Christie's Wall St. Donors Won Huge Contracts, Sucked Out Fat Pension Fees
Why shouldn't I help my friends get richer?Credit: Gage Skidmore
March 17, 2014

This was Chris Christie's much-vaunted "pension reform" [The Nation, firewalled] -- namely, move the money to private firms run by contributors who take big fees and make high-risk investments. I wish more voters understood these issues, because all they hear is "reform" and they assume it's good. It's not. Public money should be invested conservatively, and under the greed mentality of the 90s, it wasn't. It has cost the public big-time, as we see in the attacks on public pensions:

State pension plans that rely on hedge funds and other so-called “alternative investments” perform worse overall than those with more conservative strategies such as Treasury notes or the S&P 500, according to many studies, including recent reports from the Maryland Tax Education Foundation and Yale professor Roger Ibbotson. Critics charge that hedge funds not only are far more risky investments, but also that they produce less value because they carry hefty management fees and are entitled to a portion of future profits.

Early in his administration, Christie appointees at the Division of Investment pledged to double its allocation for “alternative investments,” with a goal of moving 33.2 percent of the $74.7 billion fund into an array of hedge funds, private equity firms and real estate deals. “For large pools of capital, I think it’s prudent to have both private equity and hedge funds as part of the mix of a diversified portfolio,” said Grady in 2010, shortly after voting to substantially increase the amount of New Jersey pension funds managed by hedge funds and other alternative investments.

“This started with Corzine,” says Hetty Rosenstein, head of CWA New Jersey, part of the Communications Workers of America, a union that represents many public workers in the state. “Many years ago, these investments were very conservative. But now they’ve changed that, and we’re invested in hedge funds and much more volatile investments from outside managers with high fees.”

According to industry reports, New Jersey now has the second-largest allocation in the country of state retiree money being managed by hedge funds. In 2013, the New Jersey pension program delivered a return of 11.79 percent—lower than the pension median of 16.1 percent that year. Part of the lower return, according to analysts, related to the amount allocated to alternative funds rather than to US equities. Fees also contributed to the smaller return. For example, hedge funds typically charge a 2 percent management fee on top of a 20 percent performance fee. The fees can quickly eat into any future gains, while making losses even more painful. In contrast, index funds or other, more traditional investments carry few (if any) fees.

A spokesperson for the Division of Investment disputed this characterization, claiming that any shortfall in the New Jersey pension fund’s performance in 2013 was the result of its relatively diversified portfolio, which has contributed to its steady performance in recent years.

But for critics, the long-term risks and the fees attached to alternative investments simply don’t justify the payoff. Chris Tobe, a former trustee of Kentucky Retirement Systems, estimates that outside money managers for the alternative investment program earned about $1.2 billion in management and performance fees from New Jersey’s public pension plan in 2013. “No wonder Wall Street loves Christie,” Tobe remarks. He estimates that in 2013 alone, Loeb’s fund collected nearly $5.2 million in fees from the New Jersey public pension fund, while Singer’s fund collected about $8.6 million.

The push for bigger investments in hedge funds was not a unanimous decision. James Marketti, a union representative on the State Investment Council, protested the move vehemently.

“I objected to the alternatives continually, because they are inherently more risky and certainly more corrupt,” Marketti says. He’s a retired former president of CWA Local 1032 and served on the board from 2008 to 2012 as the AFL-CIO Public Employee Committee representative. He says he presented research to the board on the fees associated with alternative funds, but he was also suspicious of finance industry cronyism.

“They all do business with that side of the universe,” Marketti says, pointing out that the Corzine and Christie administration appointees to the Division of Investment maintained cozy relationships with the same private equity and hedge fund managers that have won large state pension contracts.

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