There are numerous risks inherent in advising clients charged with the investment of public funds. Consulting or managing these accounts requires compliance with a complexity of state and local statutes, regulations, and ordinances in addition to the relevant policies adopted by the public entity itself. These regulatory schemes provide a plethora of opportunities for missteps and non-compliance.
One example comes from Colorado. Like many states, Colorado has statutes governing the creation of pension plans for both firefighters and police officers. Colorado statutes further complicate matters by differentiating the types of plans for these employees based on hire date—referred to as “Old Hire Pension Plans” and “New Hire Plans.” “Old Hire” plans specifically apply to pension benefits for employees hired on or before April 7, 1978. The “Old Hire” statute also sets forth a limited set of investments in which funds held in an “Old Hire” plan may be invested—interest bearing obligations of the U.S. (both treasuries and agencies), interest bearing bonds of the State of Colorado, and general obligation bonds of cities of Colorado.
In the course of reviewing an Old Hire Pension Plan, it was discovered that the Trustees of the plan used the wrong statute (C.R.S. § 15-1-304 instead of § 31-30.5-501) in developing the plan’s investment policy. The statute utilized by the Trustees permitted a much broader range of investment options than the statute governing investments in “Old Hire” plans. Because review of the investment policy had not taken place in some time, the Trustees (with help from their investment consultant) utilized its investment policy to invest the plan’s assets in a variety of securities—most of which were not permitted by the statute governing such plans.
Obviously, the situation described above is not ideal and could potentially open up the Trustees, the investment consultant, and/or the investment manager to liability for non-compliance with the governing statutes and regulations.