State acts to 'privatize' pension funds Officials say move to independent managers will mean less reliance on the stock market Friday, July 21, 2006 • BY DUNSTAN McNICHOL • Star-Ledger Staff State officials yesterday adopted a plan to shift billions of dollars in state pension money to private investment managers and set a course to reduce the funds' heavy reliance on the stock market. "What we are doing today arguably constitutes the most extensive readjustment of any pension program in any state in a single year," said Orin Kramer, chairman of New Jersey's State Investment Council and an architect of the new strategy. The council, a volunteer board that manages the pension funds, approved the move 7-1. The sweeping changes in the $72.6 billion fund will cut the state's U.S. stock holdings by more than $16 billion in favor of larger holdings in toll roads, hedge funds and international stocks. The pension funds bankroll retirement pay for hundreds of thousands of teachers, police officers, firefighters and public employees. Separately, the strategy will shift $18 billion of the portfolio's holdings into the hands of private managers, who are expected to earn fees of about $221 million a year for managing the state's funds. State Treasurer Bradley Abelow, who worked with Gov. Jon Corzine at Goldman Sachs, the Wall Street investment firm, said retaining a heavy reliance on the stock market is a greater risk than the new investments. "It's what I learned in business school," said Abelow, who attended yesterday's council meeting but did not participate in the debate and vote. "Excessive concentration produces excessive risk." But representatives of the Communications Workers of America, the state's largest public employees union, said moving away from the state's traditional stock portfolio is risky and would enrich Wall Street professionals at the expense of future retirees. "If this goes south, it's going to go south big-time," said Joseph Golowski, a consultant with CWA Local 1033, which represents the 60 state employees who now manage the bulk of the state's investments. "And taxpayers are going to be coming after our heads." Suzanna Buriani-DeSantis, who represents state and local government employees on the council, cast the sole vote against the new plan. "With some of these funds, the risk factor is considerable," she said. Kramer said the changes will simply bring New Jersey into alignment with other large investment funds. "I guess you could say it's just a big catch-up effort," he said. The new strategy will generate a windfall for professional money managers, who are slated to collect about $221 million annually when the new investment plan is in place. Currently, the state pays about $6 million a year in administrative costs to the in-house staff that manages the stock portfolio. Golowski and other critics say the huge fees will make the investment program a magnet for politically connected managers and will open the public funds to manipulation by unscrupulous managers. Kramer and Abelow said the program is protected against political interference by a stringent code that prohibits any investment firm that has made political contributions in New Jersey from doing work with the pension funds. "We've taken positions that are extreme," said Abelow. "They've taken us right to the edge of not being able to do business with people." Under the new investment plan, the biggest fees, totaling $90 million, are expected to go to hedge fund managers. Other firms will be paid $17 million to help set up real estate investments, and managers helping identify investments in small companies will be paid $12.5 million. The new plan includes placing $75 million to $125 million with small investment firms, which likely would include minority- and women-owned firms. Another portion of the funds would be allocated to New Jersey start-up companies. Former state treasurer John McCormac began the push toward "alternative" investments in areas like real estate and hedge funds four years ago, after the state's retirement accounts lost billions in the collapse of the stock market. Last year, the funds earned a 9.65 percent rate of return. But at $72 billion, they remain billions of dollars short of the amount needed to cover the benefit payments already promised to current and retired workers. Actuaries said that as of June 30, 2005, the funds contained $18 billion less than is needed to meet the benefits the state is scheduled to pay out over the next 30 years. Yesterday, Kramer suggested that gap grew even larger last year. © 2006 The Star-Ledger. Used by NJ.com with permission.