PENSIONS - Garden State Warrior

As chairman of the New Jersey State Investment Council, hedge fund manager Orin Kramer has been fighting an ongoing battle to drag his state’s beleaguered pension plan into the modern era.

Orin Kramer doesn’t back down from a challenge. In 2002 the hedge fund manager was appointed by then-governor James McGreevey to the New Jersey State Investment Council, the body responsible for overseeing investment strategy for the state’s $80 billion pension system. Backed by the McGreevey administration, Kramer won selection as chairman of the council in what one member described as “a hostile takeover,” and began immediately to push for a radical new investment approach that would thoroughly revamp its asset allocation strategy and require the state system to do something it hadn’t done in more than 50 years — place money with outside managers.

The feisty Kramer wanted New Jersey to invest like other big multibillion-dollar institutional investors, diversifying beyond traditional stocks and bonds to both lower risk and improve returns. In particular, the new chairman advocated that New Jersey put a sizable chunk of its assets into alternatives, specifically hedge funds, private equity and real estate. Despite some opposition from the state’s longtime adviser, New England Pension Consultants, Kramer convinced the council in December 2003 to approve a new asset allocation plan that included $4 billion in alternatives among the system’s traditional stocks and bonds.

The benefits of diversification couldn’t come soon enough for New Jersey. The pension plan — which in 2000, at the height of the dot-com bubble, had a 111.4 percent funding ratio (the value of its assets divided by the present value of its future benefit obligations) — was in a downward spiral. Investment losses in 2001 and 2002 were accompanied by a $16 billion rise in liabilities. Part of the problem was that, like many states, New Jersey squandered the pension surplus it built up during the bull market. By June 2004, New Jersey had a $12 billion funding gap.

From the beginning, Kramer’s diversification strategy has been fiercely opposed by representatives of some of those who it was most directly designed to benefit — union members, who make up the majority of New Jersey’s pension beneficiaries. And as New Jersey’s deficit has deteriorated — the state is now $25 billion underfunded — they’re becoming ever more determined in their opposition. Some unions objected to hiring outside managers. They worry about the possibility for corruption and “pay to play” — private sector entities giving kickbacks to public sector workers or government officials in order to receive contracts. And they especially don’t like the idea of investing in hedge funds, which they see as a high-risk, high-fee boondoggle for obscenely rich Wall Streeters.

“This is pension money; this is people’s safety nets,” says Rae Roeder, president of the Communications Workers of America Local 1033 — which represents more than 7,500 New Jersey public workers — and the diversification strategy’s most vocal opponent. “Now they want to shoot craps with our money. I would rather they just take it down to Atlantic City.”

Kramer, 63, who has been known to refer to some of his opponents as “financially illiterate troglodytes,” has little patience for such complaints. There is, he thinks, no time for pleasantries. In his campaign to diversify, Kramer has an important friend and ally in the current New Jersey governor, Jon Corzine, who as a former head of Goldman, Sachs & Co. understands full well the importance of modernizing New Jersey’s investments, but the unions are making inroads.

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Early efforts to derail Kramer, including lawsuits to try to block the hiring of outside managers, proved largely ineffectual, but his opponents have managed this year to chip away at his power base on the 11-person Investment Council, five of whose members are picked by the individual pension plans, which have close ties to the unions. In February, as part of its contract negotiations with the governor, the CWA got Corzine to agree to require public disclosure by council members of the sources of their income and financial holdings. In May three of the governor’s six appointees — all supporters of Kramer — resigned rather than submit to the new disclosure requirement.

More bad news looms: The CWA also negotiated for the appointment of two new union representatives to the council, meaning the council’s board membership would increase to 13. That change, which still needs to be approved by the state legislature, could make it possible for the unions to defeat Kramer when the council has its annual September vote to elect a new chairman.

“We call that our get-rid-of-Orin clause,” says James Marketti, president of CWA Local 1032.

