New Jersey freezes alternative investments

The $68.2 billion New Jersey pension system is freezing its alternative investment programme after the state’s Republican Governor-elect, Chris Christie, requested that the state take a set of 14 emergency measures to prevent the “budget hole we are in from deepening”.

The eleventh point on the list asks the state government to “freeze the retention of all new outside professionals, manager selections, and new contracts for managing alternative investments with respect to New Jersey’s pension funds”.

“The insight I have is that this is temporary in nature. The [Christie] transition team wants to review all the asset classes, which could be infrastructure, private equity, commodities, hedge funds and real estate,” a person from the state’s Treasury Department familiar with the situation told InfrastructureInvestor.

The pensions’ investment council has an overall 28 percent allocation cap to alternative investments, with 7 percent limitations each on the categories of real estate, real assets, private equity and absolute return strategy investments, according to the latest audited financial statements published by the state’s treasurer.

Across its five funds, the pensions system had limited partner interests in 66 private equity funds valued at $2.8 billion and 38 interests in private equity real estate funds totaling $1.9 billion. There were no limited partner interests in infrastructure funds as of that date, though the pension did hold equity positions in publicly traded infrastructure firms such as Macquarie Infrastructure Company.

It is unclear at this point whether the review would alter its allocation criteria for private equity and real assets, though members of the pension’s 13-member investment council, which includes several gubernatorial appointees and representatives of labour unions, have previously expressed reservations about its alternative investment programme.

At a 21 May meeting of the investment council, James Marketti, a member of the pension board appointed by Jon Corzine, the state’s current governor from a list of AFL-CIO labour union nominees, said the pension should no longer make alternative investments. Instead, Marketti suggested that the pension invest in Build America Bonds – a new type of municipal bond that gives the issuer a 35 percent subsidy on interest cost.

The review does mean, however, that New Jersey will not be making new commitments until the review is over.

“In fairness, this is not something out of the ordinary. Anytime a transition occurs, the new administration wants to thoroughly go through things and have the opportunity to analyse different policies and investments and, at this point, we are going to give them the opportunity to make that review,” the person added.

The review was part of a set of broader measures suggested by Governor-elect Christie in an effort to stem a growing budget deficit. These measures include freezing all new paid appointments and re-appointments to boards and commissions, freezing all professional service, public relations, and consulting contracts and placing all discretionary grant and state aid accounts on reserve.

New Jersey is not alone in having to make difficult choices in close its budget gaps. Last week, the National Association of State Budget Officers and the National Governors Association warned that US states face a “lost decade” of economic growth during which they will have to face down $250 billion in budget gaps and revenue shortfalls that will persist into 2015.

A meeting of the New Jersey State Investment Council is scheduled to take place later today.