The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)



I

STATE OF MICHIGAN

MIKE COX, ATTORNEY GENERAL

INVESTMENT:

RETIREMENT:

Authority of public retirement system to make investments "not otherwise qualified" under Public Employee Retirement System Investment Act

Section 20d(1) of the Public Employee Retirement System Investment Act, MCL 38.1140d(1), does not permit a retirement system with assets of less than $250,000,000 to invest in a small business, small business investment company, or venture capital firm located in Michigan as an investment "not otherwise qualified" under the Act.

Opinion No. 7140

October 6, 2003

Honorable Thomas M. George
State Senator
The Capitol
Lansing, MI

Honorable Alexander C. Lipsey
State Representative
The Capitol
Lansing, MI

Honorable Jacob W. Hoogendyk, Jr.
State Representative
The Capitol
Lansing, MI

Honorable Lorence Wenke
State Representative
The Capitol
Lansing, MI

You have asked if section 20d(1) of the Public Employee Retirement System Investment Act, MCL 38.1140d(1), permits a retirement system with assets of less than $250,000,000 to invest in a small business, small business investment company, or a venture capital firm as an investment "not otherwise qualified" under the Act, and, if so, whether the retirement system's investment is subject to the 5% total assets limitation in section 20d(1) of the Act.

Your inquiry is made on behalf of the Kalamazoo County Public Employees Retirement System. According to information provided to this office, the business in which the retirement system would invest is located in Michigan. You note in your request that because the retirement system has assets of less than $250,000,000, it is not authorized to make an investment described in section 20a(1) of the Act, MCL 38.1140a(1).

The Public Employee Retirement System Investment Act (the Act), 1965 PA 314, MCL 38.1132 et seq, was adopted to consolidate and codify the investment authority of public retirement systems. Section 20d(1), part of the so-called "basket clause,"1 provides:

An investment fiduciary of a system having assets of less than $250,000,000.00 may invest not more than 5% of the system's assets in investments not otherwise qualified under this act, whether the investments are similar or dissimilar to those specified in this act. [MCL 38.1140d(1); emphasis added.]

Section 20a(1) provides in pertinent part:

[A]n investment fiduciary of a system having assets of more than $250,000,000.00 may invest not more than 2% of a system's assets in a debt, warrant, or equity interest in a small business having more than 1/2 of the small business's assets or employees within this state, or in a debt, warrant, or equity interest in a small business investment company or venture capital firm having its principal office or more than 1/2 of its assets within this state, . . . . [MCL 38.1140a(1).]

Responding to a question similar to yours, OAG, 1989-1990, No 6597, p 198, 203 (August 24, 1989), noted that the Legislature had not defined the term "qualified investment" in the Act and examined the legislative history of the Act and bill analyses for assistance in determining the intent of the Legislature. Luttrell v Dep't of Corrections, 421 Mich 93, 103; 365 NW2d 74 (1984). As a result, OAG No 6597 concluded that the term "qualified investment" means those investments specifically authorized by the Act. It also concluded that "investments not otherwise qualified," as used in section 20d(1) of the Act, are those types of investments that the Legislature has not otherwise specifically authorized in the Act.

OAG No 6597, p 204, further noted that the Legislature specifically authorized equity interest investments in small businesses in section 20a(1) but restricted them to public retirement systems with more than $250,000,000 in assets. The opinion concluded that since an investment in a small business is an authorized investment under section 20a(1) of the Act, section 20d may not be used by a public retirement system with assets of less than $250,000,000 to make a direct investment in a small business.

In construing a statute, the act must be read in its entirety. Weems v Chrysler Corp, 448 Mich 679, 699-700; 533 NW2d 287 (1995). Legislative intent can be further discerned from a reading of section 20d(5) of the "basket clause," which provides:

If an investment described in subsection (1) is subsequently determined to be permitted under another section of this act, then the investment shall no longer be included under this section. [MCL 38.1140d(5).]

The text and legislative history lead to the conclusion that the Legislature intended that the "basket clause" authorize an investment only when the investment is not authorized under another section of the Act. Conversely, if an investment is authorized under another section, then it must be made under that section and in compliance with all the provisions of that section. Further, OAG, 1995-1996, No 6893, p 143 (March 21, 1996), noted that while a "plain reading of section 20d(1) indicates that the Legislature intended that the 'basket clause' be available for a wide range of investments," it required that "these investments be those that are not specifically authorized by the act." Thus, because section 20a(1) of the Act authorizes the investment of the assets of a public retirement system in a small business, small business investment company, or venture capital firm located in Michigan, such an investment cannot be made pursuant to section 20d(1). If a public retirement system cannot meet the asset limitation of section 20a(1), then it is precluded from making the investment under that section.2

It is my opinion, therefore, that section 20d(1) of the Public Employee Retirement System Investment Act, MCL 38.1140d(1), does not permit a retirement system with assets of less than $250,000,000 to invest in a small business, small business investment company, or venture capital firm located in Michigan as an investment "not otherwise qualified" under the Act.

MIKE COX
Attorney General

1"Basket clause" is a term of art widely used with respect to the Act to designate section 20d investments. The "basket clause" permits a public retirement system to invest a specified percentage of its assets in investments not otherwise qualified under the Act. It obviates the need to regularly amend the Act to authorize investment in new or hybrid investment vehicles as they are developed over time.

2The facts presented in your request, together with additional information supplied to this office, make it clear that your question involves a section 20a investment. However, given the limited information presented regarding the proposed structure of the investment and considering the potential for numerous hybrid investment structures, no opinion is rendered as to the applicability of other sections of the Act, including section 14, MCL 38.1134, the section relating to stock investments.