At a time when there is a glut of capital trying to find a home in venture funds, the state of New Jersey is inching closer to adding $9 billion to the alternative asset class.
The Garden State’s Investment Council on Jan. 20 approved rules and procedures to establish the Alternative Investment Program. The AIP would invest up to 13% of the state’s $70 billion in pension funds in alternative assets over five to seven years.
Proponents hope that the rules will be quickly adopted, and AIP would start investing the funds before the close of the year. Opponents want to stop the program through litigation or legislative action.
The rules will be published on Feb. 18 and face a 60-day public comment period. “We don’t expect to be slowed down at all,” says John McCormac, the New Jersey State Treasurer. “The legal issues will take their course but in the meantime we’re proceeding with the regulation process. I suspect that when some of the opponents see first hand how stringent our policies and procedures and regulations are they will realize we’ve provided the necessary controls for monitoring and transparency.”
New Jersey’s pensions are managed internally and are invested solely in stocks and bonds. Proponents of the changes argue that losses for the pension funds have been greater than those suffered by other states due in part to the lack of diversification. The state’s pension funds, owing largely to big losses in the stock market, dropped from a market value of $82.6 billion in June of 2000 to $60.2 billion by August of 2002.
The Investment Council approved the alternative asset policy last November (see PE Week, November 22, 2004). Between 5% and 7%, or between $3.5 billion and $4.9 billion, of its assets going to private equity. Other alternative asset classes in the program would include real estate and hedge funds, each with a prospective pension allocation target of between four percent and five percent. The treasurer’s office said last week that the Townsend Group will be the real estate advisor for the program. Townsend Group beat two other bidders for a three-year contract worth $400,000 per year. The treasurer’s office expects to name other investment advisors soon.
The same day saw the resignation of Peter Langerman, who served as director of the pension system’s Division of Investment. Langerman, a former CEO with Franklin Mutual Advisors, led the division as acting director in December 2002 and then as director since June of 2003. He was brought on to assist in starting an alternative asset program. The Treasurer’s office says that Langerman plans to return to the private sector.
The fight over the disposition of the pension assets has made for some strange political bedfellows in the, as State Sen. Peter Inverso and State Assemblyman Bill Baroni, both Republicans from the state’s 14th legislative district, have found themselves aligned with organized labor in fighting the pension investment plan. Both legislators, who serve a district populated with many state employees, have proposed bills that would assert the state legislature’s authority and block any changes to the state’s pension investments without the legislature’s approval. However, those bills have languished in committee, and Baroni fears that the treasurer’s efforts will move too quickly to be stopped. The Communications Workers of America (CWA) Local 1033 and the New Jersey Teachers Association have filed a lawsuit to stop the plan along.
“New Jersey is wallowing in a culture of corruption,” says Baroni. “While they’ve put on a pay-to-play ban, this is still very tempting to allow political corruption into our pension system. Hundreds of millions of dollars going to private entities is not a good idea.”