The two bills move to the full House and Senate after the House Banking, Pensions and Securities Committee approved House Bill 227 by a 21 to 0 vote yesterday, while the Senate Health, Human Services and Aging Committee approved Senate Bill 133 by a vote of nine to two. While the two legislative actions do share similarities, such as removing the state’s attorney general from the pension boards so that officeholder is free to investigate wrongdoing in the systems (See Bill Places Ohio AG in Pension Investigator Role), i t is a radical departure in investment philosophy embodied in the two bills that have lawmakers and pension observers nervous, according to a Columbus Dispatch report.
HB 227 attempts to increase oversight of Ohio’s five pension systems, which cover 1.5 million teachers, custodians, elected officials, police officers and firefighters, in addition to placing mandates on how the $100 billion in pension assets are to be invested. Specifically, the bill would r equire50% of the money invested externally must be placed with a firm that has its headquarters in Ohio or has at least three offices employing 15 or more people in the state; 70% of stock or bond trades would need to be made with firms that are either based in Ohio or have officers in the state; and another 10% above the above designations must be placed with minority firms that also meet the foregoing Ohio-centric criteria.
In turn, the investment provisions of HB 227 has enraged policymakers and investment bankers, and only survived inclusion in the final bill passed by the House committee vote by an 11 to 10 margin. Wall Street investment banking firms said such a move places many on them on the outside looking in, thus causing the pension funds to look elsewhere for investment management with sub-par returns. Echoing these concerns was the Director of Investments for the $56 billion Ohio Public Employees Retirement System (OPERS) Neil Toth. In testimony before the Banking, Pensions and Securities Committee recently, Toth noted that just four of the top 100 US money managers are headquartered in Ohio, while only fifteen or so of the top 100 money management firms would meet the criteria of having three separate offices in Ohio employing a total of fifteen persons (See Ohio Pension Funds Face “Home Grown” Investment Restrictions ).
Further,Toth said “…preliminary estimates of the cost to OPERS of complying with the investment provisions of HB 227 range from $40 million to $100 million annually.” The Ohio State Teachers Retirement System (OSTRS) – with assets of $50.5 billion – said its costs would rise up to $40 million more a year, while the Ohio School Employees Retirement System (OSERS) said that fund’s costs “conservatively” would be at least $11 million.
Joining in the dissent was both the Council of Institutional Investors, which characterized the constraints on investment activity as “a hidden tax,” and the National Association of State Retirement Administrators (NASRA). Additionally, several Ohio state senators have also voiced their disapproval of the investment quotas contained in HB 227.
On the other side of the equation Mike Van Buskirk, president of the Ohio Bankers League, said Ohio firms could handle a much larger share of trades and investments and provide them at competitive costs. “We cannot explain, on any objective basis, why they are not using us more,” Van Buskirk told the Cleveland Plain-Dealer of the public-employee pension funds.
Straddling the fence is Ohio GovernorBob Taft, who has announced his support for the governance and ethics provisions of bothbills,but said he’s undecided on the “buy Ohio” part of the House bill,spokesmanOrest Holubec told the Dispatch.
The move by lawmakers to introduce reform bills came after questions were raised earlier in the year about the spending practices at the State Teachers Retirement System (STRS). At the time, then-STRS Executive Director Herb Dyer said the pension board was trying to recruit and keep good investment staff in a competitive profession that pays well and offers good benefits (See Ohio Pension Fund Hit for Lavish Spending Practices ). The ensuing public outcry caused a major shakeup at the board that included the suspension of employee bonuses, limits placed on travel by board members, and ultimately cost Dyer his job (See Dyer Steps Down From Ohio STRS Post ).