings and loan as-
32 sociations and credit unions. A payment
shall be so made only upon the
33 written authorization and direction of the
recipient of payment and upon
34 receipt of such authorization such payments
shall be made in accordance
35 therewith. Orders for payment of such
claims may be contained on (a) a
36 letter, memorandum, telegram, computer
printout or similar writing, or
37 (b) any form of communication, other than
voice, which is registered upon
38 magnetic tape, disc or any other medium
designed to capture and contain
39 in durable form conventional signals used
for the electronic communi-
40 cation of messages.
41 (2) The board shall have
the responsibility for the management of
42 the fund and shall discharge the board's
duties with respect to the fund
43 solely in the interests of the members and
beneficiaries of the system for
HB 2542--Am.
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1 the exclusive purpose of providing
benefits to members and such mem-
2 ber's beneficiaries and defraying
reasonable expenses of administering
3 the fund and shall invest and
reinvest moneys in the fund and acquire,
4 retain, manage, including the
exercise of any voting rights and disposal of
5 investments of the fund within the
limitations and according to the pow-
6 ers, duties and purposes as
prescribed by this section.
7 (3) Moneys in the
fund shall be invested and reinvested to achieve
8 the investment objective which is
preservation of the fund to provide
9 benefits to members and member
beneficiaries, as provided by law and
10 accordingly providing that the moneys are
as productive as possible, sub-
11 ject to the standards set forth in this
act. No moneys in the fund shall be
12 invested or reinvested if the sole or
primary investment objective is for
13 economic development or social purposes or
objectives.
14 (4) In investing and
reinvesting moneys in the fund and in acquiring,
15 retaining, managing and disposing of
investments of the fund, the board
16 shall exercise the judgment, care, skill,
prudence and diligence under the
17 circumstances then prevailing, which
persons of prudence, discretion and
18 intelligence acting in a like capacity and
familiar with such matters would
19 use in the conduct of an enterprise of like
character and with like aims
20 by diversifying the investments of the fund
so as to minimize the risk of
21 large losses, unless under the
circumstances it is clearly prudent not to
22 do so, and not in regard to speculation but
in regard to the permanent
23 disposition of similar funds, considering
the probable income as well as
24 the probable safety of their capital.
25 (5) Notwithstanding
subsection (4): (a) Total investments in common
26 stock may be made in the amount of up to
60% of the total book value
27 of the fund;
28 (b) the board may invest
or reinvest moneys of the fund in alternative
29 investments if the following conditions are
satisfied:
30 (i) The total of such
alternative investments does not exceed more
31 than 5% of the total investment assets of
the fund. If the total of such
32 alternative investments exceeds more than
5% of the total investment
33 assets of the fund on the effective date of
this act, the board shall not
34 invest or reinvest any moneys of the fund
in alternative investments until
35 the total of such alternative investments
is less the 5% of the total in-
36 vestment assets of the fund subject to the
5% limitation contained in this
37 subsection. Nothing in this subsection
requires the board to liquidate or
38 sell the system's holdings in any
alternative investment held by the system
39 on the effective date of this act, unless
such liquidation or sale would be
40 in the best interest of the members and
beneficiaries of the system and
41 be prudent under the standards contained in
this section. The 5% limi-
42 tation contained in this section shall not
have been violated if the total of
43 such alternative investments exceeds 5% of
the total investment assets of
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1 the fund as a result of market forces
acting to increase the value of such
2 alternative investments relative to
the rest of the system's investments;
3 however, the board shall not invest
or reinvest any moneys of the fund
4 in alternative investments until the
total of such alternative investments
5 is less than 5% of the total
investment assets of the fund subject to the
6 5% limitation contained in this
subsection;
7 (ii) if in
addition to the system, there are at least two other sophisti-
8 cated investors, as defined by
section 301 of the securities and exchange
9 act of 1933;
10 (iii) the system's share
in any individual alternative investment is lim-
11 ited to an investment representing not more
than 20% of any such indi-
12 vidual alternative investment;
13 (iv) the system has
received a favorable and appropriate recommen-
14 dation from a qualified, independent expert
in investment management
15 or analysis in that particular type of
alternative investment;
16 (v) the alternative
investment is consistent with the system's invest-
17 ment policies and objectives as provided in
subsection (6);
18 (vi) the individual
alternative investment does not exceed more than
19 2.5% of the total alternative investments
made under this subsection. If
20 the alternative investment is made pursuant
