What's Happening with the Pension Fund? -- Part 10

by Charles Schwartz, Professor Emeritus, University of California, Berkeley
schwartz@physics.berkeley.edu                                       June 6, 2001

>> This series is available on the Internet at http://socrates.berkeley.edu/~schwrtz

A Tale from Texas - with Lessons for California

The University of California Board of Regents has appointed David H. Russ as its new treasurer and vice president for investments, replacing Patricia A. Small, who resigned (was pushed out) from that position last August. Russ was previously a managing director for the University of Texas Investment Management Company (UTIMCO).

Out of curiosity I asked google to search this organizational name and found the following fascinating story about UTIMCO. ( http://www.tpj.org/pioneers/r_hicks.html ) This piece was written by Texans for Public Justice, a "non-partisan, non-profit policy and research organization which tracks the influence of money in politics." This is one of a series of sketches about the Bush Pioneers, individuals who raised large amounts of money for the 2000 Presidential campaign of the former Texas Governor.

R. Steven Hicks and his brother Tom both founded major radio companies that merged in '99 into AMFM, Inc. After Clear Channel Communications devoured AMFM later that year, Tom Hicks became its vice chair. Tom Hicks made Bush a millionaire 15 times over when he bought the Texas Rangers in '99. Just as local taxpayers enhanced the value of Bush's Rangers by paying $135 million for their stadium, Hicks and Ross Perot, Jr. got Dallas taxpayers to spend $125 million on a stadium for their Dallas Stars and Mavericks in '98. Tom Hicks heads the corporate raider firm Hicks Muse Tate & Furst (Bush's No. 4 career patron). Hicks Muse long wanted to tap the $13-billion University of Texas (UT) endowment for its takeover deals. As Bush assumed office in '95, Hicks was confirmed as a University of Texas Regent and hired lobbyists to push a bill creating the UT Investment Management Co. (UTIMCO). With Hicks as its first chair, UTIMCO began doling out contracts to private investment firms to manage portions of the endowment. A scandal blew up when the media discovered that UTIMCO awarded many of these lucrative contracts to firms tied to Hicks and Bush - including one that former President Bush reportedly owns a piece of. The UTIMCO board doling out these contracts included Clear Channel Chair L. Lowry Mays and the Pioneers Tom Loeffler, A.W. Riter, and A. R. Sanchez. Ed Bass and Pioneer Charles Wyly owned two firms that landed some of these contracts.
An email inquiry to tpj.org returned some references that provide details and background on this scandal story from Texas. It started with an article by R. G. Ratcliffe in the Houston Chronicle on March 21, 1999, headlined "Secrecy cloaks $1.7 billion in UT investments." Excerpts follow.
AUSTIN - A little-known, quasi-state agency headed by political appointees has been meeting behind closed doors to invest $1.7 billion of public university money in the form of investments in private companies.
As chairman of the 3-year-old University of Texas Investment Management Company [UTIMCO], Tom Hicks has committed $1.7 billion in public university money to private investment banking funds that promise potentially high returns from high-risk investments.

Hicks is a Dallas investment banker with a growing sports and broadcasting empire. He is perhaps best known as owner and chairman of the board of the Texas Rangers baseball team. His good works for the university include a donation of more than $1 million to expand the UT football stadium and the gift of the Alamo diary to UT-Austin.
[O]f the $1.7 billion directed by UTIMCO, $252 million has been committed to funds run by Hicks' business associates or friends. Another $205 million has gone to five funds run by major Republican political donors. [emphasis added]

In one case, Hicks insisted that UTIMCO increase by $10 million an investment commitment to a company in which he had an indirect financial interest. The staff halted full funding of the investment when it discovered the conflict.
UTIMCO's investments were made in closed-door, off-campus meetings - including one in Hicks' boardroom at the Ballpark in Arlington. Such meetings have caused state auditors to question the secrecy and potential for conflicts of interest.

Hicks founded the Dallas investment banking firm Hicks, Muse, Tate & Furst, Inc. He was appointed to the UT Board of Regents in January 1994 by Gov. Ann Richards, who took $17,500 in campaign contributions from Hicks before her defeat. Hicks did not seek reappointment to the Board of Regents when his term expired in February, but has asked to keep his chairmanship of UTIMCO as an outside director.
The move to invest public university money in private funds began after Hicks joined the UT Board of Regents in 1994. The investments had been made through the regents boards, which are required to conduct business in public. UT Chancellor William Cunningham told the Legislature that the university needed greater secrecy in its investments so that it could place money with competitive high-return investment funds.
In the 1995 session, the Legislature authorized creation of UTIMCO, a nonprofit corporation. Since 1996, UTIMCO has handled more than $11 billion in the investments of the UT endowment funds as well as the state's higher education trust, known as the Permanent University Fund. Of that amount, $1.7 billion has been directed to private investment management companies ... [and this] is five times larger than the $282 million that was placed in such private deals between 1987 and 1992, before UTIMCO was born.

