Putting Labor’s Capital to Work:Putting Labor’s Capital to Work:Capital Strategies for Ohio EmployeesCapital Strategies for Ohio Employees

John Logue & Steve ClemJohn Logue & Steve Clem

Ohio Employee Ownership CenterOhio Employee Ownership CenterKent State UniversityKent State University

Prepared for the workshopPrepared for the workshop

““Should Ohio Establish an Should Ohio Establish an Economically Targeted Investment Fund?”Economically Targeted Investment Fund?”

Columbus, June 6, 2006Columbus, June 6, 2006

Pension Money in Employer-Pension Money in Employer-Sponsored Plans is Legally the Sponsored Plans is Legally the

Property of Pension Plan ParticipantsProperty of Pension Plan Participants It should be invested to provide It should be invested to provide

– benefits for future retireesbenefits for future retirees– benefits for employees and their communities benefits for employees and their communities

todaytoday Economically targeted investment (ETI) Economically targeted investment (ETI)

policies (“double bottom line investing”) policies (“double bottom line investing”) offer an alternative to conventional offer an alternative to conventional pension investment strategies which focus pension investment strategies which focus only on financial return.only on financial return.

Ohio Needs InvestmentOhio Needs Investment Ohio has lost 261,000 manufacturing jobs, 24% of Ohio has lost 261,000 manufacturing jobs, 24% of

our manufacturing base since 2000.our manufacturing base since 2000. The manufacturing jobs lost typically paid higher The manufacturing jobs lost typically paid higher

wages and had better benefits than the service wages and had better benefits than the service sector jobs which have replaced them. sector jobs which have replaced them.

Manufacturing jobs lost had a higher multiplier Manufacturing jobs lost had a higher multiplier effect: Not only do their higher wages and effect: Not only do their higher wages and benefits support greater ability to consume, but benefits support greater ability to consume, but manufacturing processes typically create more manufacturing processes typically create more jobs among suppliers than service employers do. jobs among suppliers than service employers do.

Ohio total employment has fallen by 200,000 over Ohio total employment has fallen by 200,000 over the last six years.the last six years.

The Rise of Pension Savings The Rise of Pension Savings in our Economyin our Economy

Assets of pension Assets of pension plans (defined benefit plans (defined benefit and defined and defined contribution plans) contribution plans) sponsored by private sponsored by private employers and state employers and state and local and local governments (in governments (in trillions)trillions)

0.50

3.40

6.80

7.30

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1977

1996

2001

2005

Additionally there are the following pension assets (2005)Additionally there are the following pension assets (2005)Federal employee pension plansFederal employee pension plans 1.1 trillion1.1 trillionIndividual retirement accountsIndividual retirement accounts 3.5 trillion3.5 trillionAnnuitized pensions held by insurance companiesAnnuitized pensions held by insurance companies 2.1 trillion2.1 trillion

Distribution of Pension AssetsDistribution of Pension Assets(in Trillions)(in Trillions)

0.41.4

2.7

2.81.1

3.5

2.1“Taft-Hartley” multi-employer funds -$400 billion

Defined benefit single companypension plans - $1.4 trillion

Defined benefit state and local publicemployee funds - $2.7 trillion

Defined contribution plans sponsoredby employers [401(k)s and 403(b)s] - $2.8 trillion

Federal Employee Defined BenefitPlans - $1.1 trillion

Defined contribution IndividualRetirement Accounts (IRAs) - $3.5trillion

Life insurance companies - $2.1 trillion

Total = $14 TrillionTotal = $14 Trillion

Issues in Pension Fund InvestmentIssues in Pension Fund Investment

Decline in pension security Decline in pension security Failure to invest for today - as well as Failure to invest for today - as well as

tomorrowtomorrow Poor stewardship of investments Poor stewardship of investments Better alternative: Economically targeted Better alternative: Economically targeted

investments - housing, good jobs, filling investments - housing, good jobs, filling capital gaps capital gaps – Building tradesBuilding trades– CalPERSCalPERS– OPERS - Ohio/Midwest OPERS - Ohio/Midwest

““Economically Targeted Investment” Economically Targeted Investment” or “Double Bottom Line Investment”or “Double Bottom Line Investment”

A competitive rate of return and A competitive rate of return and A “collateral benefit” A “collateral benefit”

– Affordable housing, Affordable housing, – Good jobs at good wages, Good jobs at good wages, – A cleaner environment, or A cleaner environment, or – More sustainable communities.More sustainable communities.

