STUMP » Articles » Public Pensions Watch: Alternative Asset Classes, pt 2 of many, New Jersey » 3 September 2014, 01:34

As per yesterday’s post, I’m taking a multi-day look at the use of alternative asset classes by public pensions.

Today’s installment is New Jersey

Gov. Chris Christie’s administration openly acknowledged that more New Jersey taxpayer dollars were going to land in the coffers of major financial institutions. It was 2010, and Christie had just installed a longtime private equity executive, Robert Grady, to manage the state’s pension money. Grady promoted a plan to put more of those funds into riskier investments managed by Wall Street firms. Though this would entail higher fees, Grady said the strategy would “maximize returns while appropriately managing risk.”

Four years later, New Jersey has secured only half the promised results. The state has sent more pension money to big-name Wall Street firms like Blackstone, Third Point, Omega Advisors, Elliott Associates and Grady’s old firm, The Carlyle Group. Additionally, the amount of fees the state pays financial managers has more than tripled since Christie assumed office. New Jersey is now one of America’s largest investors in hedge funds.

The “maximized returns” have yet to materialize.

Between fiscal year 2011 and 2014, the state’s pension trailed the median returns for similarly sized public pension systems throughout the country, according to data from the financial analysis firm, Wilshire Associates. That below-median performance has cost New Jersey taxpayers billions in unrealized gains and has left the pension system on shaky ground. Meanwhile, New Jersey is now paying a quarter-billion dollars in additional annual fees to Wall Street firms — many of whose employees have financially supported Republican groups backing Christie’s reelection campaign.

Sounds familiar, doesn’t it?

I want to note something here: this is written by David Sirota, infamous for his punching-for-pictures technique. That’s not exactly relevant, but I thought I’d disclose that info.

Sirota has been pretty good in following various private equity-public pension deals, and he’s not being particular as to the state or political party being hit.

This makes for an interesting nonpartisan muckraking, as I’m definitely no lefite and Sirota’s no conservative. I’ve noticed this all over the place — from extremely leftist to extremely conservative to everywhere in-between, people on the outside of these deals find them very questionable indeed.

I’m not checking their calculations, but here are some graphs with regards to the impact of these investments.

Seems fair – they show the years where NJ outperformed.

Now John Bury had a different take on the same information

The story first appeared in the International Business Times (IBT) with lots of charts under the screaming headline:

Gov. Christie Shifted Pension Cash to Wall Street, Costing New Jersey Taxpayers $3.8 Billion

Today it was picked up by AOL, Esquire, and Daily Kos all using the angle that Christie wants to take money from retirees barely scrimping by so he can give it to his Wall Street friends who then donate to political campaigns of his choosing. But is that the real story?

Is the national median return for Public Pensions for 2014 really 17.39%? What plans are they sampling and where did they get their information? Was that net of expenses?
……
The $125.1 million and $398.7 million numbers are taken from these pages of the respective State Investment Council (SIC) Reports for the two years. However what is not figured in is that these fees are generally on a percentage of assets basis and the amount in Alternative Investments went way up in those four years. As of June 30, 2009 they were reported to be $7.3 billion while as of June 30, 2013 according to audited report there were $20.23 billion in Alternative Investments. Expense ratios would then have been 1.71% in 2009 compared to 1.97% in 2013 which is a little steep but certainly not the windfall that the IBT article implied.

Mind you, Bury is not trying to be nice here, but trying to figure out what is actually going on here…. because he found something fishy about the asset amounts in a different post:

As for the asset side the use of actuarial value instead of market as the official asset value is one lie but, in New Jersey anyway after examining in detail the value of Alternative Investments, it looks like they are also doing some more blatant lying that they get away with because they expect everybody to trust them and the professionals they buy. I don’t.

The NJ Investment Council puts audited financial reports on their website wherein they list the Fair Value of Alternative Investments in the last few pages though they do not make it easy to do comparisons since they do not provide book values and everything is in pdf format. You would have to get a good pdf extractor program and spend a few hours manipulating the excel spreadsheet to get some idea of the duplicity.

….
They say a new car inexplicably loses 20% of its value when you put it on the road. For an Alternative Investment it looks like the value miraculously increases 20% – 80% once you put it in your public pension portfolio.

Go to John Bury’s post to check out his calculations and the numbers.

But this is one of the big issues with private equity/hedge funds, and it’s not just the outsize fees: it’s that there’s no good market value for these illiquid investments. Their value is whatever you say it is until suddenly it’s not.

Just as in the case of the value of pension liabilities, which come apparent over time, the actual value of these illiquid investments also become apparent over time, especially when they fail.