When it began operations in 1996, Hicks became chairman of the nine-member UTIMCO board of directors, which has included key fund-raisers for the Republican National Committee. Hicks and his brother, Steven, have donated $146,000 to Gov. George W. Bush's campaigns.

In the past three years, state auditors have criticized the secretive nature of UTIMCO's investment decisions and have complained about the potential for conflicts of interest for board members.
Using what public records were available, the Chronicle was able to find only sketchy information on most of UTIMCO's investments.
[Numerous details on UTIMCO investments are given in the article]
Hicks did not respond to several requests made early last week for an interview with the Houston Chronicle about UTIMCO's investment practices. But late Friday, he issued a statement [which] reads: "It appears the Houston Chronicle has constructed an elaborate and false scheme to explain a series of completely separate transactions. The facts are all of these transactions were conducted with the highest standards of integrity required in due diligence. It is far-fetched and frankly goofy to make false comparisons and then draw conclusions in an imaginary connect-the-dot exercise."

This newspaper story produced reaction from public interest groups, state legislators and newspaper editorials calling for more openness and public accountability in the public university's investment practices. Things happened.
  • By the end of March, UT officials told the Texas Legislature that in the future UTIMCO would disclose more information to the public - called "a baby step forward" by Common Cause of Texas. (HC 3/30/99)

  • In the April 11 issue of the Houston Chronicle, UT Chancellor William Cunningham issued a PR statement under the heading, "Rest assured - UT investments ably, openly managed".

  • In mid-May, Tom Hicks resigned from the UTIMCO board.

  • In June, Chancellor Cunningham announced that he would be retiring from the University "to pursue interests in private business." (HC 6/11/99)

  • In August, the chairman of the UT Board of Regents - Don Evans [later, Bush campaign chairman, now Secretary of Commerce] - said he would urge the regents to require a full open meetings policy for the UTIMCO board. (HC 8/13/99).

  • In September, the UT Board of Regents decided that the UTIMCO board would abide by the state's open meetings law, a vote that Common Cause of Texas called "a very good healthy step forward to restoring public confidence". (HC 9/4/99)
  • --------------------------

    The UTIMCO scandal is also covered in the February 2000 issue of Harper's magazine. The article, "Notes on a Native Son," by Joe Conason, has the subtitles, "The George W. Bush Success Story" and "A heartwarming tale about baseball, $1.7 billion, and a lot of swell friends." Here are a couple of summarizing quotes:

    "Although neither Bush nor Hicks knew it then [when Bush was elected Governor of Texas in 1994], each would considerably enhance the other's fortune."

    "In a certain sense, all this favoritism by UTIMCO was merely business as usual. It was and is, as they say, the corporate culture of the financial industry."

    What does all this have to do with UC's new Treasurer, David Russ? The official press release on his appointment says,

    "At [UTIMCO] since June 1997, Russ was responsible for all global publicly traded investments, both equity and fixed income, alternative marketable assets, investment manager selection and asset allocation as well as its private equity portfolios."
    So he must be very familiar with the scandal story outlined above. I wonder if this history, and the various issues involved, were discussed in the closed meetings with UC's regents and their advisors that led up to Russ' being hired. I hope so.

    More broadly, this fascinating story from Texas offers several instructive lessons for us Californians who are concerned about our own University's investment practices. The objective below is to compare the standards of behavior that apply to officials at UT and at UC. I see three main topics: Secrecy, Conflict of Interest, and Privatization.

    Lessons for Us - Secrecy

    New UTIMCO rules, issued after the scandal broke, require that

    "In future private-equity investments, the names of principals who manage the investments will be part of the public record, as will annual rates of return for each investment." (HC 4/11/99).
    At the University of California, the Treasurer's office posts a semiannual listing of the full portfolio of stocks and bonds held in the pension and endowment funds; however there are no such details made public for the private equity investments, which, under the UC Regents' new asset allocation policy, are expanding in volume.

    An even sharper contrast between UT and UC on habits of secrecy emerges when we examine their policies and practices concerning OPEN MEETINGS of regents and their investment advisors. Here one checks the list of "exceptions" to any general open meetings policy. Both universities allow closed door sessions (also called "executive sessions") when considering specific items involving litigation, personnel evaluations, the valuation of a prospective gift or of real estate if open deliberations would have a detrimental effect on the university's position in negotiations. Big differences appear, however, when we look at the details of the investment process.

    At UTIMCO, the Board may only meet in closed conference with its staff or a third party to ask questions and to receive information relating to an investment or potential investment in a private business entity if disclosure of the information would give advantage to a competitor; and during such conference members of the Board may not deliberate any business of UTIMCO. This is a very restrictive exception to the open meetings rule.

    For the UC Regents, closed meetings of the Board or its Committee on Investments (or its Investment Advisory Board) are permitted "when they meet to consider or discuss ... Matters involving the purchase or sale of investments for endowment and pension funds." This is a much broader exception to the open meetings rule than what Texas allows.

