State and union officials held a New Jersey pension version of the Summer Olympics in early August — with the union both winning the gold and experiencing a major — and unexpected — upset days later.
“Unions score big victory,” announced Spotlight NJ in its story “Public Employee Pension System Won’t Invest So Heavily in Hedge Funds.”
The story focused on the New Jersey State Investment Council’s August 3 reversal of one of several problems union members said was affecting the health of their pension system — besides the state’s reneging on its promise to fund the pension pool for agreed-upon union concessions.
An International Business Times (IBT) article put the situation in context by noting that in 2010 Gov. Chris Christie installed longtime private equity executive Robert Grady to manage the state’s pension money.Grady then promoted a plan to put more pension fund dollars into riskier investments managed by Wall Street firms, said the article.
“Though this would entail higher fees, Grady said the strategy would ‘maximize returns while appropriately managing risk.’ Four years later, New Jersey has secured only half the promised results. The state has sent more pension money to big-name Wall Street firms like Blackstone, Third Point, Omega Advisors, Elliott Associates, and Grady’s old firm, the Carlyle Group. Additionally, the amount of fees the state pays financial managers has more than tripled since Christie assumed office. New Jersey is now one of America’s largest investors in hedge funds.”
The “maximized returns” have yet to materialize, with the state paying more for less returns while the pension fund languishes, said IBT.
The situation was exacerbated by Grady becoming the subject of a complaint filed with the State Ethics Commission by the AFL-CIO. The complaint questioned Grady’s involvement with Christie’s Republican re-election campaign while overseeing the pension board. Grady then stepped down. Adam Liebtag, who represents the NJ AFL-CIO and is co-chair of the State Investment Council, has been a noted critic of the hedge fund investment. He recently argued against it in a May Star-Ledger editorial: “Public pension funds have become a cash cow for Wall Street, as states search for ways to maximize returns and deal with continued underfunding from employers. Hedge fund managers are guaranteed millions in fees, while pension members cross their fingers and hope the returns are worth it.”
“Unfortunately,” Liebtag continued, “under Gov. Chris Christie, the portion of New Jersey’s pension fund invested in high-cost hedge funds has led to skyrocketing fees with less-than-impressive returns.” Liebtag said the best-performing sector of the state’s portfolio in recent years has been managed by staff at the Division of Investment (DOI), not by outside hedge fund firms. “This tiny staff manages about 65 percent of the fund with better returns than hedge fund managers, and cost only a fraction of what we are paying in fees. The most recent annual report cites $11 million for operating expenses, compensation, overhead, and equipment for the entire DOI. By contrast, we paid an enormous $701 million in fees to alternatives managers.”
The August decision cuts hedge-fund allocations from 12.5 percent to 6 percent. It also “resolves a months-long dispute between the panel’s labor-union representatives and appointees of Gov. Chris Christie that had been preventing the council from formally adopting an investment plan for the fiscal year that began July 1,” noted an NJ Spotlight report.
“The decision in the short-term is projected to save an estimated $127 million in fees that are charged by the outside money managers who run the hedge funds. That was immediately lauded by union officials who said the savings could be redirected to boost the efforts of in-house money managers. And as one of the country’s larger publicly run pension funds, council members said they’re hoping the move also helps to shake up a hedge-fund industry that has traditionally levied performance fees of up to 20 percent on top of standard management charges.
“Public funds aren’t going to pay just whatever fees they’re charging,” said Tom Byrne, the council’s chairman and son of former Gov. Brendan Byrne. “Cutting the hedge-fund allocation, I think, will send a strong message to the hedge-fund community,” said the article. The decision also had the potential to be another strong message — one to the public about the planned inclusion of a 2016 public election vote for state constitutional amendment to allocate a yearly amount to the pension system to bring it back to health after years of bi-partisan neglect and abuse. Public sector unions heartily support the amendment. While critics — many Republicans —have voiced concerns of fast tracking the amendment without addressing pension reforms — including fees, double dipping, and scope of benefit packages — Democratic State Senate President Stephen Sweeney fanned union hopes by embracing the amendment route and creating the momentum for it to be legislatively approved for the November ballot by the cutoff date: August 8. The recent win could have been used to show the state solving its problem and garnering support.
Then a funny thing happened on the way to the ballot box — despite the proposed amendment’s approval by the State Assembly and assured approval by the State Senate, Sweeney dropped the political ball. According to NJ Spotlight, Sweeney “made the case that he’s holding back the pension-funding amendment until he can be sure it has the best chance of passing. That’s because, he said, the ongoing political gridlock over renewing the state Transportation Trust Fund now threatens to embolden opponents of the amendment like Christie, who has promised to work hard to make sure the ballot question fails. Though Sweeney didn’t allow the measure to advance yesterday, he said it will take only one more vote before the end of the year to put it on the ballot in 2017, and by then the TTF impasse is expected to be resolved.”
“Without a resolution to the Transportation Trust Fund crisis — and a full accounting of how much future tax cuts will cost — it would have been too easy for opponents to argue that the state could not afford to pass the pension amendment,” said Sweeney. “The pension amendment would have been doomed to defeat, and that would have given carte blanche to current and future governors to slash pension payments.”
Sweeney also said the current state budget calls for the pension contribution to increase from $1.3 billion to $1.86 billion, meaning no harm will be done by waiting another year to put the ballot question before voters. Under the ballot question, the state would start making the full contributions calculated by actuaries by the 2022 fiscal year with payments that will likely surpass $5 billion, said NJ Spotlight.
Sweeney’s decision resulted in a change of attitude from both adversaries and allies. The New Jersey Business & Industry Association — which openly opposes the constitutional amendment yet supports restoring the Transportation Trust Fund and the elimination of taxes discussed to do so — praised his action. However, state union representatives were getting impatient with Sweeney, an Iron Workers Union official and likely democratic candidate for governor.
On August 4 the New Jersey Education Association and the Fraternal Order of Police flexed their political muscle by reminding Sweeney that they financially supported him and would withhold political contributions unless the amendment appeared on the fall ballot. Sweeney responded with a political sucker punch: a request to both United States Attorney Paul Fishman and New Jersey Attorney General Christopher Porrino to investigate the two unions for extortion.
“These threats clearly cross the line from lobbying to attempted bribery and conspiracy. Essentially, the NJEA has put members of the state senate in the position of tying specific official action to the receipt of a campaign contribution,” wrote Sweeney in a stunning political move for a union official who may plan to run for governor. Now the unions and the senate president have since locked themselves into positions, with Sweeney continuing to say that the amendment can come up next year — which just happens to include the race for the New Jersey governor’s seat. The unions, meanwhile, are leery and weary by reversals made first by Christie and now Sweeney. The NJEA website note pretty much sums things up: “Sen. Sweeney made a promise to our members that the pension amendment would happen this year. Next year isn’t good enough. He needs to decide whether he’s going to lead or just roll over and be part of the problem. New Jersey has too many politicians who have broken pension promises. We need a leader who will keep the promise.”
Where things go from here is not exactly clear. But one thing is: the games will continue — on the taxpayers’ dime.
