August 26, 2009 - 2:29pm

Press Release

Pennacchio Urges Corzine Pension Officials to Release Details of Secret Deals

By Andrew Pratt

Senator Joe Pennacchio, a member of the Senate Budget and Appropriations Committee, has sent a letter to the state Division of Investment and the chairman of the State Investment Council after reading an Aug. 20 news article that indicates that the state will not reveal where outside advisers have invested about $100 million of taxpayer and worker pensions. The article states that the outside advisers are former employees of Lehman Brothers, which the state is suing for $118 million in investment losses.

The article in the NJBiz financial newspaper states that unnamed "officials would not provide the names of six private equity funds that make investments for the NB/NJ Custom Investment Fund, nor would they name the three private companies that receive investments from the state." The NB/NJ Custom Investment Fund was created by now bankrupt Lehman Brothers and the state to invest in New Jersey business and investment opportunities.

"Let me get this straight," Senator Pennacchio said. "State officials are suing Lehman Brothers because of allegations that our pension funds lost $118 million because Lehman's Wall Street bankers lied to us. Yet these same state officials don't want the public to know what bankers who worked for Lehman until it went bankrupt are doing with $100 million we still have in their care."

Pennacchio said he has no problem with dedicating a certain portion of state pension funds to New Jersey companies that can provide above average returns. However, he believes "secret" investments are ripe for potential abuse, including pay to play and political interference in the decision making process about who gets state money.

"Transparency is the best defense, and sometimes the only defense, against corruption,"

Pennacchio said. "New Jersey should only make investments when recipients agree to the increased and necessary scrutiny that comes with accepting the public's money."

The article that prompted the letter is below. Below the article, is the letter:

N.J. pension investment is 'a success'

Fund, which buys into Garden State companies, has so far outperformed S&P

By Andrew Kitchenman

8/17/2009

A two-year-old program that invests state pension funds in New Jersey businesses has performed comparatively well during the market slump.

The program earmarks $100 million in public employee pension money for a fund that invests in companies operating in New Jersey. Other states already do this, and the approach has its critics: one national observer of state pensions questions using geography as a criterion for any pension investment.

New Jersey's fund, the NB/NJ Custom Investment Fund, was announced by William G. Clark, Division of Investment director, on Aug. 31, 2007. From its September 2007 inception through March 31 of this year, it lost 3.7 percent — a much better performance than either the S&P 500 index, which lost 39.9 percent over that time, or the state's overall pension portfolio, which fell 25.2 percent, according to Treasury officials.

"I would consider the fund to be a success so far," said Christine Pastore, a state investment officer who heads the state private equity investments.

But officials say it's premature to judge the fund, which is set to hold individual investments for four years, and to last a total of 10 years. Of the state's $100 million investment, $41.7 million is still available to invest; the rest has been committed.

The fund is operated for the state by Neuberger Berman Group LLC, which was spun off from the bankrupt Lehman Brothers. The same management team the state originally selected from Lehman still runs the fund, officials said.

The Custom Investment Fund, originally named the New Jersey Directed Investment Fund, invests in private companies as a "co-investor," contributing no more than 25 percent of the private equity investment, and also invests through private equity funds.

The $100 million is a tiny slice of the state's total pension fund of $63.2 billion, which serves roughly 650, 000 retired and active state and municipal government workers, police, firefighters and teachers.

Officials would not provide the names of the six private equity funds that make investments for the Custom Investment Fund, nor would they name the three private companies that receive investments from the state, citing confidentiality agreements with Neuberger Berman. They did say the fund invested in financial services and life sciences companies, either directly or through a private equity manager.

The state has vetoed one investment planned by Neuberger Berman, due to a prior relationship the potential investment target had with the state that could present a conflict of interest, state officials said.

Officials said private companies that would like to receive an equity investment from the fund should contact the state Division of Investment.

Keith Brainard, research director for the National Association of State Retirement Administrators, expressed skepticism toward pension funds having any goal other than the benefit of pension recipients, such as limiting its investments to within the state.

While Brainard isn't opposed to investments inside a state when they happen to be the best targets for investment, he said it's a violation of an administrator's responsibility to take any other factor into account.

"Really, you want a project to be evaluated on its own merits" and not on whether it's located in the state, he said. "The pension is not there to help out things like venture capital in the state."

Officials defended the decision to invest in New Jersey companies, noting that any fund investment is limited to 25 percent of the equity raised by a company. In addition, the fund benefits from the state's location.

