The board that oversees New Jersey’s beleaguered public-employee pension system received some good news yesterday as new figures showed overall investment returns finished ahead by about 7 percent last year.
While those returns didn’t live up to the 7.9 percent assumption that’s set in state law for the pension system, they marked a significant improvement over the year before, when investments generated less than 1 percent returns.
The new calendar-year figures also suggested a much better outlook for the pension system — which is deep in debt thanks to years of underfunding by the state — after figures released last year for the 2016 fiscal year showed negative returns for the first time in nearly a decade. (The fiscal year runs on a July 1 to June 30 schedule, mirroring the state budget cycle.)
The full dive into the 2016 calendar-year investment returns took place yesterday during a public meeting of the State Investment Council, the board that sets policy for the $72 billion pension system. State officials said the improvement largely occurred during the second part of 2016, with areas like equity and real estate leading the way after a poor start that included plummeting energy prices. They also released new figures for alternative investments like hedge funds and private equity that showed a slight increase in fees but an overall reduction in other costs like bonuses for performance.
The board also hosted a presentation by Jim Coulter, a graduate of Shawnee High School in Medford who went on to become the co-founder of TPG Capital, which is one of the world’s largest private-equity firms.
New Jersey’s pension system — which 785,000 current and retired workers rely on to cover their retirements — is currently underfunded by an estimated $44 billion, according to the state’s calculations, and much more by some other estimates. The pension system was also recently ranked as the worst-funded state pension fund in the United States by Bloomberg, falling below both those of Kentucky and Illinois.
To help address the funding problem, Gov. Chris Christie recently enacted a bipartisan bill that will require the state to begin making its employer pension contributions on a quarterly basis instead of all at once at the end of the fiscal year, which is the current practice. That change, set to begin in the 2017 fiscal year, should help generate better long-term investment returns by getting more money into the system earlier in the fiscal year since full years with negative returns are generally rare.
In all, the pension system saw returns totaling 7.09 percent in 2016, up from the 0.64 percent measured the year before, according to the figures released during the yesterday’s meeting. The turnaround was even more impressive compared to the 2016 fiscal year returns, which came in 0.93 percent in the red.
Christopher McDonough, director of the state Division of Investment, the agency that manages the pension system on a daily basis, chalked up the improvement to “a strong finish to the calendar year over the last couple of months,” reversing what had been a horrible start to the year.
To be sure, the better returns won’t wipe away the pension system’s overall funding problem, but they do provide some positive news compared to what’s come out in recent months. Tom Byrne, the investment council’s chairman, welcomed the improvement while speaking to reporters after the meeting ended.
“The beginning of last year was terrible for pretty much everybody, maybe a little more so for us,” Byrne said. “It was just a nasty period.”
And while the new figures for alternative investments showed that fees went up slightly, from $415.6 million to $417 million, during the 2016 fiscal year, they also showed overall expenses for the alternative investments, which included bonuses known as performance allocations, dropped from $744 million to $659 million. The alternative-investment expenses also dropped as a percentage of the total assets of the investments, the new figures showed.
“We continue to negotiate better deals,” Byrne said.
Over the last six years, the alternative-investment returns have been better compared to the returns for the overall pension system, McDonough said during the meeting. The alternative investments generated 9.19 percent returns, while the pension system itself produced returns of 8.45 percent. That difference translates into an additional $1.9 billion of value for the pension system net of all fees, McDonough said.
“It’s real money,” Byrne said. “I hope the presentation brought to light why there’s value added there.”
But Adam Liebtag, the board’s vice chairman, said while the overall picture may be improving for alternative investments, concerns still remain for hedge funds, which is one type of alternative investment.
The hedge funds have been a source of friction on the board in recent years as Liebtag and other labor representatives have questioned whether the state is getting a good overall value for the fees that it pays to Wall Street managers who run the hedge funds.
The hedge-fund stakes were recently cut in half under a new initiative that was launched by the board in August. Under that policy change, hedge fund allocations are being reduced from 12.5 percent to 6 percent, saving an estimated $127 million in fees.
Liebtag said given the overall size of the pension system, the alternative-investment fees are also something to keep an eye on even as the percentages are dropping.
“It’s still a pretty high percentage,” he said.