Administration August 20, 2007

Will They or Won't They? Questions Emerge on Ohio Divestiture

August 20, 2007 (PLANSPONSOR.com) - Ohio lawmakers may have thought that Ohio's pension funds were on board with a committment to divest from Sudan and Iran - but those funds may have another idea.

Reported by

Nevin E. Adams

In June, executive directors of Ohio’s state pension systems, collectively representing 1.3 million current or retired government employees, reached an accord with House Speaker Jon A. Husted to work toward dumping investments in companies tied to Iran and Sudan, stating in a letter that they would “expeditiously develop an investment policy consistent with the boards’ fiduciary duties (see Ohio Pension Funds to Dump Shares in Iran and Sudan-linked Companies ).” According to the Toledo Blade, Husted brokered the deal in exchange for killing a bill – Substitute House Bill 151 – that would have mandated 100% divestment by the retirement funds.

Study Duty

However, according to the Columbus Dispatch, officials with two of the five pension systems said they might not go through with the deal if it ends up costing them money – and that their agreement with Husted requires only that they study the issue and take it to their boards.

“They’re independent boards,” said William J. Estabrook, executive director of the Ohio Police & Fire Pension Fund, told the Columbus Dispatch, according to the report. “They may have a totally different idea of what to do. I don’t anticipate that this will go the same way for everybody.”

According to the Dispatch, the Ohio Public Employees Retirement System has been in touch with Husted’s chief of staff, Scott Borgemenke, to make sure it complies. However, even after signing the deal with Husted, the State Teachers Retirement System passed a resolution continuing to oppose legislative efforts to limit its investments.

STRS Steps

Following a debate last week on the issue, STRS Ohio said that the draft policy developed by STRS Ohio staff is limited to the fund’s actively managed international portfolios in equities and fixed income, and in presenting the draft policy, staff noted that its language recognizes that the fiduciary responsibilities of the Retirement Board are paramount. According to an update from STRS, as written, STRS Ohio would not divest of a restricted security in Iran or Sudan unless a comparable substitute of equal risk and return, including transaction costs, is available. Moreover, board members asked that the Attorney General’s Office provide a written opinion regarding any potential conflict with the draft policy and the board’s fiduciary duty. Further, the board’s investment consultant, Russell Investment Group, will be asked to review the draft policy and comment on it at the September board meeting. However, no action was taken by the Retirement Board at the August meeting.

The Dispatch says that the divestiture issue has stoked controversy ever since state Reps. Josh Mandel and Shannon Jones – both Republicans – introduced a bill in April to force state pensions to dump billions of dollars in investments tied to Iran. Sudan, which has been a divestiture target of comparable legislation in a number of other states, was added later.

was the first state to pass legislation requiring public pension funds to divest from Sudan. Maine, Connecticut, Oregon, and New Jersey followed suit. Additionally, California, Massachusetts, New York, Vermont, Indiana, Ohio, Maryland, Colorado, Rhode Island, and Los Angeles either have passed or are considering divestiture legislation as well (see Doing the Right Thing? ).

Linkage, Impact Questioned

The Dispatch claims that hundreds of retired state employees have complained about the bill, saying it’s unfair to link their retirement incomes to foreign policy. Moreover, a number of industry experts have questioned both the potential fiduciary conflict (see Public Pension Fund Divestment: A Fiduciary Risk? , CalSTRS Opposes Broad Investment Bans ) and the impact (see Study: Public Pensions Wrong Place for Divestment ) of such moves.

However, Husted expects that the pension systems will have half of their money out of companies that do business with Iran and Sudan by year’s end, spokeswoman Karen Tabor said, according to the Dispatch. “The fact of the matter is, honorable people keep their word,” she said. “We expect the pension systems to keep their word.”