A letter to my Representative re: HB 151
The Hon. Kevin Bacon
The Ohio House of Representatives
(Address, phone no.)
A substitute bill is being circulated that may narrow the scope of companies to oil and gas. The cost of this proposal has not yet been evaluated. It is important to note the systems have no direct investments in Iran. The proponents are referring to this bill as a goal for Ohio citizens, however, the trust fund assets of the public pensions belong to the participants, not the state.
STRS Ohio’s executive director, Damon Asbury, has testified before ORSC and the House Financial Institutions, Real Estate and Securities Committee about this system’s concerns with the bill. The three primary concerns raised with legislators are: (1) the money in the trust fund belongs to the participants — this divestiture mandate puts a foreign policy objective above the board’s fiduciary duty to invest in the sole interest of the membership; (2) there will be significant costs of complying with this mandate, costs borne by the membership and not the public; and (3) the bill sets a dangerous precedent of using trust fund money to achieve political or social agendas. Dr. Asbury’s testimony can be viewed below.
The Ohio Retirement Study Council will be holding another hearing on H.B. 151 on Tuesday, May 22 at 9 a.m. in Room 114 of the Statehouse. House Bill 151 is currently being debated by the House Financial Institutions, Real Estate and Securities Committee. The next meeting of this committee is Thursday, May 24 at 11 a.m. in Room 116 of the Statehouse. With the system spending well over a million dollars a day on health care, the losses would be devastating. Click here to see the ORSC analysis.
Damon Asbury's testimony:
Interested Party Testimony on House Bill 151
State Teachers Retirement System of Ohio (STRS Ohio)
May 10, 2007
Chairman Widener and members of the committee, I am Damon Asbury, executive director of the State Teachers Retirement System of Ohio. I appreciate the opportunity to present testimony today on House Bill 151. The Board and staff of STRS Ohio understand the important issue this bill is attempting to address. Like the bill’s sponsors, we strongly condemn the acts and omissions of the Government of Iran in support of international terrorism and nuclear buildup. No rational individual or organization could approve such practices. We join with you in voicing our condemnation for their actions, and we applaud you for adding your voice to those striving to expose and attempting to remedy the situation in Iran.
I also want to thank Chairman Widener, the sponsors and others on the committee who have been working with the systems to come up with potential changes to the bill as introduced. We are hopeful that we can come to an agreement which meets the intent of the sponsors while protecting the pension and health care benefits of our participants, which we as fiduciaries are charged to ensure. For this reason our testimony today is interested party. We will wait to see the substitute language that is currently in negotiation.
I thought it was important, however, to share with the full committee the three primary concerns leading to our opposition to House Bill 151 as introduced. Those concerns are the fiduciary duty of the system to the trust beneficiaries; the costs to the participants of the system; and, the dangerous precedent of putting political and social matters above investment considerations. I would like to take the next few minutes to discuss these issues with you.
The first and most important concern is the fiduciary duty of the Retirement Board and staff to the members of the system.
This isn’t just a legal or philosophical concept. The Ohio General Assembly has charged the board with one responsibility — providing retirement security for more than 400,000 current and future retired teachers, faculty and administrators. That retirement security involves lifelong pension benefits and, if financially possible, health care in retirement. For the average teacher in retirement the career employee contributions are paid out within the first two to three years after retirement. The career employer contributions are paid out within six years. For the rest of the retired teacher’s life — and we have 100 over age 100 today — the money needed to pay the promised benefits come out of investment income. Any health care benefits are dependent on investment income. Our primary duty as fiduciaries is to steward the trust funds the members have put into STRS Ohio to ensure that there is enough available to provide lifelong retirement security. This is the sole duty of any fiduciary — loyalty and prudence to the beneficiaries of the funds. Any limitations on the ability of the board to fulfill this duty can impact that future retirement security and, perhaps, ultimately fall back on the taxpayers of Ohio.
The second concern with HB 151, as introduced, is the cost and negative impact on the international investments.
Any mandated divestiture bill will entail significant costs. Those costs include the transaction cost of the forced sale of assets; the potential for loss on those sales; the cost of increased fees when forced to trade passive management for active management; and, the lost opportunity to invest in some very high performing companies or asset classes. Our international investments and alternative investments — $18.7 billion in equities - are our highest performing assets classes. In the past three years the return on international has been over 26% annually. In the bill as introduced 20–25% of those companies would be forbidden investments. In the written testimony we delivered last week we had some specific cost numbers. Since negotiations are ongoing I will refrain from estimating what the cost may be in a substitute bill. Keep in mind, however, that it is not possible to make mandated divestment cost neutral. Any cost come out of the trust funds of the participants and impact future benefits. Most of you have been involved in conversations with us about the future of retiree health care. As I talk with the members and retirees of STRS Ohio, future pension security and health care in retirement is the issue they are concerned about. Reduced investment income will impact our ability to deliver these benefits.
Finally, we are concerned this bill will result in a dangerous precedent from a public policy and investment perspective.
Since 1920, when STRS Ohio was first created through statute, there have been many changes to Section 3307 of the Ohio Revised Code. But one underlying principle has met the test of time. And that principle is that the State Teachers Retirement Board should discharge its duties with respect to the funds solely in the interest of the participants and their beneficiaries. Your predecessors saw the value of protecting these pension plan assets — which are held in trust for the members — from outside influences and persuasion. This was appropriate, this was reasonable and this was prudent. While individual investors are free to manage their own assets as they see fit, we believe attempting to achieve social or political objectives with other people’s money violates trust laws and intercedes in the fiduciary responsibilities of the board members and staff that are responsible for overseeing these assets.
We have all seen what happens when prudent person rules of investment are not followed and the far-reaching impact of such digressions from the investment process. This recognition of the importance of keeping investment decisions above the political fray, above special interests and above singular causes — no matter how noble or well intentioned — has served our members and the taxpayers’ of this state well. Over the years, the Ohio General Assembly has diligently and successfully maintained the financial integrity of the Ohio pension funds by not using them to make political or social statements. We implore you not to start now.
In conclusion, I wish to again thank Chairman Widener, the sponsors and others on the committee who are working to make this a better bill. I am hopeful we will be successful.
1. Money in the pension trust funds belongs to the MEMBERS! The divestiture mandate puts a foreign policy objective above the STRS (& others) and above the STRS Board’s fiduciary duty to invest funds in the sole best interest of the members; it indemnifies the pension board from investment decisions.
2. There will be significant costs of complying with this mandate. Costs will be borne by the members & not the citizens of Ohio (the public). Estimates of STRS’ funding period are going from 47.2 years to 79 + years…$70+ M dollars in lost revenue.
3. This bill sets a dangerous precedent of using trust fund money to address political or social agendas
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