NorthJersey.com

Investment Gains For N.J.'s Pension Fund Fell Sharply Last Fiscal Year

The Record (NorthJersey.com) — January 27, 2016

By SALVADOR RIZZO
state house bureau |
The Record

Investment gains for New Jersey's $79 billion pension fund fell sharply in the fiscal year that ended June 30, and those pension investments are in negative territory so far this year, state officials reported Wednesday.

Christie administration officials and the State Investment Council had acknowledged in July that, with 11 months of data, the pension fund was likely to see a sharp drop in its rate of return for fiscal year 2015. Now, with all 12 months of data, the state announced that it achieved investment gains of 4.16 percent, a tumble from 16.87 percent in the previous year.

New Jersey's pension fund is the 17th largest in the country and 33rd largest worldwide - investing in everything from real estate, private equity, commodities, stocks, hedge funds and more. Nearly 780,000 public workers and retirees are beneficiaries of the pension system, meaning they depend on the success of those investments.

The state Supreme Court has said that public workers are entitled to their pension checks "when due." If the money does not come from investment gains, it would have to come from state taxpayers or public workers.

The fund's performance is in negative territory so far this fiscal year, down 3 percent for the July-through-December period, officials added.

Healthy investment returns in recent years had been a bright spot for the troubled pension system, easing the pressure from a persistent funding crisis and the political logjam in the State House. Governor Christie and Democratic leaders in the Legislature are not in negotiations to find a solution.

Meanwhile, members of the State Investment Council have been cautioning for months that the days of double-digit-percentage gains may be coming to an end.

"I'm just kind of warning people that ... a lot of these return assumptions going forward are going to be much too high," said Guy Haselmann, a council member, at a monthly meeting Wednesday.

"Absent additional state funding or a marked improvement in investment returns, asset depletion could come as early as 2027," according to a report from Moody's Investors Service in October. "This depletion date may even come sooner if investment returns underperform expectations, as they did in 2015."

Division managers averaged a 10.49 percent annual rate of return over the last five years. The last year included in that average was fiscal year 2015, with a comparatively lower gain of 4.16 percent.

The declining price of crude oil, an economic slowdown in China, European fears of a Greek default, the Federal Reserve's policy of keeping interest rates near zero for several years, a stronger U.S. dollar and volatility in the stock market were all flagged as reasons for the lower investment gains this year.

Christopher McDonough, director of the state Division of Investment, called 2015 "a challenging year for investors."

"In the U.S., the market was pretty choppy," he said Wednesday, pointing to a "dramatic sell-off in stocks in August."

Venture capital, real estate and equity investments performed the best. But the state's investments in commodities tumbled 20.85 percent largely due to crude oil prices falling by half in recent months, and bets on emerging and developing economies around the world turned out to be losers.

A spokesman for the state Treasury Department, Christopher Santarelli, said that "while division staff did an excellent job managing assets, the public markets were extremely volatile in 2015." New Jersey outperformed "70 percent of ours peers" among large public pension funds, he added.

In the current fiscal year, from July through December, the fund "was down about 3 percent ... because the returns were negative for each asset class with the exception of risk mitigation," McDonough said.

The pension system pays out roughly $8 billion to retirees each year.

The state chapter of the NAACP and the consumer-watchdog group New Jersey Citizen Action had urged the investment council to divest from a company called Ace Cash Express, a payday lender. State officials announced Wednesday that they had sold their stake.

Payday lending is illegal in New Jersey. Critics say it amounts to expensive short-term loans targeted at people in desperate financial conditions who often end up facing punishing borrowing costs. The state owned a stake in Ace Cash

Express indirectly through an investment in JLL Partners Fund.

"Ace Cash Express was fined $10 million not just for sketchy practices but for actually illegal practices," said Beverly Brown Ruggia of Citizen Action, thanking members of the council. The fine was imposed by the Consumer Financial Protection Bureau in 2014.

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