The Christie administration has finally released the results of its investigation of pay-to-play allegations against an ally of the governor, newly elected Massachusetts Gov. Charlie Baker, finding that state’s investment of millions of pension fund dollars with a company Baker worked for did not run afoul of the law.
Baker, who Christie campaigned for last year and whose inauguration he attended earlier this month, gave the New Jersey Republican State Committee a $10,000 contribution in May 2011. Seven months later New Jersey agreed to invest up to $15 million with General Catalyst Partners, the Massachusetts venture capital firm where he worked.
New Jersey’s pay-to-play law bars contracts with firms whose “investment management professionals” have made political donations in the state in the previous two years.
A state Treasury audit released last night found that while General Catalyst listed Baker as a partner, he did not provide “investment management services” to the state that would make him subject to pay-to-play restrictions under the law. Treasury auditors found he provided such services to a different unit of General Catalyst than the one where New Jersey placed its investment, so the company was not required to report his earlier political contribution.
The auditors noted that “people of like mind can draw different conclusions” on their interpretation of the state’s pay-to-play policy, and recommended that the definitions of employees subject to the law should be clarified. The state Division of Investment said in a written response that “there are inherent difficulties in attempting to craft more precise definitions that will encompass the multitude of organizational structures in the thousands of existing alternative investment funds in the marketplace.”
The revelation of the investment deal last year sparked anger in both states and charges that Christie was using pension fund investments to reward contributors to Republican organizations. The NJ AFL-CIO subsequently filed an ethics complaint against the State Investment Council, which oversees pension investments, and the council’s chairman at the time, longtime Christie political adviser and former Carlyle Group partner Robert Grady.
The union said fees paid to politically connected fund managers had more than tripled under Christie to $398 million in 2013, and criticized the council for approving a management deal with Carlyle while Grady was still drawing income from his stake in the firm. Grady stepped down from the council in November. New Jersey’s $9.7 million investment with General Catalyst was sold in September for $14.1 million, earning the state a 46 percent return.
An NJ AFL-CIO spokeswoman said last night that the organization had not seen the Treasury report and could not comment.
The audit of the politically charged pay-to-play allegations against Baker was originally supposed to take a few weeks, but it was only released last night after the Investment Council’s Acting Chairman Tom Byrne mentioned its findings at the end of a council meeting yesterday afternoon. The audit is dated as having been completed November 20.
Asked about the lengthiness of the audit, a Treasury spokesman said, “The issues that the audit reviewed raised novel legal questions, so the auditor had to seek legal advice from the Attorney General’s office.” The statement did not address the two-month delay in releasing the report after it was completed.
Compared to another pay-to-play situation the council discussed yesterday, involving a contribution to state Sen. Raymond Lesniak (D-Union), the investigation of the Baker case “was more complicated,” Byrne said. “Did that justify eight months? I don’t know. I think there were more nuances in that situation.”
“I don’t think politics played any role in the investment decision,” he said, referring to General Catalyst. “We pretty much bend over backwards to avoid any political influence or the appearance of it.”
During the meeting the Investment Council addressed the Lesniak contribution by voting to approve an exemption from the pay-to-play law. Eugene Reilly, a senior executive at San Francisco-based Prologis, made a $1,000 contribution to the senator in April 2013, but when the state agreed to invest with the company five months later, Prologis reported that its executives had not made any reportable political contributions.
Prologis later said that Reilly had forgotten about the contribution. A Division of Investment investigation agreed that the violation was inadvertent, found that Lesniak had not communicated with the agency’s staff, and pointed out that its investment with Prologis “continues to perform extremely well.” The investment is expected to earn the state $250 million to $325 million over 10 years, according to Division of Investment Director Christopher McDonough.
Byrne, a private-asset manager who is the son of former Gov. Brendan Byrne and a former chairman of the state Democratic party, said pay-to-play laws were created to stop “blatant” efforts to influence state contracts, but added that he was concerned about the “chilling effect” on the political process if people feared contributing to friends’ campaigns.
The State Investment Council voted 8-0, with 4 abstentions, to allow an exemption from the pay-to-play rule for Reilly. Among those abstaining was Adam Liebtag, president of Communications Workers of America Local 1036 and the AFL-CIO representative on the council. He has previously called for stiffer pay-to-play restrictions on investment managers and had pressed the Treasury to finish the Baker audit.
“I’m concerned with the overall interpretation and application of this rule. As we know, there is at least one other complaint that is still under inquiry as of right now,” he said, referring to the General Catalyst audit whose findings Byrne announced a moment later.
The pay-to-play investigations have played out against a larger struggle over the state’s pension liabilities.
Christie last year responded to a shortfall in tax revenues by cutting state pension contributions by $2.4 billion over two years, reneging on a law he signed that would have reduced the state’s unfunded liability over seven years. A Superior Court judge is expected to rule soon on a suit by state employee unions that seeks to force the governor to make the mandated payments. Christie is also expected to describe his pension payment strategy in his proposed 2016 budget next month.
Byrne is a member of a Pension and Health Benefits Study Commission established by Christie last August to write a report recommending solutions to the pension crisis. Byrne did not know when the report will be released and declined to say what the commission would recommend.
“I’m surprised it’s not out yet. The commission is basically done with its work,” he said. Byrne said he was comfortable with the report’s “general direction,” but would put out a statement when it is released indicating where he “might have come out just a little bit differently.”
“This is such a huge problem,” he said. “We took some of the smartest actuaries in the country, and there are really only limited options for dealing with this. It’s not like we have a menu of, ‘Hey, here’s 10 different ways to close a gap of at least $37 billion, and maybe considerably more.’”
The State Investment Council helps guide the Treasury’s investment decisions but is not involved in calculating the state’s pension liability or making its annual contributions. It oversees $76.8 billion in pension-related assets for over 773,000 retired and active government workers and others. Its investment return for the bulk of its funds was 7.3 percent last year and 6.8 percent over 10 years, according to figures released for its annual meeting yesterday.
The meeting yesterday was highlighted by an opening question-and-answer session with former U.S. Treasury Secretary Timothy Geithner, who is now president of Warburg Pincus, one of the state’s pension investment managers. Geithner was generally bullish on the U.S. economy, saying he saw foresaw ongoing growth here even as Europe and Japan encounter huge economic challenges.
“We’re tremendously lucky in terms of our resources and energy. We have a manufacturing sector that’s coming back very strong relative to almost any major economy in the world. We still have a tremendously dynamic, innovative economy,” he said. “The economy, even though it’s been growing now for five years … We don’t seem to be close yet to approaching the natural limits of that.”
But Geithner also said the recovery had been paid for in part by cuts in federal spending on infrastructure, and argued the country can afford to invest more to update aging facilities and boost employment. He said the United States already had very high rates of poverty before the last recession and recent economic growth had not reversed that long-term trend.
“We are not close to the frontier of using available policies to try to mitigate some of those things,” he said. “Even when we’ve had a longer period of growth above potential, and unemployment rates are back towards more normal levels, and income growth starts to increase again, we’re still going to left with very high rates of poverty and a diminished faith in the equality of opportunity, and that’s a generation’s challenge.”