Alarm Over NJ Pension System’s Ties to Foreclosures in Puerto Rico

John Reitmeyer | February 2, 2018 | Budget
Members of state investment council make clear they would not be comfortable if pension fund profited from the hardships of Puerto Ricans

Hurricane Maria Puerto Rico
Four months after being crushed by Hurricane Maria, Puerto Rico is bracing for a mortgage crisis, with many residents now way behind on their payments. And some 1,500 miles away, policymakers for New Jersey’s public-employee pension system are trying to make sure investments that were launched here years ago don’t make the situation worse.

Members of the New Jersey State Investment Council were recently notified that two private equity funds that the pension system owns significant stakes in have financial ties to companies that are pursuing foreclosures on the devastated island.

The private equity funds are part of the $77.5 billion pension system’s substantial alternative-investment portfolio, and private equity was a top performer for the system during the 2017 calendar year, according to the latest returns reviewed during the investment council’s public meeting yesterday. In all, the pension system enjoyed returns totaling nearly 15 percent last year, which more than doubled the 7 percent assumed rate of return.

Right now, the federal government has placed a moratorium on most foreclosure proceedings in the wake of the storm, but that is due to run out next month. It’s uncertain what will happen once the moratorium expires, but the council members made it clear during a public meeting yesterday that they are not comfortable seeing the pension fund profit from the hardships being faced in Puerto Rico.

“I don’t think any of us are looking to make three extra basis points on this fund by throwing people out of their homes in Puerto Rico,” said Tom Byrne, the panel’s chairman.

Maribel Soto, an Elizabeth resident, addresses members of the New Jersey State Investment Council in Trenton yesterday.
Byrne spoke about the issue moments after the panel heard from Maribel Soto, a resident of Elizabeth who said she is originally from Puerto Rico. Speaking through an interpreter, she told the council about the difficulties many on the island are now dealing with when it comes to their mortgages. She demanded that the state halt any new investments in the two equity funds, the Blackstone Group and TPG Capital.

Taking advantage

“It’s unjust that companies are taking advantage of people at such a moment,” Soto said. “Our state must take a stand.”

Byrne, and other council members assured her that no new investments are being considered with either fund right now. They also voted to urge TPG to engage in dialogue with advocates for the Puerto Rican residents, something that Blackstone has been willing to do, and suggested they may get more involved in the issue going forward.

The pension system’s ties to the companies pursuing foreclosures in Puerto Rico are rooted in a diversification strategy that the investment council launched more than a decade ago as it sought to protect against major losses that can occur during a market crash. The diversification strategy relies in part on so-called alternative investments like hedge funds, venture capital, and private equity.

Far less control

But the alternative stakes can also give state pension officials far less control compared to some of the more conventional investments that are managed in-house by the Division of Investment, which is an agency within the Department of Treasury. For example, in 2015, the investment council faced pressure to get rid of a stake in another private-equity firm, JLL Partners. That came when its ties to a Texas-based payday lending firm that was fined after being accused of heavy-handed lending practices were brought to the panel’s attention. The practice of payday lending is prohibited in New Jersey, and the council ultimately decided to unwind the investment.

According to recent reporting by the New York Times, an estimated 90,000 borrowers in Puerto Rico fell behind on their mortgages as a result of Maria, which hit the island last September. Thousands of New Jersey residents faced similar challenges in the wake of 2012’s superstorm Sandy as they were forced to pay rent for temporary housing and also cover the mortgages on their damaged homes.

In Puerto Rico, some of the owners of the mortgages include major investment banks like Goldman Sachs and Credit Suisse, but also companies with ties to TPG Capital and Blackstone, the New York Times reported.

Jim Baker, from the Private Equity Stakeholder Project, told the investment council yesterday that some of the foreclosures are not just conventional mortgages, but also reverse mortgages that have been set up with senior citizens who are required to make property tax and homeowners insurance payments in order to receive payouts.

Baker urged the panel to get involved in the issue, saying the federal moratorium on foreclosures is “fast approaching” and it’s still not clear what is going to happen once it passes. Baker said he would like to see the moratorium extended for another year, which is something four U.S. senators, including New Jersey’s Robert Menendez, have asked the federal government to do.

‘…worst kind of vulture activity’

Christopher McDonough, director of the Division of Investment, said his agency has been in contact with the two firms to get more information about the foreclosure issue, but he declined to discuss the matter in more detail during the public meeting yesterday.

“I feel it would be unfair to comment at this point because we have not had an opportunity to review all of the information available to us,” McDonough said.

But the panel did agree in a unanimous vote that it would press TPG to open lines of communication with Baker and other advocates for the Puerto Ricans. Adam Liebtag, the investment council’s vice chairman, led that effort, saying he could envision a scenario in which Puerto Ricans are being served foreclosure papers filed in federal court that would not be in their native language, and at locations where they could not live on regular basis due to the storm damage.

“That’s just the worst kind of vulture activity and I don’t think anyone up here wants to be involved with that,” Liebtag said.