Greater Transparency Urged for Political Donations by Private Pension Managers

Fund managers who handle billions in state’s assets currently required only to ‘self-report’ contributions

Credit: NJTV
Sen. Robert M. Gordon (D-Bergen and Passaic) chairs the state Senate Legislative Oversight Committee.
By law, when state government hires an engineering firm or a construction company, any political contributions made by the company and its executives are generally listed in a searchable online database if the contract is worth more than $50,000.

But when New Jersey’s pension system hires private fund managers to handle some of the retirement system’s roughly $80 billion in assets, the state asks the investment professionals to “self-report” to pension officials any contributions they’ve made to state candidates or political parties.

Contributions made within a two-year window that are worth more than $250 would generally disqualify any investment in the private fund.

Yet there’s no searchable database to show whether the private fund managers — some of whom are overseeing investments that can be worth hundreds of millions of dollars — have made any political donations.

Now, at least one state lawmaker who’s looked closely at the deals with private fund managers this year wants that to change. And pension officials themselves are also reviewing their rules because numerous concerns have been raised about expensive fees and possible political interference.

Public-records requests for information on the private-fund investments can also take months to fulfill. For example, the state Department of Treasury has asked for several extensions in response to a request for public records submitted by NJ Spotlight in early August. The request filed under the state’s Open Public Records Act sought due-diligence materials, including political-contribution disclosures, which were prepared for review in advance of the New Jersey State Investment Council’s July 22 meeting.

During that meeting, three private-equity and two hedge-fund investments were considered, with the investments potentially worth up to $1 billion in the aggregate.

Treasury’s latest request for an extension establishes Sept. 28 as the new date for the agency to provide the materials sought by NJ Spotlight. The council’s next meeting, meanwhile, is scheduled to be held in Trenton tomorrow.

Still, New Jersey scored an “A” on pension-fund transparency as part of an overall “B+” grade in state-by-state accountability rankings released in May by the Washington, D.C.-based Center for Public Integrity. Changes to ethics rules that were made over the years in response to a string of scandals have put New Jersey ahead of other states in several categories, including lobbying, contract procurement and auditing, the group found.

State lawmakers earlier this year tried to tighten the pension-system regulations that apply to the hiring of outside fund managers, including requiring regular disclosure of fees paid to the fund managers and banning political contributions to national organizations like the Democratic National Committee and the Republican Governors Association.

Their efforts — which were vetoed by Gov. Chris Christie in May — came in response to concerns raised over the last year about the growing value of the fees and carried interest being paid to the fund managers, and the political contributions that some have made in recent years despite New Jersey’s contribution ban.

In one case, Treasury performed an audit of a $15 million investment in a venture-capital firm launched in 2011 after news reports revealed that one of its investment-management professionals made a $10,000 contribution that same year to the New Jersey Republican Party.

The audit determined that the investment-management professional, Charlie Baker, was not affiliated with the specific fund that the pension system was invested in. Baker, who like Christie is a Republican, is now the governor of Massachusetts.

The investment council, after conducting another review of a campaign contribution earlier this year, voted not to disqualify an investment in Prologis Management, another equity fund the pension system has a stake in. The decision came after the discovery of a $1,000 contribution to state Sen. Ray Lesniak (D-Union) in 2013 by an investment-management professional affiliated with Prologis.

Questions questions were also raised in March when the investment council reviewed an up to $100 million stake in a private-equity firm whose chairman gave more than $2 million to the Republican Governors Association, a group Christie recently led that has also supported his runs for governor.

[related]The council allowed the investment to move forward since the contributions made to the RGA, first reported in an International Business Times story, were not technically covered by the state’s contribution ban despite Christie’s involvement. That’s because the state rules only apply to state candidates and political parties located here.

Still, after the audit was prepared in the wake of the Baker contribution, some members of the investment council raised concerns about the current regulations, suggesting definitions could be updated to tighten up the language and clarify the rules.

A spokesman for the Department of Treasury said yesterday that a subcommittee of the investment council held its first meeting earlier this summer, but the current rules remain in place.

“No changes have been made to the regulations at this point,” spokesman Christopher Santarelli said.

The pension system, which covers an estimated 770,000 current and retired state employees, has taken positions in hedge funds, private equity and other so-called alternative investments as part of a broader diversification strategy that is aimed at protecting the retirement system against fluctuations in the stock market. But the strategy has also come under fire, especially as Christie’s profile has grown nationally.

Last year, the AFL-CIO labor organization filed an ethics complaint asserting that a series of contributions to groups not directly covered by the state’s pay-to-play rules were nonetheless improperly influencing investment decisions — a charge strongly denied by pension officials.

Senate Legislative Oversight Committee Chairman Robert Gordon (D-Bergen) said it makes sense for the pension system to consider creating its own searchable database of political contributions made by the private fund managers.

Gordon led a hearing held in June that scrutinized the fees and carried interest being paid to the private fund managers, payments that totaled $600 million during the 2014 fiscal year.

“I’m all for greater disclosure,” he said.

Lawmakers sought to ban the contributions to the national political organizations, noting they’ve become a powerful force in elections at all levels in New Jersey in the wake of a 2010 U.S. Supreme Court ruling that loosened up federal campaign-finance rules. But Gordon said it may be more appropriate to require the private fund managers to simply disclose any contributions they’ve made to such groups.

That would take the pension-system regulations a step beyond the database that’s set up for general state contracts.

“I would prefer disclosure rather than an outright prohibition,” Gordon said.

Union officials, meanwhile, are also pressing forward with their push for more scrutiny of the investments handled by the private fund managers. After conducting their own review that suggested investments handled by in-house staff are performing better, the union officials have pressed the investment council to authorize an independent cost-benefits analysis.

“We expect alternative investments will again be brought up for discussion at this week’s meeting, because pensioners’ request for a cost-benefits analysis of alternative investments has not been honored,” said Charles Wowkanech, president of the New Jersey AFL-CIO.