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Pension Scandals Put Christie In Deep Hole

Over at Naked Capitalism, Yves Smith has written a great post recapping the recent pay-to-play allegations surrounding Chris Christie and Robert Grady and untangling the web of relationships at the heart of the scandal. The post, in full, is below.

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By Yves Smith, Naked Capitalism

Memo to Chris Christie: when you are in a hole, quit digging.

If you have any appetite for political slugfests, an unusual one is playing out in New Jersey. Former Pando, now International Business Times reporter David Sirota has been digging into dubious connections between officials in various states who have influence over pension fund investments and their well-heeled Wall Street connections and patrons.

To give a very short summary of Sirota’s biggest current story, the IBT journalist has uncovered questionable connections with two prominent figures, Charlie Baker, who is a Republican gubernatorial candidate in Massachusetts, and former New Jersey pension fund chief Robert Grady.

First, a short background on the Baker story: Sirota showed how that Baker made a $10,000 donation to the New Jersey Republican Party shortly before Christie officials gave Baker’s firm a pension management contract. That donation ran afoul of the Garden State’s pay-to-play rules that bar contributions from executives and partners of entities that manage state pension funds.

New Jersey launched an investigation into Sirota’s charges and announced that as a result, it was exiting the contract with Baker’s firm.

In a sign that Sirota is drawing blood, Christie himself, as well as members of his administration, have launched personal attacks on Sirota rather than making honest rebuttals to his charges (another strategy has been to misrepresent the stringent requirements of the state pay-to-play law). The paper of record in Massachusetts, the Boston Globe, has yet to deign to report on this scandal.

Sirota has also been probing the relationships among state pension fund investments and the holdings of long-standing Christie friend and pension fund overseer Robert Grady. The Christie administration has denied, forcefully, that Grady had any financial interest in firms that benefitted from New Jersey pension fund investments on his watch. That word “interest” is critical, because that’s the term of art in the New Jersey pay-to-play law. And in reading the discussion that follows, bearing in mind that New Jersey rules bar state officials from “being involved” in “any official manner” in which they have direct or indirect personal or financial interest.*

From the article:

Grady was pursuing a new strategy, shifting money into hedge funds and private equity holdings in the name of diversification and higher returns. He was now pushing to entrust up to $1.8 billion of New Jersey pension money to the Blackstone Group, one of the largest players in private equity.

But one special feature of that Blackstone bet underscores the interlocking relationships at play as states increasingly rely on the counsel and management of Wall Street institutions to invest their pension dollars: One of the private equity funds New Jersey was investing in – a pool of money called Blackstone Capital Partners VI – claimed among its investors a Wyoming-based company named Cheyenne Capital. That company’s list of partners included one Robert Grady.

In short, Grady was pushing to invest New Jersey public money in the same Blackstone fund in which his own firm was investing — without disclosing that fact to N.J. officials.

There are two legs to Sirota’s charges. One is that Grady’s firm looks to have gotten preferential treatment from Blackstone. Documents from an SEC investigation state that Cheyenne made a total investment in the Blackstone fund of $2.69 million. That is well below its minimum investment requirement of $20 million.

Due to the opacity of these investments, it is impossible to ascertain whether Cheyenne might have gotten other concessions, such as reduced fees in the fund itself, by lowering the management fees or the performance fees paid by investors in the fund.

Another way that private equity funds reward preferred parties is by giving them co-investment rights, which allows them to invest in the portfolio companies directly and bypass fees at the fund level. We explained how that works last year:

Let’s look at a particularly egregious conflict involving the Boston law firm Ropes & Gray. Ropes is Boston’s ultimate Brahmin firm, with a pedigree dating back to 1865. Past partners including Henry Cabot Lodge and Archibald Cox.

Industry insiders report that Ropes does the legal work for Harvard’s investments in private equity funds… Ropes & Gray also represents two of Boston’s leading PE firms: Bain Capital and Thomas H. Lee Partners

The March 6, 1998 Federal Register contained an application to the SEC by Ropes & Gray to form an in-house 1940 Act “investment company” that would be owned by the employees of the firm in order to invest their capital. Critically, as part of its investment company application, Ropes sought and was granted by the SEC an exemption from the normally comprehensive and ongoing public reporting requirements to the SEC that investment companies normally provide.

