New Jersey Gov. Phil Murphy has vetoed a bill that would have imposed certain conditions on the investments of its retirement system and required due diligence in the selection of external managers.
The bill had been overwhelmingly approved by the state legislature as the New Jersey Senate passed it 26-12 with two senators not voting, while the state assembly passed it 67-6 with seven representatives not voting.
In his veto letter to the New Jersey state senate, Murphy said he rejected the bill because it was too broad and, as a result, “could jeopardize the overall health” of the state’s retirement systems.
“This bill creates broad proscriptions on the state’s investment practices that would be challenging for the Division [of Investment] to implement,” said Murphy. “The bill’s sweeping prohibition against any investments that could pose a ‘reputational risk’ to the state’s retirement systems, for example, could be interpreted to apply to a wide range of direct and indirect investments, and may be used to call into question investments that are objectively appropriate.”
Murphy also said that he had been advised by the state’s treasury that the bill could undermine certain investment strategies that have been used to reduce fees and increase returns. As an example, he said the state’s Division of Investment has managed many of the state pension funds’ real estate investments through separate accounts rather than a commingled investment vehicle. He said the use of a separate account is expected to save the division approximately $39 million in fees over the life of the $300 million commitment.
“This bill could significantly reduce the division’s ability to take advantage of the savings opportunities available through this and similar investment structures,” wrote Murphy.
According to the text of the bill, the proposed legislation would have imposed conditions on domestic equity investments in the private real estate, private equity, and private infrastructure asset classes in which the Division of Investment has more than a 50% interest. The bill also imposed requirements related to the protection of public sector jobs and the selection of external managers.
The bill required external managers to be evaluated for their record of compliance with the policies, including any responsible contractor policies of public pension plans for which they served or have served as external managers. They would also have been required to disclose any instances of non-compliance with such policies, and to certify that they and their portfolio companies are not out of compliance with any such policies at the time of any proposed investment by the division.