The Wrongologist

Trenton, New Jersey is the political home of Republican Governor Chris Christie. The rest of America sees Mr. Christie as a tough-talking know-it-all, a moderate Republican who could be a real threat to win the presidency in 2016.

David Sirota in the International Business Times reports that Christie is sending state pension money to his buddies on Wall Street. The idea was to improve pension plan investment returns. From Sirota:

Gov. Chris Christie’s administration openly acknowledged that more New Jersey taxpayer dollars were going to land in the coffers of major financial institutions. It was 2010, and Christie had just installed a longtime private equity executive, Robert Grady, to manage the state’s pension money. Grady promoted a plan to put more of those funds into riskier investments managed by Wall Street firms. Though this would entail higher fees, Grady said the strategy would “maximize returns while appropriately managing risk”.

Some of the higher risk investments were in hedge funds. Ten years ago, public pension funds stayed away from hedge funds. Possibly hedge funds seemed too risky, or opaque, or exotic. After all, public pension funds invest money so they can afford to keep sending checks to retired schoolteachers, police officers and firefighters. Christie and Robert Grady went ahead.

Now, four years later, New Jersey has achieved about half of their promised results:

With the exception of the 2012 fiscal year, annual public pension return rates in New Jersey are significantly lower than the national median. Those differences add up when you are investing a pool of $80 billion. However, the fees NJ paid to its financial managers have more than tripled since Christie assumed office:

Mr. Christie took office in 2010. In all, New Jersey’s pension system has spent $939.8 million on financial fees between fiscal year 2010 and 2013. That’s just slightly less than the amount Christie cut from state education funding in 2010.

Half the results at triple the cost! Madison Avenue is so NOT stealing that claim.

The news gets worse: NJ’s pension fund is $47.2 billion short of what it needs to fulfill its promised benefits to retirees. The gap had narrowed to $36.3 billion in 2010 after Christie signed bills that boosted contributions from employees, raised the minimum retirement age for new workers and froze cost-of- living adjustments for retirees.

But, the gap grew again after Christie skipped a $3 billion pension payment in fiscal 2011. Christie also decided in May to skip this year’s $3.1 billion payment, again, in order to balance the state budget. As justification for the move, he argued that retirement benefits for NJ police officers, firefighters and teachers are unaffordable and therefore must be reduced.

Even more bad news: Many of the Wall Street firms NJ now pays management fees have been donors to Republican groups backing Christie’s election campaigns. Employees of those firms have also donated more than $11 million to the Republican Governors Association and the Republican National Committee. Now, not all of that money goes to support Mr. Christie, but the New York Times reports that both organizations spent big in support of his 2013 reelection campaign: (brackets by the Wrongologist)

A third of the $1.65 million the [National Governors] association raised in New Jersey [in 2013 by Christie] came from people and businesses who had significant contracts with the state, or from utilities, which are prohibited from making any contributions to candidates for governor.

As the IBTimes also reported, at the time many of these campaign contributions were made, Robert Grady was moving about 1/3 of New Jersey’s portfolio to some of the donor firms. Grady is a former managing director of the Carlyle Group, and Carlyle and a subsidiary have received $450 million in New Jersey pension investments since Christie took office.

NJ has a history of pension pratfalls. In 1997, Republican Gov. Christine Whitman issued $3 billion of state bonds and used the proceeds to make a leveraged stock market bet that failed when the Internet bubble popped. Ms. Whitman went on to withhold payments of $ billions to the public employee pension funds over the next few years, using the bulk of that money to balance the state budget.

Wait! There’s more: From 2006-2009, NJ also failed under Democrats: (brackets by the Wrongologist)

Orin Kramer [was]…Chairman of the New Jersey State Investment Council, which is tasked with oversight of the state’s public pension system. In 2006 he successfully pushed to shift a huge chunk of the state’s $72 billion pension fund to private money managers rather than [have them managed by] state employees.

Kramer was also the architect of the decision to invest $400 million in Citigroup and $300 million in Merrill Lynch as those firm tried to survive the sub-prime market crisis in 2008. Later in 2008, Kramer “invested” union pension money into Lehman Brothers shortly before the firm’s collapse.

That move lost $115 million.

Although “public officials” decide where to place pension funds, increasingly with hedge funds, the pension monies belong to state employees.

How ironic that these same public officials blame the employees for the failure of the pension funds to have sufficient funds to meet their obligations.

Why not blame the “public officials”?

Circle of Graft, indeed!