to participation by the system
21 in a multi-investor pool, the 2.5%
limitation contained in this subsection
22 is applied to the underlying individual
assets of such pool and not to
23 investment in the pool itself. The total of
such alternative investments
24 made pursuant to participation by the
system in any one individual multi-
25 investor pool shall not exceed more than
20% of the total of alternative
26 investments made by the system pursuant to
this subsection. Nothing in
27 this subsection requires the board to
liquidate or sell the system's holdings
28 in any alternative investments made
pursuant to participation by the sys-
29 tem in any one individual multi-investor
pool held by the system on the
30 effective date of this act, unless such
liquidation or sale would be in the
31 best interest of the members and
beneficiaries of the system and be pru-
32 dent under the standards contained in this
section. The 20% limitation
33 contained in this subsection shall not have
been violated if the total of
34 such investment in any one individual
multi-investor pool exceeds 20%
35 of the total alternative investments of the
fund as a result of market forces
36 acting to increase the value of such a
multi-investor pool relative to the
37 rest of the system's alternative
investments; however, the board shall not
38 invest or reinvest any moneys of the fund
in any such individual multi-
39 investor pool until the value of such
individual multi-investor pool is less
40 than 20% of the total alternative
investments of the fund;
41 (vii) the board has
received and considered the investment manager's
42 due diligence findings submitted to the
board as required by subsection
43 (6)(c); and
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1 (viii) prior to
the time the alternative investment is made, the system
2 has in place procedures and systems
to ensure that the investment is
3 properly monitored and investment
performance is accurately measured.
4 For purposes of this
act, ``alternative investment'' means nontraditional
5 investments outside the established
nationally recognized public stock
6 exchanges and government securities
market. Alternative investments
7 shall include, but not be limited to,
private placements, venture capital,
8 partnerships, limited partnerships
and leveraged buyout partnerships;
9 (c) except as
otherwise provided, the board may invest or reinvest
10 moneys of the fund in real estate
investments if the following conditions
11 are satisfied:
12 (i) If, in
addition to the system, there are at least two other
sophis-
13 ticated investors, as defined by
section 301 of the securities and exchange
14 act of 1933;
15 (ii) the
system's share in any individual real estate investment is
lim-
16 ited to an investment representing
not more than 20% of any such indi-
17 vidual real estate
investment;
18
(iii) The system has received a favorable and
appropriate recommen-
19 dation from a qualified, independent expert
in investment management
20 or analysis in that particular type of real
estate investment;
21 (iv)
(ii) the real estate investment is consistent with the
system's in-
22 vestment policies and objectives as
provided in subsection (6); and
23 (v) the total of
such real estate investments made pursuant to partic-
24 ipation by the system in any one
individual multi-investor pool shall not
25 exceed more than 20% of the total
of real estate investments made by
26 the system pursuant to this
subsection. Nothing in this subsection re-
27 quires the board to liquidate or
sell the system's holdings in any real estate
28 investments made pursuant to
participation by the system in any one
29 individual multi-investor pool held
by the system on the effective date of
30 this act, unless such liquidation
or sale would be in the best interest of
31 the members and beneficiaries of
the system and be prudent under the
32 standards contained in this
section. The 20% limitation contained in this
33 subsection shall not have been
violated if the total of such investment in
34 any one individual multi-investor
pool exceeds 20% of the total real estate
35 investments of the fund as a result
of market forces acting to increase the
36 value of such a multi-investor pool
relative to the rest of the system's real
37 estate investments; however, the
board shall not invest or reinvest any
38 moneys of the fund in any such
individual multi-investor pool until the
39 value of such individual
multi-investor pool is less than 20% of the total
40 real estate investments of the
fund;
41 (vi)
(iii) the board has received and considered the
investment man-
42 ager's due diligence findings submitted to
the board as required by sub-
43 section (6)(c);
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1
(vii) prior to the time the real estate investment is
made, the system
2 has in place procedures and
systems to ensure that the investment is
3 properly monitored and
investment performance is accurately measured;
4 and
5 (viii) the
provisions of this subsection shall not apply to any real
estate
6 investment held by the system
on July 1, 1992; and
7 (d) the board
shall not invest or reinvest moneys of the fund in any
8 banking institution, savings and loan
association or credit union which
9 positions the system as a shareholder
or owner of such banking institution,
10 savings and loan association or credit
union.