How has RGIP been investing the Ropes partners’ money? Thanks to the SEC waiver, it’s impossible to know everything. But RGIP appears regularly as an investor in Bain and Thomas H. Lee (another top Boston-based PE fund) deals.

Pay attention, because the distinction I’m about to make is critical to understanding how stinky this is. I am not talking about RGIP being an investor in Bain and Thomas H. Lee funds. To the extent that were the case, RGIP’s interests would be aligned with Harvard as a fellow fund investor, since they’d be in all the same deals, be subject to the same gains and losses, and presumably pay the same or similar fees.

Instead, Ropes & Gray, Harvard’s counsel, is investing alongside Bain and Thomas H. Lee funds in which Harvard is an investor. From an economic perspective, Ropes & Gray is investing ahead of Harvard, because it is not paying the fees a limited partnership investor pays. Moreover, it may well be in an even more advantaged position by virtue by getting access to only the best deals (as in cherrypicking within the funds**) and could potentially better rights on other fronts than its client.

Let me stress: we have no evidence that Cheyenne got this sort of sweetheart deal. But we also can’t be certain that it didn’t. The cult of secrecy around private equity investments means the public, including New Jersey taxpayers, has no idea of knowing, beyond the concession on the minimum investment, whether Grady’s firm got other sweeteners as a result of the New Jersey investment in the same fund. And that is precisely why the New Jersey statues are so draconian on the issue of possible personal and financial conflicts of interest.

Grady provided strenuous denials that he has an “interest”; those statements don’t pass the smell test. As private equity industry expert Eileen Appelbaum remarked:

“Whether or not he has a direct piece of the action from this particular investment, he is a partner in the company that is going to benefit from the investment,” said Eileen Appelbaum, an economist at the Center for Economic and Policy Research and author of the book “Private Equity at Work.” “If the investment in Blackstone turns out to be profitable, his company is going to benefit from that.”

And don’t kid yourself that Grady was too remote to have had anything to do with the pension fund investment in Blackstone VI:

State Investment Council records show that Grady himself made the formal motion to approve the Blackstone deal, and then voted for it along with most members of the council. Former State Investment Council member Jim Marketti told International Business Times he had no recollection of Grady disclosing his firm’s investment in Blackstone at the time Grady had the council vote on the Blackstone investments.

Another questionable relationship involves the same Blackstone fund’s salvage of Knight Capital. Grady was on the board of Stifel, which was a significant customer of Knight and also joined in the rescue.

The details:

In August 2012, Blackstone Capital Partners VI used money from its investors to finance a deal involving Knight Capital Group, according to SEC documents. Knight had notably suffered losses in the wake of news that a computer glitch in its electronic trading system had sent share prices plummeting on the New York Stock Exchange. The infusion of Blackstone money stopped the bleeding. Blackstone had been joined in its rescue of Knight by another firm, Stifel Financial, which later acquired a piece of Knight’s trading and sales operations. Among the members of Stifel’s board was Grady, according to corporate documents.

According to SEC documents, Grady also owns more than 10,000 shares of the company’s stock, and N.J. financial disclosure forms show Grady is compensated for his position at Stifel.

In short, Blackstone Capital Partners VI applied its investors’ money — including funds from the New Jersey pension system — to co-invest with Stifel, whose board included among its ranks the overseer of New Jersey’s pension investments.

Does this look arm’s length to you? Factor this into your assessment:

[Christopher] Santarelli, the New Jersey Treasury department spokesman, said Grady’s State Investment Council would have no knowledge or influence over how Blackstone opted to invest the money in its fund. Yet a New Jersey investment official previously declared that state officials often influence the financial decisions of the private equity funds in which the state invests.

“We’re a large player,” said then-Division of Investment executive director Timothy Walsh, in a May 2011 interview with the Bergen Record. “We have impact.” He told the newspaper that state pension officials sit on advisory boards for most of the private equity firms with which New Jersey invests, adding that New Jersey’s pension system is better able to influence private equity firms’ decisions than those of companies whose stock it owns.

The New Jersey state pension system listed 600,000 shares of Stifel in its portfolio in 2013, according to the New Jersey Department of Treasury’s annual report. Stifel executives made $15,000 worth of contributions to the New Jersey Republican Party in 2011, according to campaign finance disclosures.

