STUMP » Articles » Public Pensions Watch: Alternative Assets, pt 8 of many -- New Jersey followup » 14 September 2014, 10:04

I already mentioned NJ pensions have been shifting more into higher-fee “alternative assets”, in the never-ending search to plug the pensions funding hole without, you know, having to pay more money.

Well, the NJ AFL-CIO is filing an ethics complaint over the investments [the following is from an AFL-CIO press release]:

The New Jersey State AFL-CIO has filed a complaint with the State Ethics Commission calling for an investigation into lucrative pension fund management contracts awarded to top political donors to Gov. Chris Christie and the Republican Party.

In an 11-page complaint filed Friday, New Jersey State AFL-CIO President Charles Wowkanech highlighted reports exposing a disturbing pattern of big contributions to Christie for Governor or Republican organizations by firms handpicked to manage hundreds of millions in state pension funds.

….
Fees paid to politically connected fund managers have more than tripled under Christie, to $398 million last year alone. Many of the state’s relationships with Wall Street firms coincide with generous political contributions, even though state ethics rules require a two-year lag before a donor can be a pension investor. For example, an employee of the Blackstone Group donated $10,000 to the NJ Republican State Committee in 2011, the same year new investment business was being proposed for the firm. Another Blackstone employee donated to candidate Christie.

Unsurprisingly, Christie has his own reaction to this:

Christie spokesman Kevin Roberts scoffed at the complaint.

“It’s a cheap political stunt based on shoddy, distorted reporting from an individual who over and over again has been shown to be biased, willfully inaccurate, and just flat out wrong,” he said.

Chris Santarelli, another spokesman for the New Jersey Department of Treasury, said the complaint is baseless.

“The (State Investment Council’s) mandate is to provide policy and governance oversight,” Santarelli said. “The SIC ensures and certifies that adequate and appropriate due diligence has been conducted by the (Division of Investment) when making investments. Investment proposals are presented and explained by DOI in open public meetings before the SIC. Decisions on DOI investment strategy are based on the merits and performance of the proposed fund and its fit within the State’s broader portfolio.”

Peter S. Goodman, editor in chief of the International Business Times, said, “We are pleased the governor is continuing to read our stories, and we note that he has yet to challenge any facts.”

Now, I will not deny that David Sirota, who did much of the reporting that went into the NJ AFL-CIO complaint, is a very biased reporter.

But that does not mean he is necessarily wrong. And while he’s specifically going after NJ, this is not just a Republican issue (not even within NJ itself – lots of Democrats are also involved with shifting the pensions to riskier assets in trying to get higher returns). As earlier in the series, we have the Democratic candidate for governor (who won her primary last Tuesday) also being called out by people like Sirota and Ted Siedle.

To be sure, there can be a whiff of impropriety in what looks like too much buddy-buddyism among politicians and asset managers who get pension deals. There may not be any actual corruption involved, though.

The desperation to make up for pension undercontributions as well as shoddy past performance explains this crap just as well.

But that goes for the subprime mortgage crisis as well — while some people who fed that beast were engaging in outright fraud, I think many more took on risks they really couldn’t afford, out of a variety of motivations. But it didn’t matter if their intentions were good or bad — that desperation for returns still ended with disaster.

As I have noted elsewhere, there’s nothing particularly wrong with pensions taking on a few riskier assets to round out a portfolio — but when it becomes a large percentage of the portfolio, danger lurks.

And I really don’t trust politicians, or even pensions trustees, to be able to handle the amount of investment risk they’re taking on, just because they’re more scared of the political risk of having to find the money to make larger contributions to pension funds.