"New Jersey is fortunate to have opportunities to invest in financial companies that are physically located in the heart of the world's financial capital, and in life sciences companies that make up the world's medicine chest," said Treasury spokesman Thomas Vincz.

Other states have launched similar funds. New York's In-State Private Equity Program has had a 30 percent rate of return from 2000 to March 1, said Emily DeSantis, spokeswoman for Comptroller Thomas P. DiNapoli.

DeSantis said New York's program — which has $931 million committed toward it — has been a success. She said the state won't pick a company "just because it's in New York."

Other states with public pension investments in in-state private equity funds include California, Florida and Indiana; Maryland is exploring the option.

August 20, 2009

William Clark, Director

New Jersey Division of Investment

50 W. State Street, PO Box 005

Trenton, NJ 08625

Dear Mr. Clark:

I was shocked by an article in NJBiz, the statewide financial and business newspaper, that says the Division of Investment will not reveal where outside advisers place approximately $100 million in pension fund money. (The article is included in this mailing.)

The Aug. 17 story is under the headline "N.J. pension investment is 'a success'" and the sub headline, "Fund, which buys into Garden State companies, has so far outperformed S&P." The article touts a 3.7 percent loss on state pension investments in unnamed New Jersey businesses, and praises how the loss compares favorably to much bigger losses in other investments the Division of Investment has or could have made over the last two years.

What the article does not tout are the names of the New Jersey companies or New Jersey funds into which this $100 million was invested. To quote the article: "Officials would not provide the names of six private equity funds that make investments for the Custom Investment Fund, nor would they name the three private companies that receive investments from the state, citing confidentially agreements with Neuberger Berman." Can this article be accurate? Do members of the State Investment Council and the Division of Investment really believe it is ethical and responsible for the state to invest $100 million without revealing to the public where that substantial sum of taxpayer and public employee money is placed in trust?

Further, according to this article, we originally placed these investments in the trust of Lehman Brothers, a now-bankrupt Wall Street firm.

The state is suing Lehman brothers. The state alleges that lies told by Lehman execs led to $118 million in investment losses. Yet the state now employs Neuberger Berman to handle this investment money. Neuberger Berman was part of Lehman until Lehman went bankrupt.

Should we really trust that ex-Lehman investment managers are telling us the truth about either the performance or the management of these investments, when we are accusing their former employer of lying to the state about other investments?

Moreover, in my opinion, the chances are very high that the beneficiaries of these investments have strong relationships with some local government officials. We have seen repeatedly that absent transparency and outside oversight in the handling of New Jersey taxpayer money, political considerations can and do lead to improper diversions of precious resources. Absent transparency and full disclosure, how can the public be assured that investments are being made honestly?

It's unfortunate, but given the recurring arrests and convictions of public officials related to pay to play and other corruption accusations, New Jersey should not be making investments that are not subject to the same transparency rules as any other type of investment.

Without full disclosure of where state investment money is going, how can citizens be confident that political considerations aren't affecting investment decisions?

Rather than keep these decisions secret, New Jersey should only make private investments when the recipients agree to the increased scrutiny that comes with accepting public money.

On behalf of the constituents who elected me their representative, I would like answers to the following questions:

How many other investments has the Division of Investment made where the recipients of state investments of any kind are not disclosed to the public?

What legislation allows the Investment Council to enter into secret investment agreements? Does the legislation apply to all investments, including the Cash Management Fund, or only to pension investments?

How does the Investment Council reconcile its decision to do secret deals with the bans on campaign contributions it has imposed or the public disclosure and bidding rules already in effect under state law, particularly those pertaining to campaign contributions?

How are businesses and funds selected to receive money from the so-called NB/NJ Custom Investment Fund? Who receives and reviews the information on the investments and decides which companies and funds to select?

Who, outside of the Division of Investment, reviews these decisions to ensure that no one has made political contributions or provided other favors to state government officials? Is there any independent, outside oversight of these secret deals?

Are there any outside agencies that review your investment decisions to insure that there are no conflicts of interest?

Do you require that companies, funds or banks seeking investment business or direct investment from the state reveal their political contributions, -- local, state and federal? If so, is there any independent or outside agency that reviews these disclosure forms to ensure the reporting is accurate?

Web: www.senatenj.com Twitter: twitter.com/senatenj YouTu

ANDREW PRATT can be reached via email at apratt@njleg.org.

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