With Corzine in his corner, Kramer should be able to withstand the assault of the unions — for now. At stake is how to solve New Jersey’s gnawing pension deficit. For Kramer, who runs Boston Provident, a $100 million New York–based hedge fund firm, the answer is obvious: diversification. The New Jersey native came on board to steer the state toward a broadly diversified mix of noncorrelated asset classes to improve returns while lowering volatility.

“If New Jersey had been run in a modern way, I don’t know if I would have taken on this job,” says Kramer of his decision to join the Investment Council. “I like things with a low hurdle rate, and with New Jersey the bar is set very low.”

Low, indeed. With $110 billion in accrued liabilities, New Jersey has a pension shortfall of $25 billion, leaving the state only 77.5 percent funded. The numbers are even more grim for some of the individual funds within the system. The Teachers’ Pension and Annuity Fund has an unfunded liability of $11 billion and a funding ratio of 76.3 percent; the Public Employees’ Retirement System is only 72.1 percent funded, with unfunded liabilities of $4.1 billion. In April the Securities and Exchange Commission informed the New Jersey Division of Pensions and Benefits that it is conducting an investigation into management of the system’s assets and liabilities.

Part of the problem has been the state’s antiquated investment model. Before Kramer arrived, New Jersey had roughly 65 percent of its assets in equities, 30 percent in bonds and 5 percent in cash, most of which was invested in the U.S. Although that strategy appeared to work fine during the run-up in equities in the 1990s, New Jersey paid dearly for its lack of diversification during the 2000–’02 bear market.

The new allocation model — which for the fiscal year ended June 30 includes 54 percent in equities (including a healthy dose of international stocks), 28 percent in bonds, 7 percent in inflation-sensitive assets like commodities, 8 percent in alternatives and 3 percent in cash — was established to address the problem. In just the past two years, New Jersey has moved nearly $5 billion out of equities and into alternatives, including $2.5 billion committed to hedge funds, both directly and through funds of funds. By the end of this year, the New Jersey pension system could have almost as much money in hedge funds as the pioneering $245 billion California Public Employees’ Retirement System, which has invested almost $5 billion in the asset class since 2002.

“This is about reducing risk,” says William Clark, 44, director of the 65-person New Jersey Division of Investment, which has day-to-day responsibility for managing the state’s $80 billion portfolio out of its offices in Trenton. “From an investment perspective and a public policy perspective, we do not want a fund that is again subject to the kind of volatility we experienced in the early part of this decade.”

Clark is charged with implementing the Investment Council’s asset allocation policy. That’s a particular challenge for New Jersey because until 2005 it was the only state pension fund in the U.S. that actively managed all of its assets in-house. The main reason this setup continues — and makes the investment strategy in New Jersey so difficult to change — is that the majority of the investment personnel are unionized. CWA Local 1033 has represented the nonmanagement members of the Division of Investment since the early 1980s. So when the Investment Council first started talking about hiring outside managers, the CWA saw it as a classic case of outsourcing and became concerned that some of its members could lose their jobs.

Kramer is a target of the unions’ animosity. They see the council chairman, who can come across as gruff and impatient, as part of the problem — a hedge fund manager keen to send their pension money to his cronies. It doesn’t help that Kramer, a former aide to president Jimmy Carter, is close to Governor Corzine, with whom he became friends in 1996 when they worked together on then-president Bill Clinton’s Commission to Study Capital Budgeting. Kramer chaired the governor’s fundraising campaign for his successful 2000 U.S. Senate bid. In the eyes of the unions, Kramer and Corzine both represent Wall Street wealth. Kramer, who is unpaid for his work on the Investment Council, certainly knows both the highs and lows of the hedge fund business. After years of double-digit returns, his hedge fund lost more than 50 percent of its value in 1998 but later recovered.