11 (6) Subject to the
objective set forth in subsection (3) and the stan-
12 dards set forth in subsections (4) and (5)
the board shall formulate policies
13 and objectives for the investment and
reinvestment of moneys in the fund
14 and the acquisition, retention, management
and disposition of invest-
15 ments of the fund. Such policies and
objectives shall include:
16 (a) Specific asset
allocation standards and objectives;
17 (b) establishment of
criteria for evaluating the risk versus the poten-
18 tial return on a particular investment;
19 (c) a requirement that
all investment managers submit such man-
20 ager's due diligence findings on each
investment to the board or invest-
21 ment advisory committee for approval or
rejection prior to making any
22 alternative investment;
23 (d) a requirement that
all investment managers shall immediately re-
24 port all instances of default on
investments to the board and provide the
25 board with recommendations and options,
including, but not limited to,
26 curing the default or withdrawal from the
investment; and
27 (e) establishment of
criteria that would be used as a guideline for
28 determining when no additional add-on
investments or reinvestments
29 would be made and when the investment would
be liquidated.
30 The board shall review such
policies and objectives, make changes con-
31 sidered necessary or desirable and readopt
such policies and objectives
32 on an annual basis.
33 (7) The board may enter
into contracts with one or more persons
34 whom the board determines to be qualified,
whereby the persons under-
35 take to perform the functions specified in
subsection (2) to the extent
36 provided in the contract. Performance of
functions under contract so
37 entered into shall be paid pursuant to
rates fixed by the board subject to
38 provisions of appropriation acts and shall
be based on specific contractual
39 fee arrangements. The system shall not pay
or reimburse any expenses of
40 persons contracted with pursuant to this
subsection, except that after
41 approval of the board, the system may pay
approved investment related
42 expenses subject to provisions of
appropriation acts. The board shall re-
43 quire that a person contracted with to
obtain commercial insurance which
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1 provides for errors and omissions
coverage for such person in an amount
2 to be specified by the board,
provided that such coverage shall be at least
3 the greater of $500,000 or 1% of the
funds entrusted to such person up
4 to a maximum of $10,000,000. The
board shall require a person con-
5 tracted with to give a fidelity bond
in a penal sum as may be fixed by law
6 or, if not so fixed, as may be fixed
by the board, with corporate surety
7 authorized to do business in this
state. Such persons contracted with the
8 board pursuant to this subsection and
any persons contracted with such
9 persons to perform the functions
specified in subsection (2) shall be
10 deemed to be agents of the board and the
system in the performance of
11 contractual obligations.
12 (8) (a) In the
acquisition or disposition of securities, the board may
13 rely on the written legal opinion of a
reputable bond attorney or attorneys,
14 the written opinion of the attorney of the
investment counselor or man-
15 agers, or the written opinion of the
attorney general certifying the legality
16 of the securities.
17 (b) The board shall
employ or retain qualified investment counsel or
18 counselors or may negotiate with a trust
company to assist and advise in
19 the judicious investment of funds as herein
provided.
20 (9) (a) Except as
provided in subsection (7) and this subsection, the
21 custody of money and securities of the fund
shall remain in the custody
22 of the state treasurer, except that the
board may arrange for the custody
23 of such money and securities as it
considers advisable with one or more
24 member banks or trust companies of the
federal reserve system or with
25 one or more banks in the state of Kansas,
or both, to be held in safe-
26 keeping by the banks or trust companies for
the collection of the principal
27 and interest or other income or of the
proceeds of sale. The services
28 provided by the banks or trust companies
shall be paid pursuant to rates
29 fixed by the board subject to provisions of
appropriation acts.
30 (b) The state treasurer
and the board shall collect the principal and
31 interest or other income of investments or
the proceeds of sale of secu-
32 rities in the custody of the state
treasurer and pay same when so collected
33 into the fund.
34 (c) The principal and
interest or other income or the proceeds of sale
35 of securities as provided in clause (a) of
this subsection (9) shall be re-
36 ported to the state treasurer and the board
and credited to the fund.
37 (10) The board shall
with the advice of the director of accounts and
38 reports establish the requirements and
procedure for reporting any and
39 all activity relating to investment
functions provided for in this act in order
40 to prepare a record monthly of the
investment income and changes made
41 during the preceding month. The record will
reflect a detailed summary
42 of investment, reinvestment, purchase, sale
and exchange transactions
43 and such other information as the board may
consider advisable to reflect
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1 a true accounting of the investment
activity of the fund.
