N.J. pension investments miss their mark

Tom Byrne, chairman of the panel overseeing the pension fund investment portfolio, reported a gain of 4.58 percent through May, one month shy of the full fiscal year that ended June 30. Because of a weak June, final results, which won't be available until September, are expected to be even lower, he said at Wednesday's State Investment Council meeting.

New Jersey's assumed rate of return, the amount actuaries say it needs to avoid adding to its liabilities, is 7.9 percent. And while 4.58 percent is "decent" and outperformed its benchmark, Byrne said, it's a departure from the 16.9 percent the fund reaped the year before, the fourth consecutive year churning out double-digits.

"It's not a bad report by any stretch of the imagination. We still produced decent returns," said Byrne, son of former Gov. Brendan Byrne and a member of Gov. Chris Christie's pension reform commission. "But we have a pension system that is one of the most underfunded in the country and we can't continue to rely on double-digit returns to keep it as strong as we'd like it to be."

This time last year the fund was valued at $81 billion, and it's estimated to end the current fiscal year around $78 billion, Byrne said.

The performance of the investment fund has high stakes for hundreds of thousands of current and retired workers, as each year pensioners draw more out of the system than public workers and employers put into it.

The state portion of the pension system is short $40 billion of what it would cost to pay for promised pension benefits.

"We, and the Division of Investment staff obviously cannot control financial market outcomes, all we can do is do our best to exceed our benchmarks, which we have done consistently, and that has resulted in hundreds of additional dollars in the fund every year," Byrne said.

Investments in real estate and private equity paid off last year, he added.

But Byrne's assertion that those alternative investments have boosted the state's returns over time did little to convince skeptics of alternative investments, also including hedge funds and commodities, that their high fees and bonuses are adding value to the pension fund.

Tom Bruno, chairman of the Public Employees Retirement System, continued his push for an independent review of the investments, which a growing chorus of opponents have said is an expensive and failing strategy that lacks transparency.

State Sens. Loretta Weinberg and Bob Gordon (both D-Bergen) on Wednesday echoed that call.

"I see no reason for the State Investment Council not to go ahead with this requested audit," Weinberg said in a statement. "With the state's pension system so severely underfunded, we need confirmation of whether the state's shift into alternative investments has truly provided a hedge against steeper losses in down markets or if the state could have achieved similar results at less cost through other investment strategies."

New Jersey spent $600 million on management fees and performance bonuses in 2014, including $265 million in fees and $335 million in bonuses. Those costs have been steadily rising since the state embraced alternatives a decade ago to protect against downturns.

At a legislative oversight hearing into the state's stake in alternative investments in June, a labor-backed financial expert testified that investing in alternatives rather than traditional investments like stocks and bonds cost the system hundreds of millions of dollars.

Byrne countered then, and again Wednesday, that it's easy to second guess the council's investment strategy after-the-fact and cherry pick metrics. 

Intensifying that debate, the liberal activist group Hedge Clippers released its own report claiming New Jersey's hedge fund assets were trounced by its traditional portfolio and accusing officials of making politically motivated investment deals and hiding fees.

Investment council members who said they had little time to digest the report challenged the group's methodology, with Christie appointee Guy Haselmann saying he couldn't replicate its numbers.

"If there are people who don't like Wall Street or who think the system is rigged, you're entitled to your point of view," Byrne said. "You're entitled to your own ideology, but I don't want to confuse that with prudent investing."

[Original article]