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10.5% Returns for NJ Public Pension System, Big Turnaround from Last Year

Investment council maintains strategy, continues to cut back hedge funds, waits to see if Legislature will take up governor’s Lottery proposal

With financial returns on state investments now rising to over 10 percent for the current fiscal year, the panel that sets investment policy for New Jersey’s beleaguered public-employee pension system has opted to stick with its current investing strategy.

A decision to keep the existing targets for stocks, bonds, and other investments when the next fiscal year begins in July was made yesterday by the New Jersey State Investment Council during a public meeting in Trenton.

Maintaining the status quo means the $73 billion pension system will continue with an ongoing effort to scale back investments in hedge funds. That policy was started last year after union officials on the panel raised concerns about pricey fees just as the investment strategy for the current fiscal year was being drafted.

The choice to stick with the current asset allocation also leaves the door open to new changes being made in coming weeks if Gov. Chris Christie’s proposal to transfer the revenue-producing state Lottery enterprise into the pension system is eventually approved by the Legislature. The lottery was recently valued at over $13 billion; its transfer could influence the panel’s investment decisions by providing a boost to a pension system that is underfunded by nearly $50 billion, according to the state’s latest official estimates, and much more by other calculations.

“We can reopen these discussions at any time,” Tom Byrne, the council’s chairman, said yesterday after the meeting. “This is the normal cycle, but if we have $13 billion in new money in July, we’ll discuss it, that makes sense.”

Much better performance

With investment returns that hit 10.5 percent through the end of April, the current asset allocation is delivering a much better performance for the pension system just weeks before the end of the current fiscal year than the plan that was in place for the prior fiscal year, which saw returns come in nearly 1 percent in the red. The pension system’s assumed rate of return is 7.65 percent.

“We’re moving in the right direction,” Byrne said during the meeting. “We compare very favorably to peers, on both an absolute and a risk-adjusted basis.”

But to be sure, the overall health of the pension system, which covers the retirements of an estimated 770,000 current and retired public workers, remains a serious concern, something union officials stressed during yesterday’s meeting. Despite Christie’s recent proposal involving the Lottery, he’s also continued a practice through two terms in office of only making partial employer contributions into the pension system, and his budget proposal for the 2018 fiscal year would deposit about half the amount that actuaries have estimated is needed to help restore the overall fund to good health.

“We can’t grow our way out of this problem with investments alone,” said Adam Liebtag, an AFL-CIO labor-organization representative who serves as the investment council’s vice chairman, during yesterday’s meeting. “We need more of a contribution from the employers, not accounting tricks, and no more continued underfunding of the contribution.”

The decision to reduce the pension system’s exposure to hedge funds was made last year after the investment council yielded a rare, deadlocked vote in its initial attempt to establish an asset-allocation plan for the 2017 fiscal year. Liebtag and other union officials sought to reduce the hedge-fund stakes from 12.5 percent to only 4 percent of overall investments, citing hefty management and performance fees that are typically paid to the outside managers of the hedge funds. Under a compromise that was eventually reached to break the deadlock, the current asset-allocation mix puts the pension system on a course to limit the hedge-fund investments to just 6 percent by the end of next year.

Lingering concerns about hedge-fund divestment

Yesterday, Christopher McDonough, the director of the Division of Investment, the state agency that manages the pension-system investments on a day-to-day basis, said the hedge-fund stakes were projected to be just over 8 percent as of June.

Eric Richard, a representative of the AFL-CIO, cast one of the only votes against maintaining the current asset allocation, citing lingering concerns about the pace of the hedge-fund divestment and the fees that are still being paid even as the Division of Investment has worked to get better terms from the outside managers. “I’m happy with the direction we’re moving in,” Richard said. “I think more needs to be done.”

It’s still unclear what impact, if any, Christie’s proposal involving the Lottery could have on pension-system investments going forward. Earlier this month, state Treasurer Ford Scudder told reporters during a policy briefing that transferring the Lottery enterprise — which generates about $1 billion in annual revenue for the state budget after jackpots are paid out — into the pension system could improve the system’s funded ratio from 45 percent to near 60 percent. The shift would also have minimal impact on the state budget because the improved funded ratio would influence the actuarial calculation of the state’s annual pension contribution, thereby lowering the required payment, Scudder said.

Democratic legislative leaders have remained open to the Republican governor’s proposal, and Senate Budget and Appropriations Committee Chairman Paul Sarlo (D-Bergen) recently said he’s planning to sponsor the legislation to set the transfer in motion. But Christie has also indicated that he may want unions to offer employee givebacks in exchange for the transfer, something labor leaders have voiced strong opposition to. With all 120 seats in the Legislature up for grabs in November, it’s unlikely that legislative leaders will buck the unions if Christie insists on getting any givebacks.

Byrne told members of the investment council yesterday that Christie’s proposal remains in a “state of flux,” but he also said it has the potential to produce a “virtuous circle” for the pension system.

“As funding ratios go up, one can easily make the case for an asset allocation that seeks slightly higher returns,” he said.

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