Assemblyman John Wisniewski, who heads the state’s Select Committee on Investigation, is pushing for an official probe into l’affaire Grady.

Even though it seems unlikely in the cesspool of New Jersey politics, it is still entirely possible that Robert Grady’s conduct regarding his dealings with Blackstone, both with the fund investment and the Knight rescue, were on the up and up. But even so, he clearly looks to have violated the state’s stringent laws about conflicts of interest.

And this case serves as yet another object lesson in how private equity’s draconian secrecy policies can foster corruption. Even if it didn’t actually occur here, it would be easy for it to have taken place.

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*Clearly, this restriction would not apply to cases where a pension fund executive held a public stock and a New Jersey pension fund bought shares in the same stock. The impact of the New Jersey buy, if any, would be too small and short term for the state official to derive any benefit.

New Jersey Lawmaker Pushes For Stricter Pay-To-Play Rules For Pension Investments

SEC rules prevent pension funds from investing with firms that have made political contributions to politicians with any control over the pension fund’s investment decisions.

But a New Jersey Senator wants the state to go even further. Reported by NorthJersey.com:

The law that restricts the state pension fund from investing in firms whose investment managers make political contributions to New Jersey candidates should be expanded to include donations to national political groups, a legislator said Wednesday.

Sen. Shirley Turner, D-Mercer, announced her intentions to broaden the state’s pay-to-play law a day after the Division of Investment confirmed the pension system had sold its stake in a venture capital fund with ties to a Massachusetts gubernatorial candidate who donated to the New Jersey GOP.

[…]

When the pension system approves an alternative investment — including venture capital firms and hedge funds — those firms are required to fill out disclosures listing the managers of the particular fund New Jersey is investing with and whether those individuals have made political contributions. But the state’s conflict of interest law does not cover political donations to groups outside New Jersey, like the Republican Governors Association, which Governor Christie heads.

“The method of investment should be selected based on performance and merit, not because of campaign contributions and investments should be made in the best interests of our retirees,” said Turner, whose district includes a significant number of state workers, said Wednesday in a statement. “There shouldn’t be even the appearance of political favorites.”

This is a hot-button issue in New Jersey. One union, the New Jersey AFL-CIO, filed an ethics complaint last week asking whether political donations have influence pension investments.

The issue was also raised at the meeting of the State Investment Council on Tuesday.

Photo by Truthout.org via Flickr CC License

John Bury On New Jersey’s Pay-to-Play Allegations: Let’s Move On To The Real Problems

John Bury is an actuary that tightly covers New Jersey pension news over at the blog Bury Pensions. He has an interesting perspective on the latest pay-to-play allegations thrown at Christie.

Bury’s point: if the pay-to-play allegations are true, it’s par for the course. But there are bigger issues with New Jersey’s pension system, and those issues are the ones we should worry about. Here’s Bury’s post in full:

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By John Bury, Bury Pensions

“It’s a cheap political stunt based on shoddy, distorted reporting from an individual [David Sirota] who over and over again has been shown to be biased, willfully inaccurate, and just flat out wrong,”

– NJ Governor Chris Christie spokesman Kevin Roberts responding to allegations in an AFL-CIO lawsuit

He may have some points – though not the ones I would make:

Like the double-dipping non-issue I do not see Chrisitie allegedly steering investment contracts to campaign donors as the state Retirement System’s biggest problem. Remember, this is New Jersey. Find me someone who has donated to a politician or party who does not expect (and get) payback of some sort.

How about a law firm where the lawyers get together each election cycle to give $30,000 to the campaigns of freeholders and somehow wind up with annual billings from that county of over $1 million. That’s legal here so what’s the problem with hedge fund honchos working the system we have, though much less blatantly than DeCotiis according to Fortune Magazine?

Then there’s the issue of criticizing a rate of return of 16.9% (or 15.9% or 15.5%). Imagine you get any one of those as an annual return in your own portfolio. Are you complaining? The question in New Jersey is whether those Alternative Investment assets being reported are really there. I don’t think so.

Finally, there is this reality:

THE PLAN BARELY HAS 50% OF THE ASSETS NECESSARY TO ANNUITIZE ONLY (YES ONLY) THE RETIREES, WITH THE OTHER 475,000 PARTICIPANTS HAVING LESS THAN NOTHING.