Kramer and other members of the Investment Council have been talking publicly about the funding gap for some time. Council member Douglas Love, CIO of fixed-income manager Ryan Labs in New York, insists that the true figure is closer to $50 billion if the assets and liabilities are accurately marked to market.

“There are no nice answers to this problem,” Love says of the funding shortfall. “There is a lot of implicit wishful thinking about how it can be made to go away.”

New Jersey is certainly not alone. During the good times of the late 1990s, many corporations and government entities either did not fulfill their pension obligations or took money out of their overfunded pension systems. So when the stock market cracked in 2000, almost every defined benefit plan in the U.S. — public, corporate and Taft-Hartley — experienced a funding crunch. Negative returns combined with low interest rates, which cut the discount rate used to calculate pension liabilities, caused a perfect storm for the defined-benefit-plan community.

New Jersey’s funding ratio is far from the worst in the country. According to a February report from rating agency Standard & Poor’s comparing funding levels for state pension systems for the fiscal year ended June 30, 2005, the mean funding ratio for the principal state pensions was 81.8 percent; New Jersey’s was 81.5 percent. Still, because New Jersey’s is the eighth-biggest public pension fund in the U.S., behind such relatively well-funded systems as CalPERS, the California State Teachers’ Retirement System, the New York Common Fund and the Florida State Board of Administration, its $25 billion deficit is troubling.

ORIN KRAMER grew up in South Orange, New Jersey, a small town about 20 miles west of New York known for its quaint gaslit streets. His father was president of Suburban Foods, a food wholesaler in Newark. Kramer attended Deerfield Academy in Massachusetts, received a BA in history from Yale University in 1967 and went on to get a JD from Columbia University School of Law. After a brief stint as an associate at Simpson Thacher & Bartlett in New York, Kramer embarked on a career in public policy in 1973 as executive director of the New York State Commission on Living Costs and the Economy. There he attracted national attention by unearthing a major nursing home scandal; about a year later he took a job as counselor for the New Jersey State Treasurer.

In 1976 the 31-year-old surprised many of his friends when he decided to become a speechwriter for little-known Georgia governor Jimmy Carter, then a long-shot candidate in the Democratic presidential primaries. During the Carter administration, Kramer worked as associate director of the White House domestic policy staff and was the senior staff member responsible for the financial services industry, municipal finance and housing.

After Carter lost the 1980 presidential election to Ronald Reagan, Kramer returned to New York and joined the financial institutions group of consulting firm McKinsey & Co. In 1983 he left to start his own firm, Kramer Associates, which specialized in consulting on insurance issues. He remained active in politics, leading state commissions in New York and California, and later was a fundraiser for Bill Clinton.

Kramer launched his hedge fund, Boston Provident Partners, in 1992, originally as part of Fort Lee, New Jersey, investment firm Kramer Spellman. The long-short equity fund, which invests in financial services companies, including banks, insurers and specialty finance firms, has an average annualized net return of nearly 14 percent since inception, compared with 11.2 percent for the Standard & Poor’s 500 index during the same period. Kramer’s long-term record includes a disastrous 1998, in which Boston Provident fell more than 58 percent, with the bulk of the losses coming in the wake of the Russian debt crisis and the collapse of hedge fund Long-Term Capital Management. To his credit, Kramer did not close the fund. Because of its high-water mark, he didn’t collect his 20 percent performance fee for a few years.

(Investors who stuck by Kramer were rewarded. In 2003, Boston Provident was up nearly 59 percent. The fund’s average annualized net return for the past five years was 21 percent, compared with 8.5 percent for the S&P 500.)

While Kramer’s fund was struggling in 1998, the New Jersey pension plan was having a stellar year, rising 22.7 percent as it rode the wave of large-cap U.S. growth stocks. In 1999, New Jersey was up 16 percent, putting it in the 99th percentile among public pension funds with $1 billion or more in assets, and had a funding ratio of 109 percent.

