Ohio Pension Funds Face "Home Grown" Investment Restrictions

November 10, 2003 (PLANSPONSOR.com) - Having come under fierce attacks for their performance and spending habits, Ohio's public pension funds may have yet another obstacle to overcome if pending legislation is enacted.

That legislation, part of a bill (HB 227) that attempts to increase oversight of Ohio’s five pension systems, would also require that:

  • 50% 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.
  • Another 10% above the above designations must be placed with minority firms that also meet the foregoing Ohio-centric criteria.

House Speaker Larry Householder is backing the mandates, which are similar to an investment policy enacted by the Ohio Bureau of Workers Compensation in 1997, according to the Columbus Dispatch.   “Ohio has a strong history of banking and investment, and “it’s time that Ohio takes care of Ohio,” said Householder, according to the Dispatch.

Serious Impacts

However, in testimony before the Banking, Pensions and Securities Committee recently, Neil Toth, Director of Investments for the $56 billion Ohio Public Employees Retirement System 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.   Limiting the choice of managers “would potentially have very serious impacts on returns and asset-management fees,” Toth told the House panel (OPERS says it currently executes 20% of its securities trades through Ohio-based firms).

Toth noted that “…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, 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 said that fund’s costs “conservatively” would be at least $11 million, according to the Dispatch.   

Householder said the new legislation does not tell the pension funds what they can invest in, just who to invest with, according to the Dispatch.   The House bill is being endorsed by the Ohio Bankers League, which says the state pension funds have resisted doing business with its members.

A Hidden Tax

Weighing in against the proposal were 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), which in a letter to Ohio Governor Bob Taft obtained by PLANSPONSOR.com , said that “…HB 227 would actually hinder the ability of public retirement plan trustees in Ohio to carry out their fiduciary responsibilities, which require them to operate solely in the best interests of the plans’ participants—working and retired public employees.”  

NASRA President David Bergstrom went on to note that, “Although this measure may be intended as a way to increase the profits of locally based firms, the advantage given to a few businesses would likely come at a very expensive price tag to millions of state taxpayers, public employees, and retirees, who must make up shortfalls in the funds’ performance.”  

In another letter to Taft, Sarah Teslik, executive director of the Council of Institutional Investors, cautioned, “Unless it can be persuasively argued that 70% of the best money managers and brokers in the country are domiciled in Ohio, one would have to conclude that the investment restrictions proposed by HB 227 would result in lower investment return and higher trading costs than would be the case without such restrictions,” according to a letter also addressed to Ohio state officials, obtained by PLANSPONSOR.com .   The CII is an organization of more than 300 investment professionals, including more than 130 public, corporate, and union pension funds with more than $3 trillion in investments.

Next Steps

The Ohio legislation is expected to move out of the Banking, Pensions and Securities Committee this week – and could reach a vote on the House floor by week’s end.   Another pension reform bill is pending in the state Senate, but one without the Ohio investment requirements (see  Bill Places Ohio AG in Pension Investigator Role ).

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 ).