ETI aligns pension fund investment with ETI aligns pension fund investment with the values of the owners of the pension the values of the owners of the pension funds without sacrificing returnfunds without sacrificing return

Labor’s Experience with ETI (1) - Labor’s Experience with ETI (1) - Building Trades Funds Building Trades Funds

National funds - Housing Investment National funds - Housing Investment Trust (HIT - 1964)Trust (HIT - 1964)– Multi-Employer Property Trust (1982)Multi-Employer Property Trust (1982)– Building Investment Trust (1988) Building Investment Trust (1988)

Local funds - ERECT funds (1987)Local funds - ERECT funds (1987)– Northern Ohio Building Trades Real Northern Ohio Building Trades Real

Estate Investment Trust (2001)Estate Investment Trust (2001) Direct investment - Ohio Brotherhood Direct investment - Ohio Brotherhood

of Carpentersof Carpenters

Labor’s Experience with ETI (1) - Labor’s Experience with ETI (1) - Building Trades Funds Building Trades Funds

Good financial returnGood financial return More good union jobs and good More good union jobs and good

wageswages Increased financial stability for the Increased financial stability for the

pension fundspension funds

Labor’s experience with ETI (2) - Labor’s experience with ETI (2) - State and local public employee State and local public employee

pension funds pension funds

1995 General Accounting Office 1995 General Accounting Office study - 50 of 139 funds surveyed had study - 50 of 139 funds surveyed had made ETIsmade ETIs– 2.0% of assets in housing and real 2.0% of assets in housing and real

estate estate – 0.4% of assets in business development0.4% of assets in business development

Labor’s experience with ETI (2) - Labor’s experience with ETI (2) - State and local public employee State and local public employee

pension funds pension funds

National leader: CalPERS, the California National leader: CalPERS, the California Public Employee Retirement SystemPublic Employee Retirement System– members’ home mortgagesmembers’ home mortgages– housing through HIThousing through HIT– urban revitalizationurban revitalization– private equity in “underserved markets”private equity in “underserved markets”– direct equity investments in business direct equity investments in business

expansionexpansion Created 54,000 jobs in California (2002)Created 54,000 jobs in California (2002)

Labor’s experience with ETI (3) - Labor’s experience with ETI (3) - Canadian labor sponsored Canadian labor sponsored

investment fundsinvestment funds Started in Quebec in 1983Started in Quebec in 1983 Half of private equity funds in Canada. Half of private equity funds in Canada. Invested primarily in growing small and Invested primarily in growing small and

medium sized, closely held businessesmedium sized, closely held businesses Tax creditsTax credits Reinvested in provinceReinvested in province

Hear more about the Hear more about the Fonds de solidarité FTQFonds de solidarité FTQ -- the -- the Quebec Solidarity Fund -- later todayQuebec Solidarity Fund -- later today

Labor’s experience with ETI (3) - Labor’s experience with ETI (3) - Canadian labor sponsored Canadian labor sponsored

investment fundsinvestment funds It has a quadruple bottom line:It has a quadruple bottom line:

– to create, maintain, or protect jobs in Quebecto create, maintain, or protect jobs in Quebec– to promote workers’ economic literacy “so they to promote workers’ economic literacy “so they

can increase their influence on the economic can increase their influence on the economic development of Quebec”development of Quebec”

– to make strategic investments in Quebec’s to make strategic investments in Quebec’s economy for the benefit of workers and economy for the benefit of workers and businessesbusinesses