The pension system’s apparent investment strength proved its undoing. During the early 1990s the state had changed the way it accounted for plan assets and, as a result, lowered state and employee contributions. Following passage of the state’s 1997 Pension Security Plan, New Jersey stopped making annual pension contributions entirely. That year, under pressure to pay into the system, then-governor Christine Whitman issued $2.75 billion in pension obligation bonds — effectively an IOU to be paid by the pension system itself. All this meant that while its future liabilities continued to grow, the pension system’s asset base was almost entirely dependent on its investment returns, which spelled trouble when the bull market came to a crashing halt in 2000. New Jersey’s funding level plummeted from 111.4 percent in June 2000 to 77.5 percent in June 2006.

“We are in a pretty extreme position in New Jersey because we went through a period when we didn’t put any cash at all into the system,” says State Treasurer Bradley Abelow, who shares oversight responsibility for the Division of Investment with the Investment Council.

Clark joined the Division of Investment in September 1999 as deputy director from New Jersey–based MBL Life Assurance Corp., where he had been a senior vice president in charge of pension and investment products. From early on, Clark lobbied to diversify into alternatives, especially private equity. He says he met resistance, in part because people at the pension system were reluctant to reallocate capital away from growth stocks.

“We had a 20-year bull market, the likes of which we will never see again,” he says. “The investment division rode it up until 2000, when the world changed but we didn’t.”

By 2002, New Jersey was in crisis. Although the pension scheme was still fully funded according to Government Accounting Standards Board rules, the market value of the securities in its portfolio had fallen nearly $20 billion since 2000. Newly elected governor McGreevey set out to fix the problem at the Investment Council level. With the advice of Kramer, who had been finance chairman for McGreevey’s unsuccessful 1997 gubernatorial campaign, the governor appointed a slate of financial heavyweights to the Investment Council to help steer the investment division toward a more sophisticated approach. McGreevey’s appointees included Kramer, Ryan Labs’ Love and labor attorney James Farrell.

At the first Investment Council meeting that Kramer attended, in May 2002, then-chairman Richard Spies, who had been CFO at Princeton University, announced his resignation because he had taken a job at Brown University in Rhode Island. Robert Hoffman, a money manager who had served on the council for more than a dozen years, replaced Spies on a temporary basis. Hoffman expected that the change would be made permanent, but for that to happen he had to be officially nominated and approved by a majority of the council. A vote was scheduled for September.

The McGreevey administration wanted Kramer as chairman and worked behind the scenes to build support for him. At the September meeting Kramer made a presentation in which he said that New Jersey should follow the example of other successful institutions that invest in alternatives. Later, when it came time to vote on a new chairman, Hoffman was nominated as expected, but Love, who was attending his first council meeting, suggested an alternative candidate — Orin Kramer. When the votes were tallied, Kramer won by a 6–4 margin. (Hoffman abstained; Kramer didn’t.)

Hoffman resigned from the Investment Council two months later. In his resignation letter he said he had been victim of what some on the council had called a “hostile takeover.” Hoffman bemoaned the politicization of the Investment Council and argued against any dramatic shift in investment strategy. He doesn’t believe that alternatives are the way forward for New Jersey. He worries about the high fees charged by alternative asset managers and the state’s ability to gain access to funds that are really providing value.

“It is all right when you are Princeton University and have been doing this type of investing for 25 years,” says Hoffman, a former value equity manager with Scudder Kemper Investments in New York who now runs a hedge fund, Candlewood Capital Management, in Princeton. “But New Jersey is just now trying to catch up.

Politicians will come and go, but I am not at all sure this is the right thing for the pension system.”

WHEN KRAMER BECAME chairman of the State Investment Council, one of his first acts was to trade in his Mercedes-Benz for a Cadillac. “I figured the unions would appreciate it if I drove an American-made car,” he says.

