Originally posted May 25, 2007

Possible Vote on Investment Divestment Bill on May 29, 2007

Substitute House Bill 151 has been introduced and is currently being debated by the Ohio House Financial Institutions, Real Estate and Securities Committee. This bill would require the state’s five retirement systems, including STRS Ohio, to divest themselves of foreign companies doing certain types of business in Iran and Sudan.

STRS Ohio’s executive director, Damon Asbury, has testified before the Ohio Retirement Study Council and the House committee about this system’s concerns with the bill. The three primary concerns raised with legislators are:  (1) the money in the pension 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 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.

Click here to view a copy of Dr. Asbury’s May 10, 2007, testimony.

Click here to view a copy of Dr. Asbury’s May 24, 2007, testimony.

Some proponents of the bill have suggested that the pension funds are putting members’ money at risk by investing in companies that are doing business in these countries. However, investment professionals take these issues into consideration when making investment decisions, balancing risk and potential return. Further, these companies are multinational companies (e.g., Royal Dutch Shell) and have interests throughout the globe, which provides overall protection to them — and to their investors.

Further, this bill only affects Ohio’s public pension plans, and not investments made by alternative retirement plans, mutual funds, etc.

It is possible that a vote on this bill may occur in one of the committee meetings scheduled for next week. The first one is on Tuesday, May 29, beginning at 3 p.m. STRS Ohio members wishing to voice their opinion about this bill can obtain information via the following link http://www.house.state.oh.us/jsps/Representatives.jsp.

 

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House Financial Institutions, Real Estate and Securities Committee

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.

 

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House Financial Institutions, Real Estate and Securities Committee

Opposition Testimony on House Bill 151

State Teachers Retirement System of Ohio (STRS Ohio)

May 24, 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 once again present testimony on House Bill 151.

Chairman Widener has requested cost information on the impact of the substitute bill.

While we appreciate the efforts that have been made to narrow the scope of the mandated divestment, the substitute bill is still not clear on the intended targets of divestment. As we read the latest version, private equity, real estate and U.S. companies appear to still be in play. The sponsors have indicated that the substitute bill will only involve some 22  companies involved in oil production. We currently hold $700 million in those companies. Our analysis of the cost for divesting of these 22 companies is a one-time cost of $5 million in transaction fees and an estimated loss of $75 million annually in investment returns. The net effect of these costs is an estimated reduction in total fund return of 10 bps annually — which would effectively lower our pension assets and challenge our ability to fund health care in the future. Our funded ratio would decrease and our funding period would increase — just at a time when our fund is in sight of being within the 30-year funding period goal.  

However, California is currently reviewing a similar bill that would require divestiture from defense, oil, nuclear, natural gas and terrorist organizations in Iran. Unlike the Ohio version, the California bill does not include mineral extraction, energy production, real estate, private equity, U.S. companies or Sudan. Still, the California pension fund has identified 50 companies that could be on the list. If private equity and real estate are still at risk, our cost increases significantly.
     
Since we don’t really know what companies may be affected, it is difficult to calculate potential costs. Nevertheless, any mandated divestiture bill will entail significant costs. It is not possible to make mandated divestment cost neutral. Those costs will be borne by the beneficiaries of the trust fund. Reduced investment income will impact our ability to deliver the benefits, especially health care.

We continue to have serious concerns that H.B. 151 supersedes the Retirement Board and staff fiduciary duty to the membership. The substitute bill continues to include language (Section 137.09) that makes that duty to the membership secondary to a new foreign policy duty on Iran and Sudan. The system cannot accept any language that puts the best interest of the trust beneficiaries below political agendas, no matter how noble the intent.

I also want to point out that the policies in other states that have been held up as models — Missouri, California and Florida — have significant differences from what is contained in Sub. H.B. 151. The Missouri program was a policy of the Treasurer and not a legislative mandate on the pension funds. California has language that guarantees the fiduciary duty of the system to the membership and provides indemnification from the general revenue fund, not the trust funds. Florida includes a cap on the level of losses to the pension trust fund.

We believe the passage of Sub. H.B. 151 will establish a dangerous precedent for the future. Already we have seen the original bill expanded to another country, Sudan. Since every proponent of tapping into trust funds believe their’s is a noble cause, once the door is opened it will never be closed. There will always be global conflict somewhere in the world. There will always be differing views among intelligent human beings on what is socially right and moral — whether the issue is a country, a product or a behavior. For precisely this reason trust funds are set up to be removed from the political fray and to require the trustees to discharge their 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 do 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. It is important for the record to note that even though STRS Ohio holds nearly $19 billion in global investments, we have no direct holdings in Iran or Iranian businesses.

We appreciate the efforts that have been made to revise the bill as introduced and have worked in good faith with the sponsors over the past two months to that end. While there have been some improvements in the bill, we believe sincerely that it continues to place a mandate on the systems that is a breach of our fiduciary duty to the membership and for that reason, cannot support the substitute bill in its present form. I urge you to join with your colleagues from the Ohio Retirement Study Council who voted unanimously to oppose the bill and urge you to consider the substitute language, modeled after Sub. S.B. 133, that has been provided to the sponsors, which would place a mandate on the systems to develop appropriate policy and procedures to address the original concerns of the sponsors.