Employ only investment advisers who have never donated to a political campaign (if you can find any) and get rid of all the double-dippers and you may have solved 1% of a $150 billion problem that will be a $250 billion problem in the years it will take your distracto-reforms to be implemented.

Is New Jersey Fudging Its Pension Fund Results to Defuse a Christie Scandal?

Over at Naked Capitalism, Yves Smith has written a great post looking deeper into New Jersey’s pension fund return data, which was revised upward last week. Yves asks the question: Did New Jersey artificially increase the value of its pension fund’s alternative investments to ward off mounting criticism of the fund?

This article was originally posted at NakedCapitalism.com

Is New Jersey Fudging Its Pension Fund Results to Defuse a Christie Scandal?

By Yves Smith

You cannot make stuff like this up. New Jersey, in its attempt to diffuse a pension fund scandal that implicates Chris Christie (it roused him to respond in public), looks to have committed the classic crisis management blunder of a cover-up worse than the original crime.

International Business Times reporter David Sirota has been putting questionable relationships between state pension funds and Wall Street under the hot lights. One of the objects of his scrutiny has been the New Jersey pension fund, which is seriously underfunded. A recent tally puts it at number 43 out of 50 states in the level of its pension funding, with only 60% of its commitments funded. The New Jersey shortfall is the result of a series of classic blunders, starting with a decision to starve the pension system in the 1990s under governor Christine Todd Whitman.

New Jersey dug its hole even deeper during the crisis, by taking risky bets right before the markets unraveled, including investing in Lehman shortly before its collapse.

This bad situation was made worse under Christie. As we wrote in 2011:

A more accurate rendition would be that, at least in New Jersey, the state has been raiding the pension kitty for over 15 years. This is not news to anyone who has been paying attention, any more than underfunding of corporate pensions. In the Garden State’s case, Governor Chris Christie skipped the required $3.1 billion pension fund contribution last year. He claimed this move was to force reform, but what impact does another $3.1 billion failure to pay have on an unfunded liability that was already over $50 billion?

Fast forward to the Sirota investigation. Sirota showed how Christie shifted fund allocations to managers of “alternative assets” like hedge funds and private equity funds, which charge vastly more in the way of fees than simple stock and bond funds. It should be no surprise that hedge and private fund managers are heavyweight political donors. The result was more fees to the managers and underperformance for New Jersey. As Sirota wrote:

Gov. Chris Christie’s administration openly acknowledged that more New Jersey taxpayer dollars were going to land in the coffers of major financial institutions. It was 2010, and Christie had just installed a longtime private equity executive, Robert Grady, to manage the state’s pension money. Grady promoted a plan to put more of those funds into riskier investments managed by Wall Street firms. 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… Had New Jersey’s pension system simply matched the median rate of return, the state would have reaped roughly $3.8 billion more than it did between fiscal years 2011 and 2014, says pension consultant Chris Tobe.

Unfortunately, it is all too common for pension fund systems to swing for the fences when they are in trouble and commit even more money to supposedly higher return investment approaches like private equity. In fact, due to too much money flooding into these strategies, returns for both hedge funds and private equity funds have generally lagged stock market returns in the post-crisis period.

On top of that, New Jersey’s authorized allocation to alternative investments is a full one third, a stunningly high level. Even CalPERS, a long-standing investor in alternatives, has less than half that level committed to these strategies.

But in New Jersey’s case, there’s even more reason than usual to doubt that the motivation for the shift to riskier investments was due to desperation to catch up, as opposed to rank corruption. After all, Christie’s professed strategy has been to worsen the crisis at the pension fund. What better way to achieve that result than to invest the money indifferently in high fee strategies, and get the side benefit of currying favor with extremely well-heeled donors?

Now, under heat for the suspicious-looking shift to Wall Street firms combined with embarrassing underperformance, New Jersey is suddenly reporting higher results as if no one would notice the change. On Friday, Sirota published a new scoop: New Jersey is now saying its pension fund returns for 2013 are a full 1% higher than previously announced. As Sirota writes:

Facing an ethics complaint after disclosures of the state’s below-market pension investment returns, Gov. Chris Christie’s top economic officials defended themselves by declaring that they delivered 16.9 percent returns in fiscal year 2014. Yet only weeks ago, the Christie administration reported the returns were 15.9 percent — lower by more than $700 million.

