Issues

ETI Trustee Checklist

ECONOMICALLY TARGETED INVESTMENTS (ETIs)

General Definition: An investment which has collateral intent to assist in the improvement of both national and regional economies, and the economic well being of the state, its localities and residents while producing a market rate of return by filling capital needs in underserved markets where investments have a competitive advantage.

Purpose of ETIs: To mobilize the powerful instrument of financial capital in new and innovative ways, consistent with the highest fiduciary standards, to respond to the challenges of widening economic disparity. Successful ETI programs are designed to harness the public sector to invest capital in a way which meets two objectives:

  • Achieving successful investment results, and 
  • Broadening economic opportunity in at-risk communities.

Why should public funds make ETIs?  Public funds are stakeholders. Public funds have a stake in the continued economic strength of their states, given the interlocking relationship among:

  • The fiscal health of the state,
  • Revenues generated by the economy,
  • Public sector costs to mitigate social and economic dysfunction, and
  • The reliance of public funds on state and local government contributions to maintain viability.
  • Investing in capital gaps can produce outsized returns


The challenge of ETIs for public funds: Finding ways to invest public assets and capital in a manner that is fully consistent with the highest fiduciary standards and which yield competitive market returns and to deploy assets and capital that broaden economic opportunity and contribute to long-term economic success in the state.

Fiduciary Duty: Trustees must fulfill their fiduciary duty through due diligence in making their investment decisions, and keeping and maintaining records that reflect this diligence.

Diligence and Prudence: Trustees are not considered legally liable for the outcome of their investment decisions, but for the diligence and prudence of the decision-making process.

System Target Investment for ETIs: ETIs should not be treated as a separate asset class; instead, funds can set targets within each of their asset classes, equaling across the full spectrum of classes, roughly two percent of a fund’s total portfolio.

 

Demand for Capital Not Being Met

  • Minority businesses are growing even faster than the population in terms of both numbers of new firms and revenues. 
  • This is an “emerging” and largely untapped domestic market.
  • This rapid growth is a catch-up phenomenon for a historically underserved business market and is being constrained by inadequate capital access.
  • The total minority business community capital demands measured $144 billion in 1999.  Only a small portion of these capital demands is being met.
  • The U.S. private equity market does not meet the standards for market efficiency.  Underserved markets, or capital gaps, represent real investment opportunities.

 

ETI Trustee Checklist

  1. Become educated about basic investment fundamentals and essentials of fiduciary duty.
  2. In consultation with professional experts, trustees should draft and adopt a written fund investment policy specifying the percentage of assets that may be devoted to ETIs.
  3. When trustees hire professionals to make the actual investments, they must exercise extreme diligence in the interviewing and hiring process and carefully monitor the professionals' performance.
  4. Ensure that proposed ETI transactions are thoroughly investigated and shown to offer a risk/return profile that is equal to or better than alternative available investments.
  5. Document all transactions related to their ETI investment decisions.

SAMPLE ETI PROGRAMS

New York City Employees Retirement System (NYCERS):


Invested $234.5 million in 2003. NYCERS’ ETIs “seek to benefit the City and pensioners by providing solid, market-rate returns to the funds while improving and creating low- and moderate-income housing, revitalizing neighborhoods, returning property to the tax rolls and creating construction and small business employment. ETIs provide capital in areas that are inadequately served by the market. New investments made or committed in 2003 totaled $234.5 million.”

CalPERS - California Urban Real Estate (CURE):
In August 2005, CalPERS reported that it has earned annual returns of 22.2% from its California Urban Real Estate partnerships since the program’s inception in 2001.

Launched in 2000, The Double Bottom Line: Investing in California’s Emerging Markets has successfully directed more than $14 billion in investment capital at CalPERS, the California State Teachers’ Retirement System (CalSTRS), and the State’s investment funds to spur economic progress in California’s inner cities and underserved communities. This strategy marked a fundamental shift in state policies by investing to fulfill the dual objectives of solid returns for the State’s pension and investment funds and broadened opportunity in California communities.

CalPERS and CalSTRS, the nation’s largest and third largest pension funds, each adopted the goal of investing two percent of their investment portfolios in domestic emerging markets – communities that have struggled to attract investment capital, but that hold great potential for financial returns and economic success – and to make significant real estate investments in California’s urban neighborhoods. As a part of this overall initiative, CalPERS expanded its urban real estate investments in 2000 and launched the CURE initiative in 2001.

