Interview: David Sirota on New Jersey’s Risky Pension Investments

David Sirota has a name familiar to many on the left — he became known first as a Democratic political consultant, then as a columnist and radio host. These days he’s aiming for a different job description: Muckraker.

Sirota, now with the International Business Times, last week published a story saying that under Gov. Chris Christie, New Jersey had increasingly invested state pension funds in high-risk Wall Street investments — often with politically favored firms — but without standard Wall Street results: New Jersey’s “alternative” investments underperformed the stock market by a total of nearly $6 billion in returns, Sirota said.

Now state union officials are demanding more information, two firms have dropped the state’s bond rating in the last week, and Christie administrators are trying to blame Sirota for inflammatory reporting:

Christie spokesman Kevin Roberts scoffed at the complaint. “It’s a cheap political stunt based on shoddy, distorted reporting from an individual who over and over again has been shown to be biased, willfully inaccurate, and just flat out wrong,” he said. Peter S. Goodman, editor in chief of the International Business Times, said, “We are pleased the governor is continuing to read our stories, and we note that he has yet to challenge any facts.”

And in any case, Sirota’s reporting seems to be producing results. Fortune magazine reports today that New Jersey is selling its stake in a Massachusetts-based venture capital fund — connected to a GOP gubernatorial candidate there — after Sir0ta reported the original investment might’ve violated state and federal pay-to-play rules.

Sirota recently talked to Philly Mag about his reporting. Some excerpts.

You have a recent piece about how Chris Christie is investing New Jersey’s employee pension funds. What’s he doing that’s different from what his predecessors were doing?

The Alternative Investment Program started under Jon Corzine. It put funds from the pension fund into private equity, venture capital, real estate, hedge funds, and other alternative investments. As we’ve reported, that started in 2006. What’s different is now there’s so much more money in alternative investments.

When (Christie) came into office, his state investment council increased the allocation to alternatives to up to 38 percent of the entire pension portfolio. The amount of money that’s shifted to alternative investments under Christie has tripled. It’s above $20 billion. It’s become much bigger — fees have tripled, fees that the state pays to alternative investment firms has skyrocketed. The pension portfolio has delivered below-median returns overall, the alternative investment portfolio has trailed the stock market despite the projections and promises of New Jersey officials that it would beat the stock market.

The amount has tripled, the fees have tripled, but the returns have not tripled, I take it?

One of the big points of paying higher fees is so you get something special in return. State officials had strongly suggested that the reason to move into alternatives and pay the higher fees is because those fees would be worth it because those returns would be better than the market. They also said alternative investments would diversify the portfolio and expose it to less risk. What we’ve seen is that the higher fees correlated with worse returns than the stock market, worse returns than the funds that do not put as many investments into alternatives.

The risk question is an important question, but in seven of the eight years since the alternative investment program has started, the alternative investment portfolio has trailed the S&P 500. The one year it didn’t trail the S&P 500 was 2008, which was the year of the financial crisis.

How much is this program a factor in the pension funds’ ongoing problems?

Had New Jersey followed the investment advice of Warren Buffet, had it followed the investment strategy of Montgomery County, Pa., which is to diversify its portfolio through passively managed, low-fee stock-indexed funds, had it done that rather than put the money into alternative … the state would have $5.8, $6 billion more in its portfolio. That’s huge.

To put it in perspective: Gov. Christie has decided not to make the full pension payment, which further destabilizes the pension system. If you had that $5 or $6 billion more in the pension system, it would reduce the amount the state would have to contribute every year to be put on a path to stability. Because the pension system doesn’t have that $5 or $6 billion because of the alternative investment portfolio, the gap becomes bigger, the payments become bigger, how much the pension system falls behind becomes even bigger.

Your story came out right after one of the bond rating agencies dropped Jersey’s bond rating, but before S&P dropped Jersey’s bond rating this week. How strongly is this investment policy connected to those bond drops?

I think you can say this: The pension system in New Jersey has shortfalls. The governor has not made the payments that were promised to be made. State tax revenues are down. The returns from the pension system are trailing the returns from the other pension systems — all of those are factors that contribute. I think it’s one of three or four major factors.

Does the governor have unlimited authority over these funds, or can anybody — the legislature or elsewhere — step in?

The State Investment Council votes on the caps, sets the caps on the percentage that goes into the alternative investment portfolio. The legislature — I’ll put it this way: In most states, the legislature can also weigh in on total asset allocation caps. So the legislature, unless I’m missing something special in New Jersey law, can certainly weigh in. That’s really where it’s going to be, because the governor controls the State Investment Council through appointments.

What else do you want me to know?

Well, an important piece of the story is: Why the move into alternative investments? I think there are two possible motives. One is the idea of trying to chase yield — let’s get bigger and bigger bets on investments with higher risk. The other factor in this, if you look at it: At the same time that New Jersey is putting money into Wall Street firms, many Wall Street firms have made major campaign contributions to political organizations that have significantly backed Gov. Christie’s re-election campaign, are now backing the Republican Governors Association that he chairs. We tracked roughly $11 million from employees of alternative firms … that have gone to the RGA, the Republican National Committee, to New Jersey Republicans. Some of these campaign contributions have gone out in very close chronological proximity to pensions contracts going out from the state of New Jersey to those alternative investment firms. There are state and federal pay-to-play laws on the books that are designed, in general, to restrict this kind of thing. Is it the motive? I don’t think we know. I think it’s a relevant factor.

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