Putting Labor’s Capital to Work: Capital Strategies for Ohio Employees John Logue & Steve Clem Ohio Employee Ownership Center Kent State University Prepared for the workshop “Should Ohio Establish an Economically Targeted Investment Fund?” Columbus, June 6, 2006

Pension Money in Employer- Sponsored Plans is Legally the Property of Pension Plan Participants  It should be invested to provide –benefits for future retirees –benefits for employees and their communities today  Economically targeted investment (ETI) policies (“double bottom line investing”) offer an alternative to conventional pension investment strategies which focus only on financial return.

Ohio Needs Investment  Ohio has lost 261,000 manufacturing jobs, 24% of our manufacturing base since  The manufacturing jobs lost typically paid higher wages and had better benefits than the service sector jobs which have replaced them.  Manufacturing jobs lost had a higher multiplier effect: Not only do their higher wages and benefits support greater ability to consume, but manufacturing processes typically create more jobs among suppliers than service employers do.  Ohio total employment has fallen by 200,000 over the last six years.

The Rise of Pension Savings in our Economy  Assets of pension plans (defined benefit and defined contribution plans) sponsored by private employers and state and local governments (in trillions) Additionally there are the following pension assets (2005) Federal employee pension plans1.1 trillion Individual retirement accounts3.5 trillion Annuitized pensions held by insurance companies2.1 trillion

Distribution of Pension Assets (in Trillions)

Issues in Pension Fund Investment  Decline in pension security  Failure to invest for today - as well as tomorrow  Poor stewardship of investments  Better alternative: Economically targeted investments - housing, good jobs, filling capital gaps –Building trades –CalPERS –OPERS - Ohio/Midwest

“Economically Targeted Investment” or “Double Bottom Line Investment”  A competitive rate of return and  A “collateral benefit” –Affordable housing, –Good jobs at good wages, –A cleaner environment, or –More sustainable communities. ETI aligns pension fund investment with the values of the owners of the pension funds without sacrificing return

Labor’s Experience with ETI (1) - Building Trades Funds  National funds - Housing Investment Trust (HIT ) –Multi-Employer Property Trust (1982) –Building Investment Trust (1988)  Local funds - ERECT funds (1987) –Northern Ohio Building Trades Real Estate Investment Trust (2001)  Direct investment - Ohio Brotherhood of Carpenters

Labor’s Experience with ETI (1) - Building Trades Funds  Good financial return  More good union jobs and good wages  Increased financial stability for the pension funds

Labor’s experience with ETI (2) - State and local public employee pension funds  1995 General Accounting Office study - 50 of 139 funds surveyed had made ETIs –2.0% of assets in housing and real estate –0.4% of assets in business development

Labor’s experience with ETI (2) - State and local public employee pension funds  National leader: CalPERS, the California Public Employee Retirement System –members’ home mortgages –housing through HIT –urban revitalization –private equity in “underserved markets” –direct equity investments in business expansion  Created 54,000 jobs in California (2002)

Labor’s experience with ETI (3) - Canadian labor sponsored investment funds  Started in Quebec in 1983  Half of private equity funds in Canada.  Invested primarily in growing small and medium sized, closely held businesses  Tax credits  Reinvested in province Hear more about the Fonds de solidarité FTQ -- the Quebec Solidarity Fund -- later today

Labor’s experience with ETI (3) - Canadian labor sponsored investment funds  It has a quadruple bottom line: –to create, maintain, or protect jobs in Quebec –to promote workers’ economic literacy “so they can increase their influence on the economic development of Quebec” –to make strategic investments in Quebec’s economy for the benefit of workers and businesses –to encourage retirement savings

Financial Returns on “Double Bottom Line” Investing  “Socially responsible” funds for 401(k)s, 403(b)s and IRAs –Domini 400 Social Index returned 18.54% vs % for the S&P 500 ( ) –Socially responsible investment firms tracked by Morningstar were more likely to be ranked in the top two categories than the universe of funds tracked  Building trades funds –The HIT has outperformed its benchmark, the Lehman Aggregate Bond Index, over the last 1, 3, 5 and 10 year period. –The BIT has provided a better return than its benchmark NCREIF Real Estate Property Index since its inception in 1988.

Financial Returns on “Double Bottom Line” Investing  Public employee funds –Matched or exceeded benchmark returns in bond, loan and CD purchases and private placements in their business development efforts but fell short of the benchmark in venture capital placements (1995 GAO study)  Canadian labor-sponsored funds –Quebec: 4.9% plus tax credit (at American rates) yields 7% return

Employee Ownership in Economically Targeted Investment  Anchor jobs and capital  Higher wages - median wage premium is $1.25/hour  Higher benefits - 2 ½ x retirement savings –More likely to have good medical care  Two extra bottom lines

Employee Ownership in Economically Targeted Investment  More growth –Annual sales growth + 2.4% –Annual employment + 2.3%  More job retention in recessions  Anchor wealth in community –FY04 filing:  Ohio-headquartered ESOP companies had created $36,678,000,000 in wealth for their 482,000 employee owners or $76,000 each.  Paid out $2.8 billion to retirees in the filing year.

Courses of Action for Ohio Labor (1)  Possible objectives –high wage, high benefit union construction jobs (national building trades) –local union construction (local building trades’ funds, CalPERS, Solidarity Fund); –affordable housing (HIT, CalPERS); –mortgages for members in high housing cost areas (CalPERS);

Courses of Action for Ohio Labor (1)  Possible objectives –Urban revitalization (CalPERS and others); –Positive occupational health and safety, environmental, and labor relations records (Solidarity Fund); –Regional development in outlying, declining, and rural areas (Solidarity Fund); –Developing new industries such as tourism (Solidarity Fund), high tech (Solidarity Fund), or alternative energy; –High economic multiplier effects  Manufacturing  Locally owned businesses  Employee-owned firms

Courses of Action for Ohio Labor (2)  Means 1 –ERISA plans  Multi-employer –Asset allocation model with appropriate benchmarks –Intermediaries  Single employer –seek to bargain investment policy –State and local public employee plans  CalPERS example  Expand OPERS strategy  Create new intermediaries for Ohio investments  Legislative guidelines?

Courses of Action for Ohio Labor (2) cont.  Means 2 –Employer-sponsored defined contribution plans [401(k)s and 403(b)s]  Labor and community organizations set model standards  Need new, labor-sponsored investment vehicles  Create community reinvestment vehicles?  Add to employer-sponsored choices  Open local building trades funds to individual investment?  Open new public employee investment intermediaries to individual investment?

Courses of Action for Ohio Labor (2) cont.  Means 3 –IRAs  Labor and community organizations set model standards  Need new, labor-sponsored investment vehicles for Ohio manufacturing –State tax incentives for reinvestment in Ohio?  Create community reinvestment vehicles?  Open local building trades funds to individual investment?  Open new public employee investment intermediaries to individual investment?

Placement of Investments by Ohio Public Employee Pension Funds OPERSSTRSSERS Police/ Fire Highway Patrol (in %) 12/31/046/30/052/28/0612/31/0412/31/04 Bonds2219½ Domestic stock 4745½ Foreign stock 2221½ Real Estate 58½1158 Alternative investments *2½22 ─ Cash & short term 22½212 Total portfolio value on date (billions) $65.4$59.6$9.9$9.8$.680 Alternative investments include private equity and hedge funds. *less than 1%