Auditor finds no pay-to-play conflict in N.J. pension investment

TRENTON - New Jersey's decision to invest $15 million with a venture-capital firm tied to Massachusetts Gov. Charlie Baker did not violate pay-to-play laws, even though Baker contributed $10,000 to the New Jersey GOP months earlier, the state Treasury Department's chief auditor said in a report released Thursday.

The department released the report, dated Nov. 20, after a daylong meeting of the State Investment Council, which oversees the management of the $82 billion pension fund for public workers.

The council voted to table discussion of the report until its next meeting. In a separate case, the board granted an exemption to a firm that it said had violated pay-to-play laws, voting that the breach was inadvertent.

The Baker case has prompted an ethics debate at the Investment Council about political contributions and perceptions of improper influence.

Baker, a Republican who was elected governor in November, made the donation in May 2011. Seven months later, the New Jersey Division of Investment made a $25 million commitment in state pension funds to a fund controlled by General Catalyst Group, where Baker was listed as an executive in residence. The state later reduced its commitment to $15 million.

After news reports disclosed Baker's contribution in May 2014 - while he was running for governor - the Treasury Department said it would review the matter.

The Republican Governors Association, then chaired by Gov. Christie, says it spent $11 million on the race to support Baker.

The investment decision drew scrutiny during the campaign, as Baker's Democratic opponent called for the U.S. Securities and Exchange Commission to investigate the matter.

Baker also served on the boards of two health-care companies in which General Catalyst had invested. He has since resigned from those companies. The Boston Globe reported in October that Baker had taken a leave from General Catalyst in August.

Neither Baker's office nor a General Catalyst spokeswoman responded to requests for comment.

State policy prohibits the division from awarding an investment contract to a firm whose investment managers have contributed to New Jersey political parties and committees in the preceding two years.

At issue for the Treasury Department was whether Baker was involved in managing the state's pension funds.

The auditor, Dan Povia, found that Baker was an investment management professional, but primarily for a different fund.

"Mr. Baker did not provide 'investment management services' as defined by the policy in that his work was not related to the state's pension investment," the report said.

The state sold its interest in General Catalyst to Washington University in St. Louis in September.

The report said the Division of Investment should reconsider how it monitors possible pay-to-play violations. It currently relies on self-reporting. Alternatively, the division could actively search databases of campaign contributions to vet firms' principals and professionals, the audit said.

The Treasury Department said Baker was not required to disclose his donation to the state GOP because he was not involved in investment decisions with regard to the pension funds. General Catalyst said he was not even an employee.

Asked why the review took eight months, Treasury spokesman Joseph Perone said in an e-mail: "The issues that the auditor reviewed raised novel legal questions, so the auditor had to seek legal advice from the Attorney General's Office."

Tom Byrne, the council chair, acknowledged that the review took a long time but told reporters, "I don't think politics played any role in the investment decision."

Also Thursday, the council voted to maintain its $190 million investment with a fund managed by Prologis Management II, a global real estate firm, despite apparent pay-to-play violations.

In April 2013, Eugene Reilly, a member of Prologis Inc.'s executive committee, donated $1,000 to the campaign of State Sen. Raymond J. Lesniak (D., Union). Five months later, the state closed on the investment with Prologis.

State policy allows the council to grant a firm up to two exemptions per year to violations regarding political contributions, so long as it determines that the violation was "unintentional and inadvertent" and that the investment will benefit the pension fund and taxpayers.

Prologis requested an exemption in September, saying Reilly didn't remember the contribution at the time the contract was completed. Moreover, Prologis wrote, Reilly "has little direct involvement in European operations and investments."

The Division of Investment searched staff and other e-mails and found no communications with Lesniak.

Lesniak said he had no dealings with the investment council. He said that his law firm once represented Prologis in an Elizabeth development project but that he did not personally know Reilly.

The Investment Council voted, 8-0 with four abstentions, to grant the exemption.

"We're concerned about perception," Byrne said. "But the law does contemplate situations like this."