Over
objections, state clears new strategy for
investments
Tuesday, November 09, 2004 • BY DUNSTAN
McNICHOL • Star-Ledger Staff
New Jersey officials gave the green light yesterday to a
plan to move nearly $10 billion in state holdings out of the
stock market and into less traditional investments like real
estate, hedge funds and private equity.
The move came after almost three years of debate and won
approval despite objections from the two public employees'
unions whose pension funds account for the majority of the
state's portfolio.
"It's a positive development for the taxpayers of the
state and for the employees and retirees of the pension
system," said state Treasurer John McCormac, a prime
architect of the new investment strategy.
The move to alternative investments was approved 7-2 by
members of the State Investment Council, a panel of business
leaders and union representatives that sets investment
policy for the state's $79 billion portfolio.
It represents a departure from decades of conservative
management under which the portfolio had been deposited
almost exclusively into major stocks.
Of the $79 billion the state manages, $67 billion
consist of the funds dedicated to paying retirement benefits
for hundreds of thousands of teachers, uniformed officers
and public employees.
Unions opposed to the investment change say the strategy
is simply a vehicle to generate lucrative management
contracts for private financial firms that can be used to
attract political support. They also complain the use of
pension funds for nontraditional investments will open the
fund to political manipulation and scandal.
The Treasury Department will be authorized to steer up
to 13 percent of the state's investment portfolio into
alternative investments over the next five to seven years.
At the portfolio's current value, that would amount to $9.8
billion.
Since private managers typically charge a base
management fee of at least 1 percent, the new strategy will
generate contracts worth about $100 million a year when
fully implemented.
Unions representing teachers and public employees have
already filed lawsuits to head off the investment
changes.
In their suits, the Communications Workers of America
and the New Jersey Education Association contend that state
law requires the Legislature, not the Investment Council, to
approve any hiring of outside investment managers. Council
members say they have the Attorney General's approval.
McCormac and other supporters say the move to
alternative investments is needed to protect the portfolio
from steep losses that can arise when a fund is invested
almost exclusively in stocks.
The value of the state's portfolio peaked in 2000 at
about $95 billion. But the collapse of the stock market and
the state's decision to skip billions of dollars in pension
contributions while increasing benefits drained more than
$20 billion from the funds over the past four years.
"Since I perceive your pension funds to be at great
risk, I feel we would be complicit in covering up a problem
if we did not act," said Orin Kramer, chairman of the
Investment Council.
McCormac said it will probably be several months before
the state can make its first alternative investments under
the new plan.
Dunstan McNichol covers state government issues. He can
be reached at dmcnichol@starledger.com or (609) 989-0341.
© 2004 The Star-Ledger. Used by NJ.com with
permission.
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