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Fund managers 'pay to play'

Thursday, February 22, 2001

By Jeffrey Cohan, Post-Gazette Staff Writer

Six firms managing county's pension investments gave to board members' campaigns

Roddey report wasn't complete

Campaign contributions to Retirement Board members


The four politicians who control Allegheny County's $711 million, taxpayer-supported pension fund gave huge investment contracts to their campaign contributors last year, recently filed reports show.

Of the eight investment firms that contributed to at least one of the politicians' campaigns last year, six received contracts with annual commissions of $100,000 or more.

Fourteen other firms sought contracts to manage pension fund investments but did not make campaign contributions. Only two of those 14 won the business.

The four elected officials on the county's Retirement Board -- Chief Executive Jim Roddey, Clerk of Courts George Matta, Treasurer John Weinstein and Controller Dan Onorato -- also received contributions from an assortment of others who do business with the pension fund, including lawyers and actuaries.

Together, the four politicians hold a majority of the seven seats on the board, which manages the pension fund for 11,000 county government retirees and employees. The county, with tax money, matches employee contributions to the fund dollar for dollar.

According to campaign finance reports filed Jan. 31, the four politicians received campaign contributions last year from more than 40 individuals and corporations with existing or hoped-for business ties to the pension fund -- this despite the fact that none of the four face re-election until 2003.

One critic of the practice, Celia Wexler, senior policy analyst for Washington, D.C.-based Common Cause, said that the donations not only raise questions about whether board members are unduly influenced, but they also give incumbents a sizable head start over challengers in raising funds.

After a year that saw the pension board overhaul its portfolio, two-thirds of the fund is now held by investment managers who made campaign contributions to the four elected officials in 2000.

As recently as September, that figure stood at 49 percent.

The system is sometimes called "pay to play" by critics, because businesses often feel obligated to make campaign contributions if they want a shot at obtaining government contracts. Though most of the contributions were relatively modest -- totaling about $76,000 to the four politicians -- critics say the practice should be abolished.

The federal Securities and Exchange Commission, asserting that politicians "violate the public trust" when they allow campaign contributions to influence the management of pension funds, is proposing a rule that would significantly curtail the "pay to play" system nationwide.

The SEC rule would prohibit investment advisers from doing any work for a public pension fund if, within the past two years, they have contributed more than $250 to a politician who exercises control over the fund. The SEC has yet to act on the proposal.

In a similar vein, Retirement Board member Jim McGrath, the longtime Allegheny County Retirees Association president, has proposed banning anyone who has contributed to board members' campaigns from doing business with the pension fund. But with four politicians on the seven-member board, McGrath said, he can't muster the votes for passage.

The other two members are Ted Puzak, a probation officer who, like McGrath, was elected to the board by county retirees and employees, and County Manager Bob Webb, a Roddey appointee. Roddey, Matta, Weinstein and Onorato sit on the Retirement Board because their elected positions give them a seat. Matta was appointed by County Council.

Critics see cloud of suspicion

The link between government pension funds and campaign contributions raises numerous concerns.

The contributions allow incumbents to accumulate substantial sums in their campaign funds long before their next election, before any challengers even emerge. In this way, control over a public pension fund can help politicians keep their jobs, which, in this case, all pay at least $64,000 a year.

"That kind of situation is not good for democracy," said Common Cause's Wexler. "You want competitive elections."

Of course, the system can cut both ways, she noted.

"They may indeed be making judgments based solely on the criteria of who does the best work, but the campaign contributions cast a cloud of suspicion over [the politicians] and their integrity," Wexler said.

People aspiring to do business with the Retirement Board face an awkward situation, said Robert Muhlenkamp, who manages a $39 million share of the pension fund under a contract he received last year. The politicians on the board ask him to make campaign contributions and McGrath urges him not to, he said.

"You get lambasted whichever way you go," said Muhlenkamp, who contributed to Weinstein, Onorato and Matta.

Critics say that if political contributions unduly influence selection of investment managers, the pension fund -- and by extension, county retirees and taxpayers -- can be harmed.

Last October, the board invested $50 million with Pittsburgh-based Federated Investors, a firm whose executives contributed to all four of the politicians last year.

Federated got the nod even though it posted the worst results last year and over the past five years of the three finalists for an investment in large-capital value stocks. Cleveland-based Key Asset Management, the finalist with the best returns, did not make any political contributions here.

Roddey, Matta, Weinstein, and Onorato said they were showing preference for a local firm with a good track record, not paying off a campaign contributor.

Federated bills itself as one of the largest investment firms in the country, with $140 billion in assets under its management.

Federated refused to comment on its campaign contributions but stood by its performance record.

"In that asset class, we have provided very strong long-term returns," Federated spokesman J.T. Tuskan said.

Six donors awarded pacts

Last year, the Retirement Board, acting on the advice of its chief consultant, diversified the pension fund's portfolio, dropping two investment managers but adding eight, for a net gain of six.

In doing so, the board put more of the fund's assets in the hands of campaign contributors.

Of the eight new investment managers, six are local firms that donated money to the campaigns of one or more Retirement Board members. The two that didn't contribute are based out of town.

