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Fine Print: Revamping the Rules for Reporting Fees State Pays for Investments

Legislation calls for more openness in divulging details of how funds are handled, seeks to widen ban on ‘pay to play’ contributions


What it is: Lawmakers have sent Gov. Chris Christie a bill, S-2430, that would expand the way investment and pension fees that New Jersey pays to outside managers are publicly reported, including requiring such information to be posted online every few months.

The legislation would also beef up rules that ban the investment of New Jersey pension funds in firms if their "investment management professionals" have made political contributions to state candidates or political committees within two years. That ban would expand to include national political organizations and other outside groups that have begun playing a larger role in recent New Jersey elections.

The legislation was introduced last year as questions were raised about the fees, the state’s overall pension-system investment decisions, and some political contributions made by outside pension-fund managers.

The bill also came as the state Department of Treasury reviewed a 2011 state pension investment in a venture-capital fund with ties to then-Massachusetts gubernatorial hopeful Charlie Baker, who made a contribution the same year to the New Jersey Republican Party.

Treasury ultimately determined that although Baker, who is now governor of Massachusetts, was at the time an investment management professional with the firm General Catalyst, he was not an investment management professional affiliated with the firm's fund that the pension system was invested in.

What it does: The bill would require the State Investment Council, the panel that oversees the roughly $80 billion pension system, to issue detailed reports four times a year on funds handled by outside managers. The reports would have to disclose the rate and the amount of fees charged by the outside managers by asset class, including commodities, hedge funds, private equity, real estate, bonds, equities, or any other class.

The reports would be submitted to the governor, the state treasurer and the Legislature. They would also have to be posted on the state’s website.

The legislation would also extend current restrictions on state-level political contributions by investment management professionals hired by the pension system to national groups, like the Republican Governors Association and the Democratic Governors Association, and other non-state political committees.

Role of alternative investments: The pension system for years has invested a portion of its assets in hedge funds, venture-capital firms and other so-called alternative investments as a way to diversify its overall portfolio. The goal, pension officials say, is to maximize returns while also mitigating risk.

But those investments also require the state to pay management fees to the outside fund managers, and those fees totaled roughly $265 million during the last fiscal year, according to the latest State Investment Council annual report.

In addition to the management fees, those managers are also rewarded if they earn the state money on its investments, something the state describes as “carried interest” but others have termed a performance fee.

As the investments have proven successful, the amount of money earned for performance fees has increased, totaling roughly $335 million during the last fiscal year.

Pension officials have defended the total amount, roughly $600 million, as worthwhile given the success of the individual investments and the pension system as a whole, which more than doubled the 7.9 percent assumed rate of return during the last fiscal year.

But critics have argued such returns could be realized through more traditional investments without having to siphon off money for the private managers. For example, an analysis released last week by New York City Comptroller Scott Stringer questioned whether outside fund managers added any real value to the city’s pension system – which is roughly twice the size of New Jersey’s -- over the last 10 years, even as its traditional investments have also fared well.

Political contributions: Lawmakers have also raised questions about political contributions made by the outside managers and whether the state’s pay-to-play law has been able to keep pace with the current campaign-finance landscape following the U.S. Supreme Court’s landmark 2010 Citizens United ruling.

That decision has allowed groups registered under federal rules to play a bigger role in New Jersey elections while not having to abide by the state’s campaign-finance laws, including strict contribution limits. Under federal rules, they can do so as long as they don’t directly coordinate with a candidate or committee in the state.

An ethics complaint filed last year by the New Jersey AFL-CIO labor union identified more than $700,000 in contributions from private pension fund managers that were made to national Republican organizations. But pension officials have maintained that disqualifying such contributions would force the state to get rid of some of its most successful investments. Still, they said during a public meeting last month that the current regulations would be revisited.

Pension contributions: The questions being raised about the investment fees and political contributions have come against the backdrop of Christie’s decision to break a promise to begin increasing state payments into the state pension system after years of underfunding by Christie, a Republican, and other governors from both political parties.

The skipped or partial payments have left the pension system with an unfunded liability of between $37 billion and $83 billion depending on which accounting standards are applied.

And in the last fiscal year there was a compounding effect: Every dollar held back by the governor also cost the pension system some more investment gains, whether traditional or alternative, that would have been realized had the full payment been made.

Public-worker unions are challenging Christie’s decision to reduce the pledged payments, by a combined $2.45 billion over the last two fiscal years, to help solve state budget problems.

The state Supreme Court has decided to pick up the case, with oral arguments scheduled for May 6.

Christie, meanwhile, has also proposed sweeping pension reforms. His plan involves freezing the current pension system and replacing it with a new retirement plan with features of a 401(k). He would also offer employees less-generous health coverage to help pay down the current pension system’s debt.

What happens next: The bill went to Christie’s desk after passing the state Assembly by a 53-15 margin in late February. It was previously passed by the Senate, 23-8, in October. That means the 45-day window Christie has to act on the legislation is already well underway. A spokesman said yesterday that the measure is currently “under review.” -

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