The New Jersey AFL-CIO on September 12 filed a complaint with the state’s Ethics Commission charging that investments from state pension funds were steered toward investment firms that made big campaign contributions to Republican Gov. Chris Christie and his allies.
“Despite clear boundaries created to shield pension investments from the influence of politics, it appears that the State Investment Council under Robert Grady’s direction and the Christie administration’s leadership clearly violated those rules,” said Charles Wowkanech, president of the state’s AFL-CIO. “We urge the State Ethics Commission to investigate this pay-to-play scheme on behalf of taxpayers who are footing the bill for this abuse and pensioners being shortchanged of their retirement funds.”
Grady, Managing Director of Cheyenne Capital as well as Chairman of the New Jersey State Investment Council, was a prominent executive of the Carlyle Group until 2009.
The Investment Council advises and make recommendations regarding investments to the state’s pension funds.
The ethics complaint comes three days after Fitch Ratings lowered New Jersey’s debt rating. According to Fitch, one of the reasons for the downgrade was that Gov. Christie backed out of a deal to make the state’s full contribution to New Jersey’s public pension funds.
The labor organization made its complaint in a 11-page letter to the Ethics Commission. The letter was signed by Wowkanech who said that there was a suspicious link between firms that received state pension investments and their campaign contributions.
“Public reporting reveals that the Division of Investment Management . . . under the governance and direction of the State Investment Council and Chair Grady, has chosen to invest pension funds into hedge funds and private equity firms after their principals have made political contributions that benefit the governor and the Republican Party,” said Wowkanech in his letter.
For example, two large Wall Street firms, the Blackstone Group and the Carlyle Group were among those chosen to manage New Jersey pension fund investments.
In 2011 while the State Investment Council was considering investing in a private equity fund created by Blackstone, one of Blackstone’s employees made a $10,000 contribution to the New Jersey Republican State Committee while another made a campaign contribution directly to Gov. Christie.
The New York Time’s Deal Book reported that in December 2011, “New Jersey’s pension fund . . . committed up to $1.8 billion to funds managed by the Blackstone Group, a big win for the money-management giant.”
Carlyle was awarded a $450 million to manage pension fund investments while Grady was still receiving income from Carlyle.
“The presence of the State Investment Council chairman on those calls violated the rules designed to protect investment decisions from being influenced by politics,” said Wowkanech. “This serious matter affecting the pension benefits of countless current and retired former employees warrants a thorough investigation, based on evidence in the complaint that Bob Grady and Christie’s re-election team clearly used pension investments as a way to attract political contributions.”
The pensions of current and retired New Jersey employees took another blow earlier this year when Gov. Christie decided that the state would not contribute its share to the state’s pension funds.
Instead, Gov. Christie used the money that was supposed to help make the pension funds sound again to close an unexpected state budget shortfall.
But that move may have made the state’s financial problems even worse. On September 10, Fitch Ratings lowered the state’s debt rating and gave as one reason for doing so Gov. Christie’s decision to back out of a deal negotiated with legislators to fully fund state pensions.
As a result, New Jersey will now pay higher interest rates for public works projects and other public investments that require financing.
While Gov. Christie was steering state funding away from pensions, he was also steering more of toward Wall Street.
David Sirota reports in the International Business Times that since Gov. Christie has been in office, New Jersey investments in alternative investments such as hedge funds and private equity funds managed by Wall Street has increased three-fold.
Yves Smith writing in Naked Capitalism reports that New Jersey has authorized the allocation of one-third of its investments into alternative investments, which Smith calls, “a stunningly high level.”
As a result of its high level of alternative investments, New Jersey has paid Wall Street nearly $1 billion in management fees since Gov. Christie took office. In 2013 alone, the state paid Wall Street $398.7 million in management fees, the most since Gov. Christie took office and more than three times the amount that the state paid for management fees the year before Gov. Christie took office.
The fees might have been worth it had the investment returns lived up to the promised results, but Sirota writes that the failure of New Jersey’s alternative investments to meet expectations has cost New Jersey taxpayers $3.8 billion.