The Ohio House of Representatives has passed a "hidden tax" on taxpayers to finance the state retirement systems.
By an 80-13 vote, the House passed legislation that would require at least 50% of externally managed investments and 70% of brokerage trading to be handled by in-state firms.
The legislation subverts fiduciary responsibility and sound investment practice. The Ohio Senate should reject the House's bill.
In effect, the House is telling the systems' trustees and participants, as well as taxpayers, that the state has 50% of the best money managers, and 70% of the best brokers.
The bill looks out for money managers and brokerage firms in the state at the expense of public pension plans participants and taxpayers who finance the benefits.
Legislators lack candor when they contend the bill will protect pension assets from poor performance and misconduct by using in-state managers and brokers.
Some proponents of the bill argued the use of in-state managers and brokers would bring more accountability to the systems because those brokers can be monitored more closely than out-of-state brokers, and could help avoid problems.
Well, Milwaukee County's retirement fund use of Strong Capital Management Inc., or the Massachusetts Pension Reserves Investment Management Board's use of Putnam Investments, each a local manager for the respective fund, did not insulate either system from advisers with alleged abuses.
How would an out-of-state manager be less accountable to the Ohio systems?
Ohio legislators should contact these public pension funds for their views about local control.
Some legislators argued that using Ohio-based managers and brokers could improve the performance of the state's pension funds. But no one offered performance records of Ohio managers and brokers compared with those in the rest of the country, or even the world.
Neil Toth, director-investments for the Ohio Public Employees Retirement System, Columbus, which has $55 billion in assets, testified before a state House committee that the investment management restrictions of the bill would cost OPERS $40 million to $100 million annually. The cost of complying with the trading provisions would cost OPERS $20 million to $40 million a year.
Those costs, for OPERS and for the other state systems, represent the hidden tax that taxpayers will have to pay through additional contributions to the pension funds.
David Bergstrom, president of the National Association of State Retirement Administrators, Washington, wrote in a letter to Ohio Gov. Bob Taft: "By mandating that the state retirement system assets be invested by a select group of managers, and by excluding firms that may be better qualified to handle these critical investment decisions, HB 227 would actually hinder the ability of public retirement plan trustees in Ohio to carry out their fiduciary responsibilities."
Gov. Taft, unfortunately, has not come out unequivocally against the "buy Ohio" investment and trading mandates.
"The governor believes that qualified potential Ohio managers should have the opportunity to compete for business," said Orest Holubec, press secretary for Mr. Taft. "But whether it should be mandated is something he is still considering."
By the way, will the governor and legislators who support the bill or who equivocate on the mandates agree to have at least 50% of all their personal assets managed by in-state investment advisers?
It is the fiduciary duty of trustees to invest assets solely for the benefit of participants, not for benefit for the Ohio money management and brokerage community. The Legislature shouldn't use state pension funds to create an economic development program for members of the in-state financial community.
Ohio may be "the heart of it all," as is imprinted on its auto license plates, but the state will be the derriere of jokes if the House investment and brokerage diversions bill passes the state Senate and is signed by the governor into law.