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August 24, 2015 01:00 AM

Indiana law lets municipalities establish foundations

New legislation creates opportunity for money managers, consultants

Rick Baert
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    Rep. Edmond Soliday

    A new law in Indiana could turn into a windfall for money managers.

    The law gives municipal governments in the state the ability to fund foundations with proceeds of property sales, and to hire investment consultants and money managers to run the assets in a broad range of investments.

    The law, written by state Rep. Edmond Soliday and effective July 1, allows such municipal foundations with at least $50 million in assets to invest up to a maximum of 55% in equities; otherwise, investments are limited only to “any legal, marketable securities, and (are) not subject to any other investment limitations,” according to a summary of the law on the state Legislature's website.

    Municipalities must invest at least $50 million to create a foundation, under the law.

    Such foundations would not be bound by the Indiana Constitution's mandate that state governmental agencies invest in only short-term fixed income, with at most a five-year duration.

    Mr. Soliday said in an interview that the law requires foundations have an investment consultant, paid through agreed-upon fees for services rather than a percentage of returns. It also stipulates annual investment returns of up to 5% be used for any municipal use with the remainder to be kept in the foundation, he said.

    “The whole intent is to optimize the investment of capital, preserve the corpus, and provide a way for governments that are strapped for money to sell some assets and get a better return on those assets,” said Mr. Soliday.

    Mr. Soliday didn't have an estimate of how much money across Indiana potentially could be amassed in a variety of municipal foundations. But he agreed that there could potentially be hundreds of millions of dollars that could be advised by investment consultants and run by external managers. And that's only if one looks at Indiana's 92 counties; it doesn't include the myriad cities, towns and townships across the state that can also create foundations under the law.

    The impetus for the new law came in 2007, when Mr. Soliday's home base of Porter County in northwest Indiana sold the county-run hospital. Assets from the sale, totaling about $150 million, were put into general accounts that were under Indiana's fixed-income investment limitations, sparking Mr. Soliday to create the first version of the bill that same year.

    He pulled the bill after it appeared it wouldn't pass, but reintroduced it this year to a more receptive Legislature.

    “Had this (bill) been approved back then, the assets would have doubled by now,” he said.

    Porter County became the first municipality in the state to take advantage of the law, issuing an RFP for an investment consultant to manage the assets from that hospital sale eight years ago. Scott McClure, Porter County council attorney and an associate in the law firm of Rhame and Elwood, Portage, said the deadline for the RFP has passed, and that finalists are expected to be interviewed later this month. He said the county would act quickly to issue RFPs for money managers once a consultant is hired and an asset allocation is in place.

    “There are a handful of other (municipalities) in the state that are looking to do this,” Mr. McClure said.

    “There's a concern that other municipalities have wanted to sell some of their assets, but put it off because they didn't know what to do with the money,” he said.

    The law allows municipalities to continue to manage assets under the constitution's fixed-income limitations in what Mr. McClure said was “the Treasury option,” or create a foundation with the assets and broaden the investments that can be used. n

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