Hearing Looks at Whether Private Money Managers Deserve Big Bonuses, Fees

With private money managers investing about 30 percent of funds in state’s pension system, committee wants to know if ‘alternative investments’ are paying off

Credit: NJTV
Sen. Robert M. Gordon (D-Bergen and Passaic) chairs the state Senate Legislative Oversight Committee.
It’s been roughly a decade since New Jersey decided to let private money managers play a bigger role in state pension-system investments, and now lawmakers want to take a close look at whether the policy shift has paid off for beneficiaries.

The Senate Legislative Oversight Committee will hold a hearing in Trenton tomorrow morning to both evaluate the performance of so-called alternative investments and to see whether those stakes in hedge funds and other nontraditional investments are worth the millions in fees and performance bonuses that fund managers have collected from the state in recent years.

The hearing comes as unions have repeatedly criticized the size of those fees and bonuses, as well as political contributions that have been made by some private money managers who’ve received them. State pension officials, meanwhile, have staunchly defended the alternative-investment strategy as a sound way to mitigate risk while maximizing returns. They also say the criticism has been based on several misconceptions.

The timing of the hearing also coincides with a looming decision from the state Supreme Court over funding for the $80 billion pension system, which covers roughly 773,000 current and retired employees.

Pension-funding issues have dogged Gov. Chris Christie for much of the past two fiscal years after he broke state law requiring a series of escalating contributions over a seven-year term to help address New Jersey’s budget problems. Public-worker unions sued to enforce the pension-funding law, saying the required contributions are crucial to restoring the health of the chronically underfunded pension system. A decision could come from the high court at any time.

Democrats who control the Legislature criticized Christie, a Republican, earlier this year after he rejected a bill that would have extended political-contribution limits for private money managers and upgraded fee-reporting requirements.

But the hearing set for 10:30 a.m. tomorrow has been billed as more of a fact-finding mission. It was under former Democratic Gov. Jon Corzine — who had a long career on Wall Street before taking office in Trenton in 2006 — that the state shifted its investment strategy to focus more on alternative investments and the use of outside money managers.

“Today, $3 out of every $10 in our pension system is invested in hedge funds, private equity, real estate or other alternatives,” said Sen. Robert Gordon, who chairs the Senate Legislative Oversight Committee.

“It is time that we engage in an honest assessment of where New Jersey stands relative to other large pension systems and determine if these investments are truly worth the fees,” said Gordon (D-Bergen).

[related]In recent years, Gordon’s committee has held hearings on the administration of New Jersey halfway houses by outside companies and issues that have arisen during the state’s ongoing recovery from 2012’s superstorm Sandy.

The committee tomorrow is expected to take testimony from Tom Byrne, who chairs the New Jersey State Investment Council, which sets policy for the pension system, and Chris McDonough, the director of the state Division of Investment, an agency within the Department of Treasury that manages the pension-system investments on daily basis.

Byrne, a Democrat who founded Princeton-based Byrne Asset Management, last week defended the use of alternative investments during an investment council meeting and said the payment of fees and bonuses to the outside money managers — they totaled roughly $600 million during the last fiscal year — means the investments have proven fruitful for pension beneficiaries.

State Treasurer Andrew Sidamon-Eristoff said during a recent Senate Budget and Appropriations Committee meeting that the amount of money New Jersey is spending on fees and bonuses for outside money managers is “below the average for peer large public-pension funds.”

Such money managers are usually paid a standard fee to manage pension-system investments for the state, and then can earn bonuses if those investments exceed established performance benchmarks.

“The Division of Investment has aggressively negotiated preferential terms and governance rights across all alternative investments that incentivize strong performance, ensure the alignment of interests and have generated significant cost savings,” Sidamon-Eristoff said, according to his prepared testimony.

New Jersey is now devoting about 30 percent of the pension system’s assets to alternative investments, after first looking at such investments as a diversification strategy as early as 2002, the treasurer said.
But Gordon said he wants to spend time tomorrow comparing the performance of the alternative investments over the past decade with other investment options and discussing whether that performance justifies the fees that are being paid out.

Other officials invited to attend the hearing include Adam Liebtag, a member of the investment council who represents the AFL-CIO labor union, and Tom Bruno, chairman of the Board of Trustees for the Public Employees’ Retirement System, one of the individual retirement funds that makes up the pension system.

The bill that Christie vetoed on May 4 would have required the state to submit reports on fees paid to outside money managers every few months. Christie, in a conditional veto message, said he prefers annual reporting.

The measure also would have expanded current political-donation restrictions that cover contributions made by private money managers to state-level candidates and political committees. The bill would have also banned them from contributing to independent expenditure groups such as the Republican Governors Association and Democratic Governors Associations, since those entities and others like them have played increasing roles in recent New Jersey elections.

But Christie said those groups, which are registered under federal Internal Revenue Service rules, are subject only to federal restrictions and not state law.

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