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RIBCO
News
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2006-07-25
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Pension Fund Reforms |
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Tuesday, July 25, 2006
NorthJersey.com
THE RECORD'S EDITORIAL STAFF
NEW JERSEY has just changed the way it invests the $72 billion state employee pension fund. The bad news is that it will cost at least $220 million a year in fees. The good news is that the move is designed to boost the fund's lackluster performance. It's long overdue.
As the state wrestles with financial problems, the fund is one area where a more efficient, progressive strategy can reap returns, and perhaps contribute to the state's financial well-being.
That's reason enough to back the New Jersey State Investment Council, the volunteer board that manages the fund and that last week voted to adopt a new strategy. The council will begin putting about one-quarter of the fund – about $18 billion – in the hands of private fund managers.
The strategy also will put more funds into alternative or esoteric investments, such as hedge funds, real estate funds and foreign publicly traded companies.
Though some employee unions oppose the shift to private managers, the move has long been discussed in Trenton, and now is as good a time as any to take the plunge.
The strategy is not overly risky; it's generally in step with the way other large pension funds are managed. And if successful, it could help the state's financial position.
After all, the more revenue the fund generates for employee pensions, the less state coffers will have to contribute.
That's something the fund itself has not done much of late. After reaping solid returns in the late 1990s, the fund has since 2001 generated $5.3 billion less than the median of similar-size pension funds around the country, according to the investment council.
At the same time, the gap between the state's pension obligations and the fund to pay them has grown steadily. That gap is now at least $18 billion, according to the most recent estimate, and that's low-balling it.
Council officials justify the $220 million in private fund management fees by arguing that you have to spend money to make money. They say increased diversity will protect the fund against sudden market swings, and investment in alternative funds requires special knowledge that the state's managers don't have.
Those are compelling arguments. Most investors know diversity is the key to a stable portfolio; it's Investment 101. Moreover, less common, higher- risk investments can provide far better returns than the state's current portfolio of U.S. public companies and fixed income debt.
Though state employee union leaders are right to urge caution -- suggesting that the council should privatize a smaller amount of the fund at first -- the fund can hardly do worse than its recent performance.
Still, the council should proceed with caution, and avoid even the appearance of pay to play. That's especially important because it's unclear how the contracts will be awarded at present.
The council's recently approved regulations – which prevent contracts going to private managers who donate to New Jersey state politicians or political committees – will help. But the award process must be scrupulously transparent.
The fund must succeed or fail on the best advice available. The merest hint of favoritism would be catastrophic.
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