Change Urged to Diversify Pension Fund in New Jersey

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Change Urged to Diversify Pension Fund in New Jersey

By David Kocieniewski, The New York Times

September 19, 2003

Seeking support for a plan that would allow private investment managers to run part of New Jersey's $60 billion pension portfolio, the McGreevey administration released a consultant's report today that urges the state to reduce its risk by diversifying its investments.

New Jersey's employee pension system, the only public retirement fund in the country managed solely by civil servants, lost about a third of its value during the stock market slump of the past three years. Although the losses were comparable to the drop in the market, State Treasurer John E. McCormac has argued that the state can get better returns, and assume lower risks, if it hires professional investment managers to run the fund.

Despite opposition from state employees' unions, Mr. McCormac hired the consulting firm Independent Fiduciary Services to analyze the system. The firm recommended that the fund, which now invests only in stocks and bonds, begin investing in hedge funds and venture capital. State law does not permit public employees to invest in hedge or venture funds, so such a move would require the state to hire private managers.

"This report makes it clear that New Jersey should diversify, seek a safer balance and better control of risk," Mr. McCormac said.

But leaders of the state employees' unions have bitterly opposed the proposal to use private fund managers, saying it would be too costly and open the door to influence peddling.

New Jersey's pension system was established 50 years ago, after a scandal involving elected officials who had steered consulting contracts to politically connected investors, and union leaders say it has delivered a return on the fund's money. Jim P. Marketti, a union leader, said if the state allowed private fund managers to run the system, elected officials would be able to reap huge amounts of campaign donations. But he worried that public employees might see their retirement security placed at risk.

Gov. James E. McGreevey's administration has tried to ease concerns by promising to enact strict rules to prohibit managers of the employees' pension fund from making political donations. Orin S. Kramer, chairman of the state investment council, said he would also favor extending the ban on campaign contributions to those who might be acting on behalf of fund managers.