Anatomy of a Questionable Scandal: NJ Pension Accused of Pay-to-Play

New Jersey’s no-holds-barred politics have swept up the state pension fund, as a union lobs claims of impropriety at the board chairman. Leanna Orr investigates.

The New Jersey State Investment Council voted unanimously on Tuesday to reelect Chairman Bob Grady—noted Carlyle alum and a former White House official—for the fifth year running. 

Grady’s tenure as unpaid chair has been marked by benchmark-beating returns and a smooth transition between CIOs, making his reelection hardly noteworthy—except that the nation’s largest union has accused him of running a systematic pay-to-play operation out of the $78 billion fund. 

On September 12, AFL-CIO President Charles Wowkanech sent an 11-page letter to the state ethics commission calling for an investigation into the fund’s allocation practices. “Public reporting reveals that the Division of Investment in the New Jersey Treasury Department under the governance and direction of the State Investment Council, and Chair Grady, has chose to invest pension funds into hedge funds and private equity firms after their principals have made political contributions that benefit the Governor”—Chris Christie—“and the Republican Party,” Wowkanech wrote in the complaint.   

“Every hour that my team spends working on this issue is an hour we don’t spend working on making the best investment decisions for our members.” —New Jersey CIO Chris McDonough  

However, an examination of the state’s public disclosures revealed major inconsistencies with the AFL-CIO’s arguments. For example, the union pointed to three donations from Goldman Sachs employees to Republican causes totaling $14,000 made in 2012 and 2013. New Jersey’s governor was a Republican, Grady a close advisor, and the pension fund an investor with Goldman Sachs. Thus, the logic goes, Goldman Sachs paid to play. But according to the pension’s reporting, its sole investments with the firm—two European private equity funds and a hedge fund-of-funds—occurred in 2006 and 2007. At that time, the governor was a Democrat; Grady worked at Carlyle; and Goldman Sachs employees had donated more than $1 million to Democrats for the 2006 elections.

Likewise, the first page of the complaint stated that “under Grady’s direction, the division has dramatically increased its use of private equity funds.” From 2006 to the end of 2009, the fund invested $8.4 billion in the asset class. During Grady’s four-year tenure, it has allocated less than $5 billion. As a portion of the total portfolio, private equity has increased since Grady took over, from 4.77% in 2009 to 8.72% at the end of June. The average large US public fund allocates 11% to the strategy, according to Wilshire Associates data. And in the last fiscal year, New Jersey’s private equity portfolio returned 26.3%, outperforming all other asset classes.

“New Jersey’s asset allocation to alternative investments—hedge funds, private equity, real estate, commodities, infrastructure, and bank loans—is in line with peers,” a state treasury spokesperson said. “This diversified positioning is the same approach that led New Jersey to experience only a 15% loss in fiscal year 2009, when many other public funds and endowments experienced losses of 25% or more.” Furthermore, he noted, “the State Investment Council, including an AFL-CIO representative who sits on the board, has voted unanimously in favor of the asset allocation plan presented by the Division of Investment for the last two years.”  

Still, the AFL-CIO has taken issue with alternatives investments overall, arguing that they violate the council’s mandate to find the best assets offering the highest returns. Debates over the value-add proposition of alternatives are entirely legitimate, as are broader discussions of institutional investment strategy. However, one asset owner familiar with the the complaint questioned Wowkanech’s grasp on the subject matter. The complaint’s conclusion that “employee contributions and taxpayers monies” had been “used to fund private equity investments in hedge funds,” for example, struck the investor as odd. The AFL-CIO failed to respond to a request to clarify the statement. “How can you drag someone’s name through the mud when you don’t even have a basic understanding of investing?” the asset owner asked. 

When reached by CIO, Grady called the complaint “frivolous” and the allegations “flat-out” false. “I’m sorry that people have taken a policy disagreement and turned it into an attack on a board of hardworking volunteers and an investment team that has delivered outstanding results with the utmost integrity,” he said, and declined to comment further.

Grady’s close relationship with Governor Christie is one element of the AFL-CIO’s critique that hasn’t been disputed. Indeed, Grady approach the treasury department’s Ethics Liaison Officer Mark Wintermute in March 2013 to clear his potential involvement with Christie’s re-election campaign. As a senior advisor, Grady stipulated that he would provide “general campaign advice on policy matters and strategy” but have no hand in fundraising, according to documents reviewed by CIO. Wintermute—a career civil servant—approved the position twice: once over email, and once after Grady voluntarily submitted an official proposal to the ethics compliance office. The AFL-CIO’s complaint arrived a year and a half later. 

The so-called Bridgegate scandal has helped give legs to the union’s claims of political interference in the state’s pension fund. Emails uncovered last winter revealed that a Christie staffer and his appointees within the transportation authority conspired to create traffic jams on the world’s busiest bridge following a political snub by a local mayor. Knowing that Christie’s administration interfered with one state operation renders more believable the idea that it would interfere with another—the pension fund.

But unlike the Bridgegate scandal, no factual evidence has indicated that politics play a role in the pension’s operation. That is, except as a distraction. 

“Every hour that my team spends working on this issue is an hour we don’t spend working on making the best investment decisions for our members,” pension CIO Chris McDonough said. “It’s the plan participants who are hurt by these allegations—it’s honestly been a big distraction.” McDonough and every other former and current investment staffer CIO approached were adamant that the union’s claims stem from partisanship, not reality.

“The investment division itself was implicated in the complaint,” McDonough continued. “It’s as if we’re just a bunch of lackeys and Bob is telling us what to do. But his position is about policy, governance, and oversight: It’s not the council’s role to say, ‘Yes, we approve this investment ‘or ‘No, we don’t.’ The council is there to make sure we’ve covered all the bases and done the proper due diligence. The investment team doesn’t care who the governor is. They are focused on making the best decisions for participants, and most have been dedicated state employees for a long time. And frankly, it’s weird that the AFL-CIO would attack them.”

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