    In practice, moreover, the UC Regents stretch this loophole even much farther than the words quoted above permit. Throughout the months when they considered the report and recommendations from Wilshire Associates on revising their overall investment strategy and policy, all of those meetings were held in secret. Furthermore, even many months after the fact, the University's General Counsel refuses to release the minutes of those closed meetings. I complained about this specifically in Part 3 of this series and I have never gotten a cogent response from UC officials.

    Lessons for Us - Conflicts of Interest

    According to then UT Chancellor William Cunningham,

    "UTIMCO has a stringent ethics policy that includes a conflict-of-interest test that is stricter than Texas law. Each director and senior staff member is required to sign a certificate of compliance that he or she has absolutely no personal or private interest in UTIMCO's investments. ... All UTIMCO directors and staff are well aware of the severe criminal penalties in state and federal law for violation of conflict-of-interest laws." (HC 4/11/99)
    This looks to be considerably more strict than the policy we have in California.

    The critics of UTIMCO called for more stringent controls against conflicts of interest; but they were unsuccessful in making any gains there. In both Texas and California the rules on conflict of interest are often vague and more often they are not vigorously enforced. One illustrative story, from the Harper's article, links Texas and California:

    "CalPERS, the state's employee pension fund, invested $100 million with Hicks, Muse in 1997 after a positive recommendation from an outside consultant, Christopher J. Bower. A furor arose after it was revealed that Hicks had also purchased a yacht for $300,000 from Bower. That price was $45,000 more than Bower had originally paid for the used 47-foot boat, and Hicks had paid the higher price without ever actually seeing the vessel.
    "Fortunately for Hicks, the giant California pension fund's lawyers took an indulgent view of the matter. They ruled that there was no serious conflict, because the boat sale had taken place nine months after Bower's recommendation and twelve months before a second $100 million investment was approved by the CalPERS board."
    In a previous paper of this series (Part 5) I raised some questions about possible conflicts of interest regarding several UC regents' participation in the adoption of Wilshire Associates' recommendations for larger investments in private equity. Those questions of mine have never been answered, or even acknowledged, by UC officials.

    It is frequently difficult to prove, or to disprove, the existence of a quid pro quo in alleged conflict of interest situations; but it is the established obligation of officials to avoid even the appearance of a conflict of interest in order to maintain the public trust.

    Lessons for Us - Privatization

    Again from the Harper's story, following Hicks' activities after joining the UT Board of Regents in 1994:

    "Hicks began to press for more aggressive investment strategies. Speaking as one of the country's leading buyout and venture-capital experts, he convinced the other regents that falling revenues from the university's oil leases had to be offset by higher-risk, higher-return equities. ... In 1995, following [a] consultants' report, they adopted a rather radical innovation favored by Hicks and the professional staff. The plan featured a buzzword with great appeal to conservative Republicans such as the new governor [Bush]: privatization. To compete more effectively in global markets, the university could "privatize" approximately $9 billion in financial assets by transferring all of its diverse holdings into a new nonprofit corporation. This entity, separate from the regents but still under their purview, was to be known as the University of Texas Investment Management Company, or UTIMCO."

    If the word "privatization" is looked upon with favor in Texas, in California it is something else. Last September, UC Regents chairman S. Sue Johnson declared:

    "The University of California is not, I repeat not, about to privatize these funds. That was not and is not an objective of the nearly two year review of the University's investment policies and management structure. The University will maintain their custody over these funds and assets and their responsibility for their investment."
    Immediately after that speech, the regents proceeded to shift $11.5 billion in UC funds into the hands of an external investment management company. (See my Part 5.)

    The UC regents also had a fling at privatization when they merged their hospital at UC San Francisco with that of Stanford University, forming a new nonprofit entity - which was a private business and thus exempt from open meetings rules, etc.

    The Harper's article cites cases in New York and Connecticut to illustrate that,

    "The [financial management] industry's corrupting influence on public pension funds has been a perennial scandal in state capitols across the country for well over a decade."

    The most widely discussed and debated issue of privatization in this country has to do with the Social Security system. Recently, President Bush named a select panel to draft proposals on how this public pension system might be privatized. Among the people named to that commission is Gerald Parsky, a member of the UC Board of Regents. Parsky was the head of candidate Bush's campaign in California; and he was the head of The Regents Committee on Investments throughout the whole affair with Wilshire Associates.

    As I discussed in Part 5, privatization is always a very politically charged issue. Any concerned citizen is advised to stay alert and keep asking questions.

    One More Connection

    On the list of Pioneers, "George W. Bush's $100,000 Club" as identified by Texans for Public Justice, I also found the name of former UC Regent Howard H. Leach - he ranked 14th out of 212 Pioneers in the amount of contributions to the Bush presidential campaign. Leach, a private investment banker in San Francisco, was highly regarded on the UC Board and was deeply involved with the UCSF-Stanford hospital merger; he served many years on the Regents Committee on Investments and also on the special committee to select the new UC Treasurer this past year. His term as a regent expired in March; and he has been named by our new President to be Ambassador to France.