– to encourage retirement savingsto encourage retirement savings

Financial Returns on “Double Financial Returns on “Double Bottom Line” Investing Bottom Line” Investing

““Socially responsible” funds for 401(k)s, 403(b)s Socially responsible” funds for 401(k)s, 403(b)s and IRAsand IRAs– Domini 400 Social Index returned 18.54% vs. 16.95% for Domini 400 Social Index returned 18.54% vs. 16.95% for

the S&P 500 (1990-98)the S&P 500 (1990-98)– Socially responsible investment firms tracked by Socially responsible investment firms tracked by

Morningstar were more likely to be ranked in the top two Morningstar were more likely to be ranked in the top two categories than the universe of funds tracked categories than the universe of funds tracked

Building trades fundsBuilding trades funds– The HIT has outperformed its benchmark, the Lehman The HIT has outperformed its benchmark, the Lehman

Aggregate Bond Index, over the last 1, 3, 5 and 10 year Aggregate Bond Index, over the last 1, 3, 5 and 10 year period. period.

– The BIT has provided a better return than its benchmark The BIT has provided a better return than its benchmark NCREIF Real Estate Property Index since its inception in NCREIF Real Estate Property Index since its inception in 1988.1988.

Financial Returns on “Double Financial Returns on “Double Bottom Line” Investing Bottom Line” Investing

Public employee fundsPublic employee funds– Matched or exceeded benchmark Matched or exceeded benchmark

returns in bond, loan and CD purchases returns in bond, loan and CD purchases and private placements in their business and private placements in their business development efforts but fell short of the development efforts but fell short of the benchmark in venture capital benchmark in venture capital placements (1995 GAO study)placements (1995 GAO study)

Canadian labor-sponsored fundsCanadian labor-sponsored funds– Quebec: 4.9% plus tax credit (at Quebec: 4.9% plus tax credit (at

American rates) yields 7% return American rates) yields 7% return

Employee Ownership in Employee Ownership in Economically Targeted InvestmentEconomically Targeted Investment

Anchor jobs and capitalAnchor jobs and capital Higher wages - median wage Higher wages - median wage

premium is $1.25/hourpremium is $1.25/hour Higher benefits - 2 ½ x retirement Higher benefits - 2 ½ x retirement

savingssavings– More likely to have good medical careMore likely to have good medical care

Two extra bottom linesTwo extra bottom lines

Employee Ownership in Employee Ownership in Economically Targeted InvestmentEconomically Targeted Investment

More growthMore growth– Annual sales growth + 2.4% Annual sales growth + 2.4% – Annual employment + 2.3%Annual employment + 2.3%

More job retention in recessionsMore job retention in recessions Anchor wealth in communityAnchor wealth in community

– FY04 filing: FY04 filing: Ohio-headquartered ESOP companies had created Ohio-headquartered ESOP companies had created

$36,678,000,000 in wealth for their 482,000 $36,678,000,000 in wealth for their 482,000 employee owners or $76,000 each. employee owners or $76,000 each.

Paid out $2.8 billion to retirees in the filing year.Paid out $2.8 billion to retirees in the filing year.

Courses of Action Courses of Action for Ohio Labor (1) for Ohio Labor (1)

Possible objectivesPossible objectives– high wage, high benefit union construction jobs high wage, high benefit union construction jobs

(national building trades)(national building trades)– local union construction (local building trades’ local union construction (local building trades’

funds, CalPERS, Solidarity Fund);funds, CalPERS, Solidarity Fund);– affordable housing (HIT, CalPERS);affordable housing (HIT, CalPERS);– mortgages for members in high housing cost mortgages for members in high housing cost

areas (CalPERS);areas (CalPERS);

Courses of Action Courses of Action for Ohio Labor (1) for Ohio Labor (1)

