State Street Corp. is battling Pennsylvania's treasurer over a $9 million contract to provide custody services for $64 billion of the commonwealth's pension fund assets.
Treasurer Barbara Hafer is seeking to void State Street's contract. The fees were negotiated by her predecessor, a Democrat. Ms. Hafer is a Republican.
The contract, which began in 1995, was supposed to continue through 2002. It brought the $38 billion-asset Boston bank $1.5 million in fees last year.
Bids on a new contract are due Friday. Potential bidders include Mellon Bank Corp. of Pittsburgh, Bank of New York Co., and State Street, all heavy hitters in custody services.
Robert R. Gentzel, a spokesman for the treasurer, denied that the department was trying to bring the business to a bank headquartered in Pennsylvania. However, he said, that "certainly would be a nice outcome."
State Street brought the matter to Pennsylvania's Commonwealth Court last month. The bank has asked a judge to rule that its six-year contract with the treasurer is binding.
"We're confident that we have a valid contract negotiated in good faith," said Kari Murphy, a spokeswoman for State Street. "Our intention is to work through the appropriate avenues to try to resolve this matter in a way that is acceptable to all participants."
State Street is one of the largest asset custodians in the United States, with $3.9 trillion in custody. The Pennsylvania contract was first awared to it in 1994 by then-treasurer Catherine Baker Knoll.
The current contract includes custody services and U.S. and international securities lending for three pension funds: the public school employee retirement system, the commonwealth employee retirement system, and the municipal retirement system.
The contract took effect at the beginning of 1995. Before that, the services were split among a number of banks: PNC Bank Corp. provided custody, Mellon handled U.S. securities lending, and State Street handled international securities lending.
State Street's contract was renewed for six years in November 1996, as Ms. Knoll was finishing her second four-year term. In Pennsylvania, treasurers can serve only two consecutive terms. Ms. Hafer was opposed in the 1996 election by Ms. Knoll's daughter, Mina Knoll, a Democrat.
Ms. Hafer wants to void the contract on the ground that by binding her it prevents her from carrying out her duties, said Paul M. Yatron, an attorney at Reading, Pa., law firm Mogel, Speidel, Bobb & Kershner, which is representing the Treasury.
The current contract would run until two years after Ms. Hafer's first term in office is up.
"There is a long line of Pennsylvania legal cases that say public officials going out of office cannot enter into contracts that bind their successors with regard to official duties," Mr. Yatron said.
Under Pennsylvania law, the treasurer can be held personally liable for mistakes made by the bank that manages pension funds, Mr. Yatron added.
But there are other issues at stake. State Street's annual fees from the contract and the renewal negotiated by Ms. Knoll were $250,000 for the first two years, but grew to $1.5 million in 1997. Fees are scheduled to stay at that level for the remaining years of the contract.
Ms. Hafer contends that Ms. Knoll made a secret deal under which State Street would accept low fees for the first two years and after that "would be taken care of," Mr. Yatron said.
The Treasury is not alleging any criminal activity on the part of the former treasurer, Mr. Yatron said.
In a letter last August, Ms. Hafer told State Street she would void the contract and rebid it. The contract is valid until July, Mr. Yatron said.