NJ Plan For Advisers to Manage Pension Assets May Be Illegal

October 29, 2003 (PLANSPONSOR.com) - The State of New Jersey's plan to bring in a private adviser to manage a portion of the state pension funds may be illegal.

In an opinion released earlier this week, the Office of Legislative Services (OLS) said New Jersey state law prohibits the Treasury Department from delegating investment decisions to any outside party including hired managers.   This only throws up another roadblock in the state’s drive to bring in independent managers to diversify portions of the $62-billion portfolio into areas such as real estate or high-yield bonds, according to a Newark (New Jersey) Star-Ledger report.

As evidence of this contention, the OLS opinion cites two state attorney general’s opinions that conclude that current state law does not allow the use of outside managers. “We believe the State Investment Council does not possess the power to delegate management discretion and investment decisions to a private outside entity,” the OLS opinion states.

State Senator Peter Inverso (R-Mercer), the lawmaker that requested the report, said its release should pretty well take any such decision out of the hands of the Garden State’s top lawmakers.   “This should end this issue once and for all,” said Inverso. “If the governor and treasurer pursue this issue, we have solid legal standing to prevent it.”

The idea to bring in the outside advisers was only spurred last month by the release of an Independent Fiduciary Services (IFS) report that projected a 7.48% return on the state’s portfolio.  This poses a problem for state pension officials who are counting on an 8.75% return to meet their funding projections.   To help correct this deficit, the IFS report recommends the pension fund branch into new investment areas that would help move the state away from its current investment mix that includes a 65% allocation in equities (See  Report Blasts New Jersey Pension Fund Investments ).

However, at the same time the report outlines its diversification strategy it also cautions that “diversification along these lines is practical only with the use of external investment managers,” a topic that is supported by Governor Jim McGreevey’s administration but has been a lightning rod for criticism among public employees unions who represent the Division of Investment’s 60 state employees.  In fact, union representatives have gone so far as to allege State Treasurer John McCormac and Investment Council Chairman Orin Kramer are seeking to bring in outside managers only as a way to coax campaign contributions from them.

In response to the recent revelations though, McCormac said the concerns of Inverso are premature because the state has not yet decided whether to hire outside managers. He also said getting legislative approval, if needed, would not be difficult.   “We have said all along that if we need legislation for any activity we will seek it,” he said. “We are confident the Legislature will agree with our plan to protect pensioners by increasing returns and reducing risk.”

New Jersey’s pension fund – one of the few managed strictly by employees of the state – has seen its share of troubles. Over the last three years, the fund has experienced losses of $26 billion, which eventually led to the resignation of the chief investment officer (See Jersey Pension Chief Quits, Gets New Assignment).  Also, the fund ranked as one of the five worst performers last year according to a Reuters survey (See   Study: Public Pension Funds Shedding Underperforming Managers).