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New Jersey Set to Alter Pension Plan
By David W. Chen, New York Times
July 20, 2006
Prodded by a governor and a state treasurer who spent years on Wall Street, New Jersey is poised to adopt a plan that would shift about a quarter of the state’s $72 billion pension fund from the control of state employees to private money managers within the next year.
While Gov. Jon S. Corzine acknowledges that the new strategy will cost at least $200 million a year in fees and carry some risk, he says he is confident that the change will improve the state’s fiscal outlook.
In magnitude and in speed, it may be the most drastic change in any state’s pension investment policy, pension experts say. With a new emphasis on diversified investments like hedge funds, emerging markets and commodities rather than the traditional mix of stocks and bonds, the proposal will transform New Jersey from being one of the most conservative states to one of the most aggressive, along with New York, California and Oregon.
The proposal has been before members of the State Investment Council — a group of finance executives, union representatives and others — for several days, and the council’s final vote on whether to go ahead is scheduled for today.
Some financial experts who support the concept of investment diversification question whether the change is too abrupt, and the leader of one of the state’s labor unions described the proposal as a foolish high-stakes gamble.
The union leader, Rae Roeder, president of Local 1033 of the Communications Workers of America, in Trenton, said in an interview last night that her workers had been told that outside managers would eventually control as much as half the portfolio.
“They’re playing fast and loose right now with our money,” Ms. Roeder said. “Just like you’re sitting at the craps table, you can lose it all. And it’s not his money — it’s our members’ — and it’s people who are breaking their necks all these years, and all the retirees.”
The proposal also carries significant political implications for Mr. Corzine. While he earned high marks from state workers during the recent budget standoff for insisting that the state pump more than $1.1 billion into the pension fund, he runs the risk of alienating them with this proposal and souring the relationship when contract negotiations begin in a few months.
Still, it is a risk that Mr. Corzine, a former co-chairman of Goldman Sachs, readily accepts. “I’m a big believer in diversification,” he said in an interview yesterday with reporters and editors of The New York Times.
When asked about the angry reaction from the unions, he said: “They know how I feel about this. I find that sometimes it’s hard to get deep into dialogue when you look at several of the unions that are raising the most Cain about this. You look at their national retirement plans — they’re some of the most well-managed, diversified portfolios.”
In support of the new investment strategy, the state treasurer, Bradley I. Abelow, who was a partner at Goldman Sachs, is to make his first appearance before the investment council today.
In many ways, the disagreement over the investments is part of a larger policy debate over both the fiscal well-being of the state’s pension system and the philosophy behind it.
After the collapse of technology stocks in 2000, the value of the state’s fund shrank by about a third. Other state pension funds also lost money at that time, but many finance experts criticized New Jersey’s for being one of the few public retirement funds being managed by civil servants.
Even union officials outside New Jersey puzzled over why the state had been almost alone among major funds in avoiding such alternative investments as hedge funds, real estate and nontraded stocks known as private equities.
“Every other fund in the country was doing it this way, and New Jersey was doing it its own way,” said John Adler, director of private equity for the Service Employees International Union national headquarters, in New York City.
In the last five years, New Jersey’s pension fund has generated annual returns of 3.7 percent, which is about one-third lower than the returns generated by public funds with more than $100 million in assets, according to Pete Keliuotis, vice president of Strategic Investment Solutions, a San Francisco investment consulting firm that is a general consultant to New Jersey’s pension fund. In terms of risk, New Jersey’s fund has also been more volatile than most comparable funds, he said.
But Ms. Roeder and Joseph A. Golowski, a retired state auditor who is now a consultant for the Communications Workers of America, cited a trade magazine, Pensions and Investments, which has ranked New Jersey 12th best in the nation of all public and private pensions.
In addition, they noted that in the last decade, administrations under both political parties have not deposited much money into the pension.
Pension investments began to change under Gov. James E. McGreevey, who began to question whether the state was earning as much as it could. As a result, the State Investment Council turned to several money management firms to experiment with some of the pension funds. So far, it has approved more than $2 billion in new investments; that was supposed to grow to about $9 billion within five years, or 13 percent of the total pension fund.
But Ms. Roeder’s union, which represents the 60 state workers who now handle the state’s pension investments, and the New Jersey Education Association filed lawsuits to block the state’s investment plans, saying that the Legislature needed to be involved. That suit is still pending.
Even though the state began to dabble in alternative investments, Orin S. Kramer, the chairman of the State Investment Council and a prominent hedge fund manager in Manhattan, wrote in a memo to council members that overall, the current plan was a “uniquely quaint historic investment structure.” To reform the system, the memo calls for $6 billion in alternative investments; $3.9 billion in equity markets in developed countries; $1.3 billion in emerging markets; $2.9 billion in commodities; $2.2 billion to Treasury inflation-protected securities; and $2.2 billion in high-yield fixed-income, among other suggestions.
According to the memo, if the state had diversified its portfolio five years ago, the fund would have earned at least $5 billion more.
Ms. Roeder likened the proposed shift in investments to going from “a little drop to a huge waterfall.”
Governor Corzine disagreed, insisting that the plan proposed by Mr. Kramer sounded responsible and that it would be irresponsible to fail to try to improve the rate of return, given the state’s financial situation.
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