PhillyDeals: N.J. state pension system heavy on managers' fees

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Chris Christie is the latest governor to trim pension contributions instead of boosting them.

This Labor Day weekend, let's consider that excellent and endangered worker benefit, the guaranteed retirement pension.

Let's look at the New Jersey state pension system, which more than 750,000 schoolteachers, troopers, and other public servants are counting on to keep them comfortable through their golden decades.

The problem with this happy arrangement is that the politicians who promised - and who also collect - state pensions haven't set aside money to pay them all.

New Jersey's pension funds have about $80 billion to pay at least $120 billion in future checks. Even with that $80 billion invested, what the state owes, as more workers qualify and retire, has grown faster than what it owns to pay them with.

Chris Christie is the latest governor to trim pension contributions instead of boosting them. Can the state Treasury squeeze more from its pension investments? Or will future taxpayers have to make up the difference?

In 2005, the Democrats who ran New Jersey decided to supplement the state-employee stock-and-bond buyers who managed pension investments by hiring private "alternative investment" managers to bet on buyout, energy, real estate, junk bond, venture capital, and hedge funds.

Before the switch, New Jersey spent less than $10 million a year managing pension investments, state documents show. By 2006-07, as the first private managers were hired, the cost topped $60 million. Last year, state documents show, the pension system paid more than $410 million to alternatives managers. Nearly half went to hedge funds, loosely regulated investment pools whose managers charge yearly fees plus a fat cut of profits.

Some Republicans in Trenton at first opposed the change. A few months before Christie's 2009 election, the New York Times reported New Jersey was already "shying away" from hedge funds. Pennsylvania and other states have also pulled back.

But under Christie, whose political confidant venture-capital manager Robert Grady now chairs the State Investment Council, New Jersey has doubled its hedge-fund investments, to more than $6 billion. State Treasury spokesman Christopher Santarelli cites industry data showing that the total is not unusual compared to other states. New Jersey's fund-management staff moved money out of low-yielding bonds to fund alternative investments, Santarelli added.

Are alternative investments helping to close the pension-funding shortfall? The state's most recent pension report shows alternatives as a group returned less than U.S. and foreign stocks over the last year - dragging down total pension returns instead of boosting them. They also trailed the state pension system as a whole in 2012, 2011, and the previous three-year period.

But managers are still collecting their millions. Topping last year's list, state documents show: $48 million for billionaire Wharton grad Daniel Och's Och-Ziff Capital, where the state starting in 2010 has invested $450 million in "global diversified credit" investments. (State and Och-Ziff officials declined to detail where that money is actually invested. Och-Ziff has holdings all over the world; the company told shareholders this year it was under federal investigation for its dealings in African mining operations.) Och-Ziff affiliates also collected $10 million for four other investment portfolios it managed for the state, with varying returns.

The firm's total includes both management fees - 75 cents for every $100 invested with Och-Ziff Capital, per year - and, mostly, "performance fees" for nearly doubling the estimated value of its investments for New Jersey since 2010. "We are honored to be their long-term strategic partner," said Jonathan Gasthalter, a spokesman for Och-Ziff.

For all the fees it has collected, Och-Ziff Capital has not actually "distributed" a dollar of the state's principal or the estimated profits from the account back to New Jersey yet, according to state investment reports.

Among others, the documents show, New Jersey also paid fees totaling $14 million last year to ValueAct Capital Partners II, a San Francisco hedge fund where the state invested $150 million; it has yet to return a dollar. The state paid Canyon Balanced Fund, run by Canyon Capital Advisers of Los Angeles, $10 million last year; the state invested $125 million, and has received back $1 million so far. A Canyon affiliate was an investor in the failed Revel casino in Atlantic City.

The state expects to get back all these investments, plus profits, someday.

In Monday's column: The investment managers.

 


PhillyDeals:

COMING MONDAY

A look at N.J.'s state pension system investment managers.


JoeD@phillynews.com

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