The discrepancy surfaces amid intensifying criticism of the Christie administration’s decision to triple the amount of pension money invested in high-fee private equity, venture capital, hedge fund, real estate and other “alternative investment” firms — many of whose employees have made financial contributions to Republican organizations backing Christie’s election campaigns.

In an op-ed published in the Newark Star-Ledger on Friday, the two top officials of New Jersey’s State Investment Council, Robert Grady and Thomas Byrne, criticized the investment strategy proposed by investors such as Warren Buffett, who say pension money should be primarily in stock index funds, not in alternative investments. Defending New Jersey’s $20 billion bet on alternatives, Grady and Byrne declared that “in the fiscal year ended June 30, 2014, the pension fund achieved a return of 16.9%.”

A return of 16.9 percent would still trail median public pension returns.

“The July 22 release says the fund produced returns of 15.9, according to preliminary data compiled as of June 30, 2014. Now final audited results showed the fund returned 16.9 percent,” Christopher Santarelli, from the New Jersey Department of Treasury, told International Business Times in response to a request for comment about the differing numbers.

This sort of revision is unheard of. Remember, even with New Jersey, over 2/3 of pension fund assets are invested in stocks and bonds. Those valuations are unambiguous. Similarly, hedge funds are required to provide valuations (so-called “net asset values”) monthly, with those figures verified by third party appraisal firms. The stock, bond, and hedge fund results come in shortly after month-end; there’s no basis for revision after the fact (put it another way: a change in valuation for any of these types of funds, even if favorable, would warrant withdrawing funds as soon as possible, because it would be proof of serious deficiencies in controls and accounting at the fund manager).

So the only types of investments where results are less clear-cut are in private equity, venture capital, and other illiquid strategies where the fund managers rather than third parties provide the valuations for their investments.

But even here, those managers have other investors in their funds besides New Jersey. They calculate the net asset value across the entire fund and then give valuations to investors based on their percent participation. So if New Jersey was getting revised valuations for such a large portion of its funds, you’d expect some other public pension funds to report significant upticks as well. But New Jersey seems to be suspiciously unique in this regard.

To understand how implausible this miraculous 1% performance improvement is, let’s look at New Jersey’s current asset allocation, as of June 30:

We will charitably include “Commodities and Other Real Assets,” “Real Estate Debt,” and “Real Estate” in the not-independently-valued funds for the purpose of this back-of-the-envelope calculation.
If you total Debt Related Private Equity, Real Estate Debt, Police and Fire Mortgage Program, Commodities and Other Real Assets, Real Estate, and Buyouts/Venture Capital, you get 17.13%. Remember, the total that is not independently valued is almost certainly lower.
The 1% miraculous improvement in performance is attributable to at most 17.13% of the portfolio. That is tantamount to that portion of the portfolio producing returns that were at least 5.8% higher than initially reported. That is simply not plausible.
We have to believe either that New Jersey is utterly incompetent at record-keeping,which would be a violation of its fiduciary duty, or something stinks to high heaven. It’s not hard to guess which is more likely.

New Jersey Launches Website Seeking Pension Comments From Public

New Jersey’s newly established Pension and Benefit Study Commission is seeking public comments and suggestions regarding the panel’s mission of “making the system sustainable for taxpayers and retirees”.

Click here to access the comment form.

The panel was created by Chris Christie last month to brainstorm cost-cutting and reform ideas to implement into the state’s pension system.

More details from the Absury Park Press:

If you’re interested in providing Gov. Chris Christie with some feedback on how to handle New Jersey’s underfunded public employee pension systems, now is your chance.

The state Department of the Treasury has created a web page and a comments form for the newly formed New Jersey Pension and Health Benefit Study Commission.

That nine-member commission was appointed by Christie in August and tasked with providing recommendations for reforming the system, which has been chronically underfunded by the state for years.

[…]

The new web page features short biographies of the nine commission members, a widget that takes viewers to a page on which they can submit feedback and a link to Executive Order 161, which established the commission.

