NJ Pension Fund Trustees Angry Over Stalled Audit | NJ.com

Originally Published here: http://www.nj.com/politics/index.ssf/2015/09/nj_pension_fund_trustees_angry_over_stalled_audit.html

TRENTON — The trustees of one of New Jersey’s largest government employee pension funds say they have been told by Gov. Chris Christie’s administration that they have no authority to request an audit of their fund’s investments, valued at about $80 billion.

Tom Bruno, chairman of the board of trustees for the Public Employee Retirement System, said the audit demanded by two pension boards that raised questions about how the money is invested has been stalled and blocked since April.

“We’re in a little bit of a stalemate here with this thing,” Bruno said. “We have a fiduciary responsibility but no authority to act.”

The trustees received a legal opinion last Wednesday from a deputy state attorney general saying that only the State Investment Council and the Division of Investment have are the power to order an audit, according to Bruno and Bill O’Brien, vice chairman of the retirement system.

“Frankly, it’s a bit off that the very people who we’re questioning … have the final authority in calling for an audit,” Bruno said. “The odds are that they won’t do it. Why would somebody kind of look over their own shoulder?”

Five months ago, the trustees from the Public Employee Retirement System and the Police and Firemen’s Retirement System voted to hire outside help in scrutinizing the cost of the pension fund investment managers over the past three years. An annual report from the Division of Investment listed the fees and bonuses paid out in 2015 at $600 million, or 41 percent higher than the previous year, setting off alarms.

Pensioners, trustees and some lawmakers said they were concerned about the exploding costs, and confused because the division had changed how it described bonuses in its reports.

Last year, the fees and bonuses for the $80 billion pension fund’s investments hit a high; the state spent about $265 million on management fees and expenses and $335 million on performance bonuses, which are referred to as “performance allocation” in a State Investment Council annual report.

It paid $400 million in fees and expenses and $25 million in “commissions” in 2013.

“We can’t compare apples to apples unless we know we’re looking at apples,” Bruno said at the time. “And I think it might be deliberate.”

Investment officials defended the rising costs, saying the state only awards larger bonuses when it receives larger returns, and that the figures looked higher in 2014 because the division included costs not previously reported.

Bruno and O’Brien said the trustees may seek another opinion, turn to the state Legislature for help or press the State Investment Council, whose members are appointed by the governor and the pension funds, to approve an audit.

Bruno argued that simply because the authority to seek an audit is not spelled out in state statute should not mean the right to demand an audit does not exist.

State Senate Majority Leader Loretta Weinberg (D-Bergen) —  who with Sen. Robert Gordon (D-Bergen) has urged the State Investment Council to approve a cost-benefit analysis and an audit of the state’s investments and fee payouts — said she would explore the Legislature’s options.

“I’m not a lawyer, and I haven’t seen the opinion, but it sounds to me, on the face of it, that they were looking for a way not to do it rather than a way to do it,” Weinberg said.

O’Brien said the law cited by the state Attorney General’s Office indicates the boards do not have direct authority over investments — “I may disagree in principle, but the law is written that way,” he said — but he questioned what checks and balances pensioners have.

Bruno said the Attorney General’s Office, which is an arm of the governor’s administration, should have recused itself, saying it is a conflict of interest because the boards want to investigate the administration’s own investment activity.

“It’s not a stretch of the imagination that if a forensic audit turned up some hanky-panky that it might be linked to the governor,” he said. “So they’re going to advise us that we can’t do it.”

A spokesman for the Attorney General’s Office, Leland Moore, said that while he could not comment on legal advice, there was no conflict of interest.

A spokesman for the Department of Treasury said the Boards of Trustees already have oversight through their participation in the State Investment Council.

Tom Byrne, chairman of the State Investment Council, said was not clear what the trustees are seeking, and that the type of forensic audit they have requested could cost pensioners hundreds of thousands of dollars.

“I think most people are actually pretty happy with the amount of information we’ve provided,” Byrne said. “It remains true that some people are unhappy with our alternative investments because of the fees involved.”

He added that he thought union members were well represented on the State Investment Council.

“If they clearly define that they’re looking for, we will do our best to accommodate them … but they have to identify exactly what it is they’re looking for,” he said.

Byrne said that he had met with Bruno and held a luncheon for labor leaders to ease their concerns about the costs and benefits of investing in alternatives.

The rising payouts for bonuses and fees to private investment managers tracks the state’s increasing stake in such alternative investments as private equities and real estate. The share of  the state’s investments in hedge funds has tripled to 12 percent in the past five years, and real estate and private equity have nearly doubled to 5.3 percent and 9.3 percent, respectively.

Investment officials said shifting fixed-income securities to alternatives would protect the state, which lost billions in the dot-com bust and the Great Recession, in downturns, and that so far the the strategy has paid off.

In the 2014 fiscal year, the pension investments earned 16.9 percent. But four years of double-digit gains were replaced by returns of 4.58 percent through May. Final results for the fiscal year that ended in June are expected to be even lower.