According to a report by David Sirota for the International Business Times, fees paid out to Wall Street by the State of New Jersey have tripled under the administration of Governor Chris Christie, costing the taxpayers $3.8 billion. Governor Christie was already under scrutiny for the way he managed the pension system when it was revealed that he had given a multimillion dollar contract to a campaign contributor arguably in violation of New Jersey’s pay to play law.
Now it has been shown that the Christie Administration has been showering lucrative business on Wall Street financial firms that have supported Chris Christie’s political career such as famous vulture capitalist Paul Singer of Elliot Associates who received tax payer money thanks to Christie and company.
But more distressing still is that the New Jersey Pension Fund’s performance has been lackluster despite the increase in fees.
In 2009, the year before Christie took office, New Jersey spent $125.1 million on financial management fees. In 2013, the most recent year for which data is available, the state reported spending $398.7 million on such fees. In all, New Jersey’s pension system has spent $939.8 million on financial fees between fiscal year 2010 and 2013. That’s only a little less than the amount Christie cut from state education funding in 2010 — a cut that played a major role in shrinking the state’s teaching force by 4,500 teachers. That money might also have reduced the amount the state needs to pay into the pension system to keep it solvent.
Higher management fees are supposed to buy — and therefore be offset by — better investment performance for pension funds, but New Jersey’s pension investment performance has fallen far behind other states‘. That’s likely a combination of below-market returns and the Wall Street fees the pension system wouldn’t have paid if it had followed the states that put less money in alternatives and more in stocks, index funds, bonds and other low-fee investments.
More fees for worse performance? Pretty bad deal for taxpayers, but a pretty good deal for Blackstone, Third Point, Omega Advisors, Elliott Associates, The Carlyle Group, and other financial firms that, not surprisingly, like the idea of a Christie presidency.
As if that is not enough, there is a genuine concern about piling money into hedge funds rather than more traditional and safer investment vehicles. The trend is not limited to New Jersey as more states are using politically connected hedge funds instead of more cautious and restrained investment managers. Hedge funds are extremely volatile and risky which is why they either succeed brilliantly or fail comprehensively. They are boom-bust machines which is why the SEC requires those that invest in them to be rich enough to be able to lose a lot of money and survive aka be “accredited.”
By shoveling taxpayer and pensioner money into hedge funds Governor Christie not only saddled New Jersey taxpayers with higher fees he jeopardized the future financial security of the state.
Photo by Bob Jagendorf under Creative Commons license.