View the website by clicking here or visiting the direct URL:

https://www.state.nj.us/treas/reform.shtml

Report: New Jersey Pension Investments Trailed S&P 500 For Seven of Last Eight Years

New Jersey's investment returns vs. the S&P 500 CREDIT: IB Times — New Jersey’s investment returns vs. the S&P 500
CREDIT: IB Times

Last week, journalist David Sirota reported on the New Jersey pension system and its drastic shift towards hedge fund investments under Chris Christie.

This week, Sirota has analyzed the state’s financial records. His finding: despite the increased allocation toward hedge funds and other alternatives, the pension system has mostly underperformed relative to the broader market.

Sirota writes:

In seven of the eight years since the state began shifting pension funds into so-called alternative investments, returns have fallen well short of the broader stock market, an analysis of state financial records shows. In those seven years, New Jersey’s alternative investment portfolio has produced gains of just more than half of the S&P 500, the widely watched index seen as a proxy for shares of large corporations.

[…]

The below-market results from the state’s $20 billion alternative investment portfolio belie repeated assurances from New Jersey officials who said the investments would overperform the stock market. Instead, the results buttress arguments by investors like Warren Buffett and some local lawmakers, who assert that pension money should be invested in stock index funds rather than hedge funds, private equity, venture capital, real estate and other alternative investments.

Christie has responded to the fund’s under-performance by claiming that, although it has under-performed the broader market, it has beaten the fund’s internal projections.

Fitch Downgrades New Jersey Credit Rating For Second Time in Five Months

On Friday, New Jersey was dealt another fiscal blow when rating agency Fitch downgraded New Jersey’s credit rating. The agency said New Jersey exacerbated “a key credit weakness” when it decreased its payments to the state pension system. From the Star-Ledger:

Wall Street analysts at Fitch Ratings today downgraded New Jersey’s bond rating for the second time this year, citing the state’s poor economic performance, Gov. Chris Christie’s rosy revenue forecasts — which failed to materialize — and his decision to plug the resulting budget gap by cutting $2.4 billion in funding for the state’s strained pension system.

Fitch said Christie’s decision to cut the pension payments this year marked a “repudiation” of a bipartisan plan he signed to fix the beleaguered retirement system for public workers, which is underfunded by nearly $40 billion, according to state estimates.

Instead of pumping bigger cash infusions every year into workers’ retirement accounts to save them from collapse — as Christie and lawmakers agreed to do in his first term — New Jersey is now stepping away from its plan, Fitch said.

“Following significant revenue underperformance, the state relied upon the repudiation of its statutory contribution requirements to the pension systems to return to budgetary balance, exacerbating a key credit weakness,” the Fitch analysts wrote in a note to investors, lowering their rating on the state’s debt from A+ to A.

New Jersey’s Treasury department responded to the downgrade by defending Christie’s decision to divert much of the state’s pension payment into the general budget. From The Star-Ledger:

A spokesman for the state Treasury Department said Christie “acted responsibly” by shrinking two pension payments that had been scheduled for the current and previous fiscal years.

“Without raising taxes on an already overburdened populace, Governor Christie has already contributed more to the pension system than any previous governor,” said the Treasury spokesman, Chris Santarelli, in an emailed statement.

“As rating agencies and ratings expectations have been recalibrated following the financial crisis of the late 2000s, the state Treasury and Office of Public Finance have worked tirelessly to ensure that New Jersey is rated fairly and equally by the Wall Street rating agencies; and will continue to do so.”

This is the second time in five months Fitch has downgraded New Jersey’s credit rating.

Photo by Walter Burns via Wikimedia Commons

New Jersey Lawmaker Puts New Pension Proposal On Table

Chris Christie’s pension commission members aren’t the only ones brainstorming pension reforms in New Jersey lately. A Democratic assemblyman has proposed a plan that would shift new hires into a hybrid plan with some attributes of defined-contribution plans and some attributes of defined-benefit. Reported by The Star-Ledger:

Assemblyman Troy Singleton (D-Burlington) last week sent some public union leaders a draft of a bill he’s considering introducing that would keep the current pension system in place for those already enrolled in it, but shift new public workers to a “collective defined contribution retirement program” – a sort of mix between a traditional pension plan and a 401(k).