The returns on CalPERS’ urban real estate investment have been very strong – performing at double or triple the industry average tracked by the leading national benchmark. Since CURE’s inception, CalPERS’ annual returns have been 22.2 percent through December 31, 2004, compared to benchmark industry returns as measured by NCREIF (National Council of Real Estate Investment Fiduciaries) of 8.1 percent.

Through CURE, CalPERS has:

  • Directly invested approximately $1.2 billion of equity into urban real estate projects which have a total asset value of approximately $4.4 billion.
  • The vast majority of CURE’s investment, $783 million, has been in California communities.
  • CalPERS has committed a total of approximately $3.4 billion to its California urban real estate investments – up from $50 million in 1999. This includes $420 million for affordable housing in California communities.


Through other ETI investments, CalPERS and CalSTRS have:

  • Committed $480 million to private equity investment in businesses in underserved areas.
  • Invested $260 million in California SBA loans.
  • Allocated $350 million to private equity investment in businesses in underserved urban and rural communities.
  • Allocated $940 million to urban, infill real estate ventures, including $275 million for affordable housing, focused on California communities.

Professor Michael Porter who heads the Institute for Strategy and Competitiveness at Harvard Business School on CURE: “Our urban communities hold the fastest growing labor force in the new economy.  … Today’s report shows that investing in inner cities strengthens the communities while providing solid returns for investors.”

Ken Rosen, Professor of Real Estate and Urban Economics at the University of California, Berkeley’s Haas School of Business: “This report confirms that careful real estate investments in urban core locations help revitalize these communities while producing excellent risk adjusted returns for investors.”

CalPERS Statement of Investment Policy for ETIs is found here:
http://www.calpers.ca.gov/eip-docs/investments/policies/other/economically-targeted/eco-target-inv-prg.pdf

 

Massachusetts Pension Reserves Investment Management Board (PRIM)

21. ECONOMICALLY TARGETED INVESTMENT PROGRAM2
Adopted 8/14/03

A. PRIM recognizes its obligations under Massachusetts law include a responsibility to seek out investment opportunities that will benefit the economic climate of the Commonwealth as a whole, provided that such investments are consistent with the Board’s obligations to the members and beneficiaries of its participating retirement systems. (See M.G.L. ch. 32, sec. 23(2A)(h)) Accordingly, in cases where investment characteristics, including returns, risk, liquidity, compliance with allocation policy, and others, are equal, PRIM will favor those investments that have a substantial, direct and measurable benefit to the economy of the Commonwealth.

B. Such Economically Targeted Investments (“ETI’s”) must meet the following criteria:
1. Investments must target risk-adjusted, market-rate returns and provide net returns equivalent to or higher than other available investments, at commensurate levels of risk. Economic or social benefits will not justify a lower return on any PRIM investment. When evaluating ETI opportunities, PRIM will discount projected returns for any subsidies, deferral of income, higher risk levels, and other concessions to reach a real rate of return for comparison with other ETI and non-ETI investment alternatives. Similarly, ETI benefits will not justify higher investment risk. However, where appropriate, the PRIM staff, its managers, and its consultants will actively seek out and develop guarantees, third party recourse, hedging, and other acceptable and customary risk management vehicles to reduce or eliminate risk in ETI investments.

2. Investments must not exceed a reasonable weighting in the portfolio, including tracking the degree of exposure to the Massachusetts economy and ensuring appropriate geographic diversification. Investments should maintain the overall portfolio’s compliance with its asset allocation strategy. ETI benefits will not justify deviation from the Asset Allocation Plan adopted by the PRIM Board.

3. Investments should be placed with an experienced and capable manager through an objective and transparent process. Investments should be managed by qualified discretionary investment managers. PRIM will not make any direct investments.

4. Investments should target a “capital gap” where there are likely to be underserved markets.

5. Investments must be tracked (both investment performance and collateral benefits) and managed with the same rigor and discipline imposed on other investments. Investments should be reviewed and monitored by PRIM staff and consultants without disproportionate expenditure of time and resources.

 

Print Version
 

Sheila Hill
Local 1319, Maryland

Sheila Hill

"I've worked hard for my pension, and my union works hard to protect it. We want to ensure that our pension investments keep companies and CEOs honest and our retirement secure."