The battle over how New Jersey invests its state pension funds has intensified as the New Jersey State Investment Council approved a plan to invest 13% of its $66 billion in assets into alternative investments. The plan would allocate five percent, or about $3.3 billion, of its assets going to private equity. The plan faces opposition from local unions-two of which have filed lawsuits-and state legislators who say that the Investment Council needs legislative approval to proceed.
The council voted seven to two in favor of the plan with two members absent. The plan was spurred by a report issued earlier this year by Independent Fiduciary Services (IFS), which calls on the state of New Jersey to “more broadly diversify its investment portfolio” by “adding further, nontraditional asset classes and strategies.” As expected, the report supports bringing in outside investment management in “passive management in efficient securities markets.” The report also calls for the Investment Division to have enhanced internal controls, greater compensation and higher staffing levels and resources.
The New Jersey pensions are currently completely internally managed and invested in stocks and bonds. As a result the pensions took heavy losses with the bursting of the tech bubble four years ago. Proponents of the changes argue that New Jersey’s losses to its pension funds have been greater than other states. The state’s pension funds dropped from a market value of $82.6 billion in June of 2000 to $60.2 billion by August of 2002. These large losses underscored the state’s need to diversify, according to New Jersey State Treasurer John McCormac. “Most states are ahead of us in terms of diversification,” he says.
But the diversification effort is being met with resistance by unions that fear that the management fees and risks associated with private equity investments. The Communications Workers of America and the New Jersey Teachers Association have filed lawsuits seeking to block the proposed changes.
Additionally, union representatives concede that the current staff of the Investment Division does not have the private equity investment experience to establish a program commensurate with other states and that the council has taken positive steps to prevent the kind of “pay-to-play” scandals that have gripped Connecticut and Hawaii. It is also noted that the plan recommended by the investment council will not cost any state workers their jobs. Still, the unions say it is too risky to put money into risky assets and pay tens of millions of dollars to outside investors.
“It’s not possible to have in-house employees manage a venture capital or private equity or hedge fund portfolio,” says McCormac, who adds that outside managers will be selected by the end of the quarter. The Treasurer declined to comment on the litigation brought by the unions.
New Jersey State Senator Peter Inverso (R-14) and his assembly colleague Assemblyman Bill Baroni, both Republicans from the state’s 14th legislative district, have began efforts to have the legislature assert its authority and block any changes to the state’s pension investments without the full approval from the legistature.
“The issue very succinctly is one of whether or not the Treasurer, and therefore the Investment Council, had the authority to pursue alternate investments without getting statutory approval from the legislature,” says Inverso. He expects that the plan will not go forward without a court ruling on it. “For them to move ahead without having the judiciary weigh in on this would be pretty brazen at this point. If they have the authority to do it, then it becomes a matter of sitting down with the unions and seeing what would be reasonable.”