Possible objectivesPossible objectives– Urban revitalization (CalPERS and others);Urban revitalization (CalPERS and others);– Positive occupational health and safety, Positive occupational health and safety,

environmental, and labor relations records environmental, and labor relations records (Solidarity Fund);(Solidarity Fund);

– Regional development in outlying, declining, Regional development in outlying, declining, and rural areas (Solidarity Fund); and rural areas (Solidarity Fund);

– Developing new industries such as tourism Developing new industries such as tourism (Solidarity Fund), high tech (Solidarity Fund), or (Solidarity Fund), high tech (Solidarity Fund), or alternative energy; alternative energy;

– High economic multiplier effectsHigh economic multiplier effects Manufacturing Manufacturing Locally owned businessesLocally owned businesses Employee-owned firms Employee-owned firms

Courses of Action for Courses of Action for Ohio Labor (2) Ohio Labor (2)

Means 1Means 1– ERISA plans ERISA plans

Multi-employer Multi-employer – Asset allocation model with appropriate benchmarksAsset allocation model with appropriate benchmarks– IntermediariesIntermediaries

Single employerSingle employer– seek to bargain investment policyseek to bargain investment policy

– State and local public employee plansState and local public employee plans CalPERS exampleCalPERS example Expand OPERS strategyExpand OPERS strategy Create new intermediaries for Ohio investmentsCreate new intermediaries for Ohio investments Legislative guidelines?Legislative guidelines?

Courses of Action for Courses of Action for Ohio Labor (2) cont.Ohio Labor (2) cont.

MeansMeans 2 2– Employer-sponsored defined contribution Employer-sponsored defined contribution

plans [401(k)s and 403(b)s]plans [401(k)s and 403(b)s] Labor and community organizations set model Labor and community organizations set model

standardsstandards Need new, labor-sponsored investment vehiclesNeed new, labor-sponsored investment vehicles Create community reinvestment vehicles?Create community reinvestment vehicles? Add to employer-sponsored choicesAdd to employer-sponsored choices Open local building trades funds to individual Open local building trades funds to individual

investment?investment? Open new public employee investment Open new public employee investment

intermediaries to individual investment?intermediaries to individual investment?

Courses of Action for Courses of Action for Ohio Labor (2) cont.Ohio Labor (2) cont.

MeansMeans 3 3– IRAsIRAs

Labor and community organizations set Labor and community organizations set model standardsmodel standards

Need new, labor-sponsored investment Need new, labor-sponsored investment vehicles for Ohio manufacturingvehicles for Ohio manufacturing

– State tax incentives for reinvestment in Ohio?State tax incentives for reinvestment in Ohio?Create community reinvestment vehicles?Create community reinvestment vehicles?Open local building trades funds to Open local building trades funds to

individual investment?individual investment?Open new public employee investment Open new public employee investment

intermediaries to individual investment?intermediaries to individual investment?

Placement of Investments by Ohio Placement of Investments by Ohio Public Employee Pension FundsPublic Employee Pension Funds

OPERSOPERS STRSSTRS SERSSERS Police/ FirePolice/ Fire Highway PatrolHighway Patrol

(in %)(in %) 12/31/0412/31/04 6/30/056/30/05 2/28/062/28/06 12/31/0412/31/04 12/31/0412/31/04

BondsBonds 2222 19½19½ 2020 2222 2121

Domestic stockDomestic stock 4747 45½45½ 4545 4949 55 55

Foreign stockForeign stock 2222 21½21½ 2020 2222 1515

Real EstateReal Estate 55 8½8½ 1111 55 8 8

Alternative investmentsAlternative investments ** 2½2½ 22 22 ──

Cash & short termCash & short term 22 2½2½ 22 11 2 2

Total portfolio value Total portfolio value

on date (billions)on date (billions)

$65.4$65.4 $59.6$59.6 $9.9$9.9 $9.8$9.8 $.680$.680

Alternative investments include private equity and hedge funds.Alternative investments include private equity and hedge funds.*less than 1%*less than 1%