Kramer also instituted a monthly meeting schedule for the council, which had previously gotten together on a less regular basis, and made a series of due-diligence trips to see how other top funds operated. In particular, he spent two days in Sacramento, California, talking to investment staff and personnel at CalPERS, which in April 2002 had made its first hedge fund investment.

New Jersey deputy director of investment O. Ike Michaels Jr., was working for CalPERS at the time and commuting from New Jersey. He remembers Kramer’s visit well. Michaels says Kramer was interested not only in the way CalPERS was investing but also in how the fund itself operated. CalPERS, unlike New Jersey, sets its own budget separate from its state Treasury.

In late 2002, New Jersey hired a consulting firm, Washington, D.C.–based Independent Fiduciary Services, to study its investments. IFS recommended that the pension plan diversify to lower its risk and improve its overall rate of return. Based on the report’s findings, as well as comparisons with other managers, the Investment Council agreed in December 2003 to commit at least $4 billion to alternatives, including hedge funds, private equity and real estate.

Committing to alternatives was one thing. Actually investing in them was far more challenging. Kramer and the Investment Council were still investigating whether the pension plan had the authority to hire outside managers, without which it would be unable to invest in hedge funds and private equity. One of the biggest arguments against using outside managers was the fear of possible corruption. In the past, New Jersey had experienced problems with pay-to-play. The Division of Investment had in fact been created more than a half century earlier to bring the management of New Jersey’s pension systems in-house after a scandal with an outside manager.

Given the sensitivity of the unions, Kramer drafted, and the council adopted, strict guidelines regarding local campaign contributions. Effectively, no manager that had given money to a statewide or local political campaign could be hired.

Representatives for the fire and police systems and the Service Employees International Union were on board with the new asset allocation plan. But the CWA and the New Jersey Education Authority, which collectively represent as much as 70 percent of the pension beneficiaries, opposed it. In 2004 they filed lawsuits in state court attempting to block the hiring of outside managers. They argued that without legislative approval, the Division of Investment, under the guidelines by which it had been established, was forbidden from hiring outside managers.

The Investment Council, however, got an advisory from the State Attorney General’s office, which said, in effect, that the federal Prudent Investor Act gives the council and the investment division leeway to invest as they see fit so long as it is in keeping with how a prudent investor would act. So with the help of yet another consultant, San Francisco–based Strategic Investment Solutions, the Investment Council drafted, and in November 2004 approved, an asset allocation plan to commit 13 percent of the pension plan to alternatives over the next five years.

As chairman of the Investment Council, Kramer has no direct involvement in manager selection. That task falls to Clark, who has an MBA from Rutgers University in New Brunswick, New Jersey, and his team at the Division of Investment. The names of the managers they choose are then brought before a three-person investment committee, chaired by Love, before going to the Investment Council for final review. To help the investment division vet and monitor managers, New Jersey hired four investment consulting firms, including Marina del Rey, California–based Cliffwater for hedge funds; CRA RogersCasey in Darien, Connecticut, for funds of hedge funds; SIS for private equity; and Cleveland-based Townsend Group for real estate.

Given the Division of Investment’s small budget and the concern over the possibility for pay-to-play, the role of the consultants is crucial. Late last year, when CRA RogersCasey hired Kevin Lynch, formerly head of absolute-return strategies at the pension system of telecommunications company Verizon in New York, and assigned him to the New Jersey account, Kramer grilled him for four hours at the consulting firm’s Connecticut offices. He asked Lynch about everything from why New Jersey should even invest in hedge funds to CRA’s monitoring of Amaranth Advisors, a Greenwich, Connecticut, hedge fund firm that had just gone bust. “It was my second day on the job,” says Lynch. “It was quite an experience.”

New Jersey began hiring outside managers in 2005, starting with private equity and real estate funds. In March 2006 the pension plan made its first hedge fund investment, giving $75 million to New York–based Angelo, Gordon & Co. (it has since increased the commitment to $150 million). New Jersey has built a stable of more than 15 single-manager or multistrategy hedge fund firms, including standouts like Och-Ziff Capital Management in New York and Farallon Capital Management in San Francisco that are difficult to get access to.