“It may be something we don’t introduce, but it may be something we do in a different form. But I’d like to start some dialogue in where our pension system goes in the next step for our pension system,” Singleton said in a phone interview “The only thing I would tell you is it’s still a work in progress.”

The idea did not get a warm reception from the public worker labor unions, even though Singleton himself comes from the private side of organized labor, as an official in the Northeast Regional Council of Carpenters.

And Singleton acknowledged that the plan would not do anything to solve the pension’s unfunded liability of about $40 billion, which he said must be dealt with through increased state payments.

Singleton provided the Star-Ledger with an outline of how the plan would function. The gist:

Workers would establish accounts that both they and their employers would pay into, though the workers would pay three times as much as the employer. The money would be managed by a “professional money management provider” that could charge fees of no more than 0.25 percent of the total, while the plan’s appointed board and the State Investment Council would determine where the money would be invested.

The investment returns would be annually credited to the retirement accounts. But if the return is greater than 8 percent, the excess would go into a reserve fund, which would later be used if the investments lost money. The plan would allow for “bonus” payments to the retirement accounts if the reserve fund is healthy enough.

It’s far from the current pension system, in which workers’ final retirement payments stay the same, no matter how good or bad the funds’ investments are doing.

Christie appointed a commission last month to examine the state’s pension system and propose reform ideas. The commission’s final report will come in the next few months.

Christie Administration Says 2011 Pension Reform Law Was Unconstitutional

Chris Christie’s lawyers submitted a court filing yesterday urging a judge to dismiss lawsuits from unions alleging that Christie broke the law when he reduced the state’s pension payments earlier this year.

Christie himself signed a law in 2011 mandating that the state make payments into the pension system. But now, Christie’s lawyers have said that the 2011 reform law was unconstitutional to begin with. From the Asbury Park Press:

In a 122-page court filing submitted Tuesday, in response to four lawsuits filed by unions objecting to the reduced $681 million contribution that’s in this year’s budget, Christie’s lawyers argue, in essence, that one of the key concessions the governor made to get Democrats on board with his signature legislative achievement isn’t legal.

Democrats such as Senate President Stephen Sweeney have said the portions of the 2011 pension reforms that made retirement-system contributions a contractual obligation and gave unions the right to sue if they weren’t made were an important provision they wanted in exchange for agreeing to increase workers’ contributions for pensions and health care.

In the court filing, Christie’s administration says three separate sections of the state constitution — the debt limitation clause, the approprations clause and a governor’s veto power — overrule the pension reform’s effort to mandate pension contributions as a contractual right.

The court filing says the final word about appropriations rests with a governor, not lawmakers or judges, unless the state’s voters approve of such a change in a November referendum. As such, the state asks a judge to dismiss the unions’ lawsuits.

“Plaintiffs ask New Jersey to keep a commitment that the state was constitutionally incapable of making. The constitution forbids the Legislature from placing an unwilling populace in an eternal fiscal stranglehold. The Legislature may not incur long-term financial obligations that create an enforceable right to an appropriation without first obtaining permission from the citizenry whose budgetary options, preferences and needs will thereafter be constrained.”

Read the entire court filing here.

New Jersey Is Still Waiting For Return on Hedge Fund Investments

New Jersey Pension Returns — CREDIT: International Business Times

New Jersey is one of the most active states in the country when it comes to investing pension fund assets in hedge funds. That strategy carries risks and boatloads of fees—but it also carries potentially big returns.

Journalist David Sirota investigated the state’s investment decisions and the corresponding return data. He found that New Jersey was certainly straddled with management fees.

But the promised returns have not yet materialized. From Sirota:

Between fiscal year 2011 and 2014, the state’s pension trailed the median returns for similarly sized public pension systems throughout the country, according to data from the financial analysis firm, Wilshire Associates. That below-median performance has cost New Jersey taxpayers billions in unrealized gains and has left the pension system on shaky ground.

Meanwhile, New Jersey is now paying a quarter-billion dollars in additional annual fees to Wall Street firms — many of whose employees have financially supported Republican groups backing Christie’s reelection campaign.

Neither Christie nor the state pension fund’s top investment official responded to Sirota’s requests for comment. But to a certain extent, the numbers speak for themselves. Here’s a chart of the state’s management fees since 2009: