FLASHBACK -- 3 years ago -- STRS saved from Ohio brokers' desires of profiteering & HB 227

Note from John Curry: SB 133 (the bill that became law) isn't perfect, but at least it beat out HB 227 which would have lined the pockets of Ohio brokers with our monies. At least we won this battle!

Pension reform law may bring millions to state’s bank systems

Canton Repository, November 9, 2003

By PAUL E. KOSTYU Copley Columbus Bureau chief

COLUMBUS — Ohio’s financial institutions could benefit from a windfall of tens of millions of dollars a year if one of the proposed reforms of the state’s five public pension systems becomes law.

That provision may mean, however, the systems will have even greater trouble than they do now paying the health-care costs of their members.

That’s because, the directors of the pension systems say, their investment portfolios would have to absorb the cost of switching their business to Ohio-based companies and paying a higher per-trade rate.

Though the intent of the provision in House Bill 227 is to generate business for Ohio companies, directors questioned whether that really will happen. Instead, a costly “middle man” could be inserted into their investment strategy.

Mike Van Buskirk, president of the Ohio Bankers League, contends there would be no additional cost to the pension systems. He said the investment track record of Ohio financial institutions is equal to or better than those out of state.

“Switching to Ohio companies,” he said, “would not change investment strategies. The objectives remain the same, to generate income and protect the investment.”

At issue is the provision that says 70 percent of the pension funds’ equity and fixed-income trades must be conducted by Ohio companies. The bill also requires another 10 percent of those trades be handled by minority businesses.

And, it says that not less than 50 percent of the assets handled externally must go to an investment manager with headquarters in Ohio or with at least three operating locations in Ohio totaling 15 employees.

The House bill and a companion in the Senate, SB 133, are both expected to be passed by their respective committees and chambers this week. The Senate bill does not have the Ohio provision.

Gov. Bob Taft has said he wants to sign pension system reform by the end of the year.

Orest Holubec, a spokesman for Taft, said the governor is “definitely looking” at that Ohio requirement issue in the House bill.

It defines an Ohio-eligible company as one that is subject to taxation by the state, employs at least five Ohio residents and has been a securities dealer in the state for three years. It’s based on a policy used by the Ohio Bureau of Workers’ Compensation. (Note from John - BWC policy-just what we didn't need to copy!)

But pension system directors said there’s a difference between a bureau policy that is flexible in its application and a law that isn’t.

A staff report submitted to the Ohio Retirement Study Council, which reviews all legislation dealing with Ohio’s pension systems, recommended the provision be dropped. The report said the change is “a significant departure from well-established legislative principles” that oppose mandates.

The staff report said the mandates could violate Internal Revenue Service code and open the pension systems to lawsuits for “breach of fiduciary duty.”

Though it is unclear whether the House or Senate bill will become the vehicle for pension reform, Sen. Kirk Schuring, R-Jackson Township, said the Ohio provision of the House bill should be dropped.

Schuring, who sits on the study council with the bill’s sponsor, Rep. Michelle G. Schneider, R-Cincinnati, said, “I’m not sure we should be getting into investment practices. ... To handcuff the systems could be problematic.”

But Schneider said the provision is needed. “We’re not forcing them to invest in Ohio companies,” she said. “They can invest in any company. But instead of using a New York broker, they should use an Ohio broker.”

The Bureau of Workers’ Compensation uses 126 investment management companies, 31 of which have Ohio addresses. That’s 24.6 percent of the total, though other companies have an Ohio presence.

Neil Toth, director of investments for the Public Employees Retirement System, said the Ohio provision would cost his pension plan $40 million to $100 million a year.

Damon Asbury, interim director of the State Teachers Retirement System, said the provisions are “noble goals” and “well-intentioned.” But Ohio brokers, he said, don’t have the capacity, exchange capability and the research facilities needed by Ohio’s large pension systems.

The mandates “would drive up costs and would dilute the fiduciary responsibility of the board,” he said. “It goes to the independence of the systems.”

Laurie Hacking, executive director of PERS, said because of the pension plan’s size, it needs sophisticated traders who can handle multiple trades rapidly. She suggested that the Ohio provision inserts a middle man and makes the system’s trading less anonymous. Anonymity is needed, she added, so pension system trades don’t impact the market unnecessarily.

Van Buskirk said it may be true that, 20 years ago, Ohio companies did not have the size or sophistication to handle the pension systems’ investments. But not today.

In a side-by-side comparison where the costs are the same, Schneider said, Ohio companies should handle the pension business.

“They should at least be allowed to bid. They can’t even get their telephone calls returned,” she maintained.

Asbury said the Ohio provision was “hastily developed” without discussion. As written, it would cost the teachers’ retirement plan $30 million to $40 million a year, he said.

Schneider said the Ohio investment issue has been around for a while; this latest effort was initiated by Rep. Charles R. Blasdel, R-East Liverpool, who is chairman of the committee hearing the House bill. He could not be reached for comment.

Laurel Johnson, a spokeswoman for the School Employees Retirement System, said her pension system’s staff was “still crunching” information to determine the impact.

William J. Estabrook, executive director of the Police & Fire Pension Fund, said even a penny difference in the cost per share traded means a significant amount of money to the pension systems on a daily basis. He predicted using Ohio companies would be more expensive.

“This means millions of dollars to the systems,” agreed Richard Curtis, executive director of the Highway Patrol Retirement System.

Curtis predicted his system’s trade rate of 1.5 cents per share could jump to 5 or 6 cents per share, adding $300,000 to $350,000 per year to the fund’s costs.

Asbury said the added costs of the Ohio provision would have to be deducted from investment earnings, which then reduces the balance in the pension fund. As a result, less money would go into pension and health-care benefits.

“We’re not saying ‘Buy Ohio,’ ” said Van Buskirk. “Just don’t exclude Ohio. Look at the results. We have sophisticated and talented investment managers at entities located in Ohio. They just want a fair chance to compete.”

You can reach Copley Clumbus Bureau Chief Paul E. Kostyu at (614) 222-8901 or e-mail:

paul.kostyu@cantonrep.com