For hedge fund managers looking to diversify their client base with sticky assets, New Jersey is an attractive investor. The state’s typical hedge fund allocation is at least $100 million — large by today’s standards. “Just like New Jersey does its due diligence on potential hedge fund managers, generally, the top hedge funds do their own due diligence on potential limited partners,” says Stephen Nesbitt, CEO of investment consulting firm Cliffwater. “They accept those investors with which they think they can establish good relationships.”

New Jersey is investing in a mix of single-manager, multistrategy and fund-of-hedge-funds firms. Last summer it allocated $500 million to a trio of funds of funds — Arden Asset Management and Goldman Sachs Asset Management in New York and Washington, D.C.’s Rock Creek Group. New Jersey sees value in funds of funds: They enable it to deploy its capital quickly, as well as potentially benefit from sharing information about managers. But because of the added layer of fees, New Jersey intends to limit its fund-of-funds allocation to $2 billion.

The state has tended to invest in low risk, brand-name hedge fund managers — firms like Och-Ziff, which has $21 billion in assets under management and a track record that stretches back more than a decade. Kramer worries that the pension system is being too conservative. “I am personally concerned by the tendency, common at many public funds, including New Jersey, to gravitate toward older, less politically risky names,” he says.

But even with safe names, there can be setbacks. Three of New Jersey’s funds of funds — Arden, Goldman Sachs and Rock Creek — had assets invested with Amaranth. New Jersey lost an estimated $16 million when Amaranth collapsed in September 2006 after losing more than $6 billion on a bad bet on natural gas. Although the amount was significant, it was still considerably less than the $61 million the pension plan lost in 2001 when Houston-based energy company Enron Corp. failed.

Over time Kramer and Clark plan to broaden New Jersey’s hedge fund investments — both geographically and by strategy. In April the Division of Investment presented proposals to the Investment Council for allocations to specialist funds of hedge funds run by New York–based Blackstone Group and Protégé Partners. Blackstone is running $200 million — $100 million each in an emerging-markets fund and a Pacific opportunities fund. Protégé Partners, which has a $150 million mandate from New Jersey, looks to deliver alpha by investing in and seeding new managers.

Although it is still too soon to tell how the new diversified portfolio will do, the initial results look promising. From July 2006 through April, the state pension system was up 15.92 percent, beating its internal benchmark by 105 basis points. Judging the performance of the hedge fund portfolio is harder because it is still being rolled out. For the first quarter, the most complete data set available, New Jersey’s hedge funds were up 4.48 percent, 131 basis points above their benchmark (LIBOR plus 300 basis points).

One of the priorities for Clark, and for the council, is to bring in more staff to oversee alternative investments. In addition to Clark and deputy director Michaels, the Division of Investment currently has just seven people directly involved in alternatives. Finding and retaining talented individuals is particularly difficult for public plans like New Jersey’s, which is prohibited from using a bonus-based pay system because of union opposition. With an operating budget of $8.7 million — less money than what each of the hedge fund managers with which New Jersey invests probably makes in a year — and New York just a 90-minute train ride from the investment division’s offices in Trenton, Clark is forced to be creative.

“It is difficult to find staff, but I find people tend to have their own reasons for being here,” says Clark, whose $175,000 salary last year is less than what a junior analyst at a hedge fund typically makes.

ONE IMMEDIATE CONCERN is that the Investment Council is now shorthanded. In May three council members — Farrell, Cheryl Mills and Anthony Terracciano — resigned rather than submit to the new disclosure requirements, which would have made detailed information about their financial holdings and sources of income publicly available over the Internet. All were supporters of Kramer and the current investment agenda.

