GLOBAL- Investment managers who have given political donations in the state of New Jersey are set to be banned from managing that state's $68bn pension funds' assets.
The advisory council which oversees the management of New Jersey's state pension funds has drafted a strict set of external manager selection criteria in an bid to eliminate public pay-to-play.
The plan, drafted by council chair Orin Kramer, goes beyond existing state law covering external contracts and is unique among public pension funds in the US.
The move comes as New Jersey gears up to outsource its first mandates to private investment managers. The council is considering an allocation to alternative investments to try to achieve the 8.75% return stipulated by the latest state budget. The fund returned 3.3% in 2003 and only 1.8% in the five years to 2003.
However trade unions, whose members' pensions are managed by the state, are withholding support for the plans unless they are passed by the state legislature.
“Our biggest concern is that we need to have very strong regulations in place so that when those managers are hired there isn't any pay-to-play going on,” said a spokesman for the New Jersey Education Association, the teachers' union. “The problem is the council wants to do this without legislative authority. We don’t want this to be a political plum.”
Kramer, however, noted: “Obviously anyone is entitled to seek legislation and I don't necessarily think legislation is a bad idea, but on the other hand, I don't believe anyone sees legislation as something which is reasonably feasible in the short term. In the interim, the council has fiduciary obligations.”
New Jersey state governor James McGreevey supports both the move to an external manager and the proposed regulations, but wants the investment board to address union concerns.
In addition to local political ramifications, the plan could face other hurdles. CalPERS tried to install a similar plan in the late 90s, but withdrew the proposal after a court challenge.
“The proposal was that money managers that worked for CalPERS could not give campaign donations to a member on the CalPERs board,” said a spokeswoman for CalPERS. “One of the members of the board, the state controller, challenged it in court on the basis that it was a violation of the constitution, and also on the grounds that CalPERS hadn't taken it through the state regulatory process. In this case, the judge said it didn't go through the proper legal process and rejected the proposal.”
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