Roddey denied that campaign contributions influenced his voting on the Retirement Board.

"I'm not basing my decisions on who gave me money," he said.

To illustrate this, Roddey offered an example unrelated to the Retirement Board -- his decision to negotiate county labor contracts with in-house lawyers, a move that cost the law firm of one of his top campaign contributors more than $800,000 in business.

The pay to play system was illustrated Nov. 9, when the board picked five new investment managers:

RRZ Investment Management, formerly known as Russell Rea Zappala & Gomulka Holdings, received a $75 million chunk of the pension fund. In March and April, three RRZ executives contributed a total of $1,500 to Matta's campaign. One contributed $1,000 to Onorato in May. Three weeks after getting the pension contract, RRZ Chairman Charles Gomulka donated $1,000 to Roddey.

Advanced Investment Management was picked to handle $40 million. Company President J. Thomas Allen contributed $900 to Matta on April 6.

Muhlenkamp and Co., a smaller company based in Pine, was given $39 million to invest. Robert Muhlenkamp contributed $1,000 to Weinstein on July 27, $500 to Onorato on May 23 and $450 to Matta on April 6.

MDL Capital Management, Downtown obtained a $31 million share of the pension fund to invest. The firm's political action committee contributed $2,000 to Matta less than two months before.

Only one of the firms selected that day, Fidelity, had not made a campaign contribution to at least one of the four politicians. All five of the selected firms stand to make at least $100,000 in commissions this year for investing the pension money.

So do two other firms that received investment management contracts at earlier Retirement Board meetings -- Federated and BlackRock, which is owned by Pittsburgh-based PNC Financial Services.

Federated officials contributed $5,000 to Roddey, $1,000 to Weinstein, $900 to Matta and $100 to Onorato, while PNC executives and its PAC gave $13,000 to Roddey, $1,000 to Weinstein, $1,400 to Matta, and $1,100 to Onorato.

Three months before Federated received a $50 million share of the pension fund to invest, PNC's BlackRock received a $70 million share.

Weinstein also proposed creating a preferred list of local stockbrokers to execute pension fund transactions. The investment managers would be encouraged or even required to use brokers from a list generated by the Retirement Board.

At the Nov. 9 Retirement Board meeting, two brokers, both hoping to make it onto the preferred list, spoke in favor of Weinstein's idea. One, Lloyd Laughlin of PaineWebber, contributed $250 to Weinstein in 1999, $500 to Onorato last May and $125 to Matta last April. The other, William Berkowitz of Berkowitz Pierchalski, contributed $950 to Matta last year.

The board rejected Weinstein's idea, but he said he would reintroduce it this year.

Politics is 'expensive game'

A Retirement Board seat is a particular boon for a row officer.

While row officers have less authority and a harder time raising money than a high-profile politician like Roddey, control over a $711 million pension fund puts them in contact with deep-pocketed investment managers, bankers, stockbrokers and lawyers.

Matta, Weinstein and Onorato all capitalized on their Retirement Board seats last year. Each drew campaign contributions from at least 15 businesses with pension fund ties.

In contrast, three row officers who don't sit on the Retirement Board -- District Attorney Stephen A. Zappala Jr., Register of Wills David Wecht and Recorder of Deeds Michael Della Vecchia -- received a total of one contribution last year, for $100, from a business associated with the pension fund.

Matta was unapologetic about soliciting campaign contributions from companies that want business from the Retirement Board.

"Politics is a very expensive game," he said. "We look at putting together a broad base of people who might donate."

Weinstein denied that campaign contributors are trying to influence his voting on the Retirement Board.

"Maybe they believe in the job I'm doing," Weinstein said.

Muhlenkamp, though, conceded that his desire for pension fund commissions was part of his motivation to make campaign contributions.

"I can't say it wasn't an interest," he said. "[A campaign contribution] allows you to talk to people that you otherwise may not [have access to]. That's always useful."

Onorato defended the practice of asking government contractors for campaign contributions, saying it happens in virtually all levels of government, not just at the Retirement Board.

"People are allowed to contribute money as long as there is full disclosure," Onorato said. "It's not illegal. It's just the way the system is.

"Unless you had an entirely different system of funding campaigns, you're always going to have investment managers, lawyers, accountants, anyone who does professional work for government, they're all going to [donate]."

Most of the politicians on the Retirement Board emphasized that not all contributors fared so well in the diversification of the pension fund.

For instance, Mellon Bank saw the share of the fund it manages cut almost in half, from $249 million to $125 million. Similarly, C.S. McKee now manages $91 million, about $40 million less than last year.

"I am certain that just as many people who made contributions did not get business," Roddey said.

But the numbers belie that claim.

According to a Retirement Board document, 22 firms made formal sales pitches last year, seeking a piece of the pension fund to invest. Six of eight campaign contributors got work; while only two of the 14 non-contributors won contracts.

In their defense, the politicians said all of the new investment managers have the approval of Jim Yanni, an investment consultant employed by the Retirement Board. Yanni himself is a campaign contributor to Matta -- $500 in August.

Most of the new managers received the votes of McGrath and Puzak, both non-politicians.

"These were all recommended by the consultant. I think it's a pretty good investment portfolio," Onorato said.

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