Terracciano has paid the steepest price for his involvement with the Investment Council. In 2002, McGreevey appointed the former vice chairman of Chase Manhattan Bank in New York to the council. A proponent of hiring outside managers to diversify the pension system, Terracciano voted in June 2005 — along with a majority of the council — to endorse a $200 million allocation to New York–based private equity firm Warburg Pincus. During the meeting he said that he’d had business dealings with the firm, which had tapped the longtime banking executive to serve on several boards of companies in which it had investments, but did not recuse himself from the vote. This year the New Jersey Treasury ethics office opened an investigation after it got a call from a local journalist about the vote. Its findings, released before Terracciano’s resignation, concluded that although his vote was not improper, it had the appearance of impropriety and that in the future Terracciano should abstain from votes involving the firm.

But there will be no future votes for Terracciano. Kramer says the banker paid a high cost in legal fees for an investigation that put his reputation on the line. Some council members believe the push for disclosure, and the hounding of Terracciano, was at least partially politically motivated. Farrell expects the Investment Council chairman to bear the brunt of the ongoing hostilities.

“I see Orin being subject to tremendous stress by critics who want to derail what is an appropriate way of improving the integrity and structural performance of the fund,” Farrell says.

The SEC investigation won’t make life any easier for Kramer. Although the SEC has not disclosed the target of its probe, at issue is the funding and liabilities side of the state’s pension plan. Before the current administration took office, the state had not put money into the system for nearly a decade, and there are concerns about the true level of underfunding. Governor Corzine, whose administration has already put $1 billion back into the pension scheme, has asked New Jersey Attorney General Stuart Rabner to launch his own inquiry into the matter. Although the investigations do not directly affect investments, they do put even more pressure on the management of the pension system in general.

Kramer is doing what he can to repair the damage to his now-depleted coalition on the council. He is working with the governor to fill the three vacant council seats with knowledgeable financial professionals who will support his investment agenda. The new disclosure laws, however, make recruiting a challenge.

“The whole topic of disclosure is one we are dealing with across government,” says New Jersey Treasurer Abelow. “It is a very real issue for folks committing time for the privilege of serving the state for public service. There is a limit as to what amount of disclosure they are willing to tolerate.”

Across the U.S., public pension funds are struggling to recruit qualified board members because of the scrutiny, disclosure requirements and headline risk that comes with the role. As public pension plans themselves become more complex, there is a greater need for board members who are sophisticated enough financially to understand the issues and risks associated with investing in hedge funds and other alternative assets.

The situation in New Jersey is complicated by the unions, specifically some of the CWA locals, which, despite all the arguments in favor of diversification, still oppose hiring outside managers. They see money going to firms like Goldman Sachs, Corzine’s former employer, and hedge funds run by Goldman alumni like Och-Ziff founder Daniel Och, and worry that Wall Street is rewarding its own. New Jersey will pay an estimated $200 million in fees to outside managers for the fiscal year ended June 2007.

CWA Local 1032 president Marketti says that Kramer was, and is, forcing the pension fund do to something its beneficiaries just aren’t ready for. “This is an employees’ investment fund, and if he can’t convince us, he shouldn’t be doing it,” says Marketti. “This is not a dictatorship — the Roman era is over.”

Marketti could get the chance to voice his dissent in a more powerful forum if the state legislature approves the provision in the new CWA employment contract to give the unions two new Investment Council seats, as he is seen as a likely candidate for one of them. (The reconstituted 13-member council would include six appointees from the governor, six from the unions and one from the legislature.) Kramer sees the change as an opportunity to put the issue behind him as he presses ahead with his diversification plans, which for New Jersey means adding more hedge funds.

Ironically, Kramer and his union opposition both want the same thing — to fix the ailing pension system. They simply can’t agree on how to do it. The increased scrutiny by the SEC and others over New Jersey’s pension funding may actually help Kramer advance his agenda, insofar as it draws attention to how out of step the state’s investment processes had been.

“I’m trying to keep a pension system alive,” Kramer says.

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