2 (11) The board
shall provide for an examination of the investment
3 program annually. The examination
shall include an evaluation of current
4 investment policies and practices and
of specific investments of the fund
5 in relation to the objective set
forth in subsection (3), the standard set
6 forth in subsection (4) and other
criteria as may be appropriate, and rec-
7 ommendations relating to the fund
investment policies and practices and
8 to specific investments of the fund
as are considered necessary or desir-
9 able. The board shall include in its
annual report to the governor as pro-
10 vided in K.S.A. 74-4907, and amendments
thereto, a report or a summary
11 thereof covering the investments of the
fund.
12 (12) (a) The
legislative post auditor shall conduct an annual financial-
13 compliance audit of the system, performance
audits of the system as pre-
14 scribed by this section and under the
Kansas governmental operations
15 law, and such other audits as are directed
by the legislative post audit
16 committee under the Kansas legislative post
audit act. The annual finan-
17 cial-compliance audit shall include, but
not be limited to, a review of
18 alternative investments of the system with
any estimates of permanent
19 impairments to the value of such
alternative investments reported by the
20 system pursuant to K.S.A. 74-4907, and
amendments thereto.
21 (b) Except as otherwise
provided by this subsection, the legislative
22 post auditor shall conduct annual
performance audits, as directed by the
23 legislative post audit committee, which
shall include, but not be limited
24 to, one or more of the following subjects:
An evaluation of the perform-
25 ance of investment managers, an evaluation
of the rates of return of in-
26 vestments reported by the system, an
evaluation of the total compensation
27 received for the planned year by investment
managers by individual in-
28 vestment classification, and a comparison
of the system's investment prac-
29 tices and performance with the investment
practices and performance of
30 other state pension programs by asset type,
including all asset types de-
31 scribed as alternative investments in
subsection (5)(b). Commencing with
32 the performance audit for the fiscal year
ending June 30, 1994, the leg-
33 islative post audit committee shall specify
which of the subjects listed in
34 this subsection shall be included in each
performance audit conducted
35 pursuant to this subsection, in addition to
such other subjects as may be
36 directed to be included in the performance
audit by the legislative post
37 audit committee. Commencing with the
performance audit for the fiscal
38 year ending June 30, 1994, each of the
subjects listed in this subsection
39 shall be included at least once every two
fiscal years in a performance
40 audit conducted pursuant to this
subsection, excluding any fiscal year
41 during which the system and the board are
subject to review and evalu-
42 ation by the legislature under the Kansas
governmental operations ac-
43 countability law. Except as otherwise
directed by the legislative post audit
HB 2542--Am.
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1 committee, no performance audit shall
be conducted pursuant to this
2 subsection during any fiscal year
when the system and the board are
3 subject to a performance audit and to
review and evaluation under the
4 Kansas governmental operations
accountability law.
5 (c) The auditor to
conduct any audit required pursuant to this sub-
6 section shall be specified in
accordance with K.S.A. 46-1122, and amend-
7 ments thereto. If the legislative
post audit committee specifies under such
8 statute that a firm, as defined by
K.S.A. 46-1112, and amendments
9 thereto, is to perform all or part of
the audit work of such audit, such
10 firm shall be selected and shall perform
such audit work as provided in
11 K.S.A. 46-1123, and amendments thereto, and
K.S.A. 46-1125 through
12 46-1127, and amendments thereto. The audits
required pursuant to this
13 subsection shall be conducted in accordance
with generally accepted gov-
14 ernmental auditing standards. The audits
required pursuant to this sub-
15 section shall be conducted as soon after
the close of the fiscal year as
16 practicable, but shall be completed no
later than six months after the
17 close of the fiscal year. The post auditor
shall annually compute the rea-
18 sonably anticipated cost of providing the
financial-compliance audit pur-
19 suant to this section, subject to review
and approval by the contract audit
20 committee established by K.S.A. 46-1120,
and amendments thereto.
21 Upon such approval, the system shall
reimburse the division of post audit
22 for the amount approved by the contract
audit committee. The furnishing
23 of the financial-compliance audit pursuant
to this section shall be a trans-
24 action between the legislative post auditor
and the system and shall be
25 settled in accordance with the provisions
of K.S.A. 75-5516, and amend-
26 ments thereto.
27 (d) Any internal
assessment or examination of alternative investments
28 of the system performed by any person or
entity employed or retained
29 by the board which evaluates or monitors
the performance of alternative
30 investments shall be reported to the
legislative post auditor so that such
31 report may be reviewed in accordance with
the annual audits provided in
32 subsection (12)(a).
33 Sec. 2. K.S.A.
1996 1997 Supp. 74-4921 is hereby
repealed.
34 Sec. 3. This act
shall take effect and be in force from and after its
35 publication in the statute book.
36
37