Raucous Meeting of Pension-System Managers Ends in Cliffhanger

Board deadlocks over how heavily to invest in hedge funds, with public employees pushing for 4 percent cap

angry businessmen
It was supposed to be another staid meeting of the board that oversees New Jersey’s $71 billion public-employee pension system. It ended with a dramatic deadlocked vote on a key policy issue — how heavily pension assets should be invested in hedge funds — and an equally dramatic threat from one veteran board member to immediately tender his resignation.

Just to keep the volume pumped up there were accusations from an audience brimming with frustrated public-worker union members that the male-dominated board was doing too much “mansplaining.”

And when this pecuniary tempest had blown itself out, the New Jersey State Investment Council, which includes union representatives and gubernatorial appointees, could not agree on an overall investment game plan for the fiscal year that begins July 1, something that is typically put in place by the end of May.

What’s the beef with taking a stake in hedge funds? They’re just another way to increase gains and minimize losses, and are part of a broader diversification policy that is aimed at protecting the pension system against volatility and wild swings in the stock market.

But public-worker unions and others have been highly critical of these investments, which typically require the state to pay outside fund managers millions of dollars in fees, with some portion paid no matter the performance.

Hedge-fund investments have also for many come to represent growing frustration with Wall Street and overly compensated but undertaxed executives who have enjoyed a disproportionate share of the latest economic recovery.

State pension-system officials, however, have defended their diversification strategy amid recent union criticism, citing a consultant’s report that found over the past three years the hedge funds and other so-called alternative investments have generated more than 9 percent returns net of all fee. That beats the pension system’s 7.9 percent assumed rate of return, but also the 6.6 percent gains that have been generated over the same three years by all of the system’s other, more traditional investments.

“We’ve added $3 billion in value to the pension system by investing in alternatives,” said Chris McDonough, director of the state Division of Investment, an agency within the state Department of Treasury that manages the pension system on a daily basis.

That performance has also come as Gov. Chris Christie has further strained the pension system – and his relationship with public workers — by making only partial state contributions into the system throughout his more than six years in office, even as employees have been required to pay more.

But amid the ongoing discussion of the asset-allocation plan for the next fiscal year yesterday, one of the union representatives on the all-volunteer panel raised concerns about whether the hedge funds themselves are still worthwhile investments.

Adam Liebtag, an AFL-CIO labor-organization representative, cited statistics indicating some other states have much less exposure to hedge funds, while others have decided to get out of such investments altogether. Liebtag then made a motion to cap hedge-fund investments at 4 percent during the next fiscal year, a significant reduction from the current level of 12.5 percent.

“The purpose of this motion is to send a clear message and a clear direction,” Liebtag said.

His motion also called for pension-system assets currently devoted to hedge funds be barred from being redirected into other alternative investments like private equity and venture capital that also require fees to be paid to outside managers. A recent report released by the state indicated fees for all alternative investments totaled more than $700 million during the 2015 fiscal year.

“We are supporting here a course change,” said Liebtag, who is the board’s vice chairman.

But Tom Byrne, the board’s chairman, and several other Christie appointees firmly pushed back. They pointed to new recommendations from the Division of Investment that hedge-fund stakes be eased back to 9 percent of total investments as part of the broader asset-allocation plan that’s being proposed for the 2017 fiscal year.

The Division of Investment is also already in the midst of readjusting its hedge-fund portfolio to favor those with far lower fees than the standard 2 percent charged for managing the investments and as much as 20 percent taken from all profits.

“It seems to me it’s not a good idea to engage in piecemeal decision-making,” said Byrne, a former state Democratic Party chairman who is also the founder of Princeton-based Byrne Asset Management.

And Guy Haselmann, a longtime council member with over 25 years of capital-market experience, went further, launching into a long discussion of asset allocation and diversification strategy that at times seemed to be directed specifically at skeptical union members in the audience. Amid grumbles from the audience, Haselmann continued, saying the stock market is subject to volatility and overvaluation, and bond interest rates are at extreme lows.

“The question is, where do you put the money?,” Haselmann asked.

Hetty Rosenstein, state director of the Communications Workers of America labor union, one of those represented on the board, asked if she was allowed to answer from her seat in the audience, but Byrne interrupted, saying normal practice is for public comment to come at the end of the meeting.

But she went on to characterize Haselmann’s long-winded comments as “mansplaining,” a slang term for explanations made by men to women that are typically considered to be condescending in nature.

Later, as the panel prepared to vote on Liebtag’s motion, Haselmann threatened to resign if the motion were successful, citing a fiduciary duty to do what’s best for the overall health of the pension system. He said he could eventually be in favor of the reduction sought by Liebtag, but only if it came as part of an overall recommendation made by the Division of Investment after thoughtful review.

“The process has been hijacked,” he said. “This is not the way you do it.”
But Haselmann didn’t have to resign because the vote ultimately deadlocked at 7-7. Adding to the drama was the initial announcement of an 8-6 win for Liebtag’s motion that was based on an incorrect tally that was later rescinded.

The council is supposed to have 16 members, with gubernatorial appointees holding a slight edge over union representatives. Right now, however, there are two gubernatorial vacancies, something that in theory should temporarily increase the clout of the unions. But yesterday, Andrew Michael Greaney, the State Troopers Fraternal Association representative, voted with the gubernatorial appointees against Liebtag’s motion.

So it’s unclear what happens next. The board isn’t supposed to meet again until August, which would be after the new fiscal year begins. Byrne, in response to a suggestion from Liebtag, said a special meeting could be held next month if it could fit into the schedule of the other councilmembers. And if the deadlock continues beyond July 1, treasury officials said the Division of Investment would simply follow the previous fiscal year’s asset-allocation plan on a temporary basis.

After the meeting ended, Liebtag and Eric Richard, another union representative on the panel, said they were frustrated with the outcome, but promised to keep pressing for more changes.

“We’re committed to following through on this,” Liebtag said.

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