What's Happening with the Pension Fund? -- Part 12

by Charles Schwartz, Professor Emeritus, University of California, Berkeley
schwartz@physics.berkeley.edu                                 October 18, 2002

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


A series of examples show how the UC Regents abuse their authority to shield much of their deliberations over investment policies from public view. This behavior contradicts their obligations as public trustees and stands in jeopardy of violating California law.  In this study we shall recount some Earlier Experience, Subsequent Inquiries - no response, More Recent Inquiries - some responses; and examine The Law on open meetings.

Earlier Experience

     At the start of this investigation, in July 2000, I made formal request to UC's Office of the President for public records related to the controversial removal of the University's long-term Treasurer and the installation of an outside investment consultant firm, Wilshire Associates, Inc.  This major shift in operating structure and the adoption of a new investment strategy was worked out by the regents in total secrecy.  Only after the Board had approved the new set of investment policies (asset allocations, investment guidelines and benchmarks, etc.) did we - the public and the beneficiaries of the investment funds - get to learn something about what had been hatching for over a year.

     As part of my request for documents, I specifically asked for Minutes of the regents' meetings dealing with the Wilshire report and policy recommendations (especially in January and March of 2000).  That request was denied.  I appealed, arguing that it was improper to hold closed meetings on broad policy issues and therefore those Minutes should be made public. (See Part 3 of this series.) That appeal was never answered.  The series of papers I have written on this topic (see the web site listed at the top) contain many criticisms and raise many questions about the competence and the integrity of Wilshire Associates and about the regents who were involved in that process.  Disclosure of the record of those secret regental meetings would go a long way in dispelling or confirming those charges, and thus helping to answer the question, Can we trust the regents' management of the University's $34 Billion retirement fund?

Subsequent Inquiry - A Non-Response Response

     Here is some email correspondence I had with top UC officials, in summer 2001.

August 3, 2001
Richard Atkinson, President of the University of California
Leigh Trivette, Secretary of The Regents

      From examination of the Notice of the upcoming August 9, 2001, meeting of the Regents' Investment Advisory Committee it appears that there may be excessive and improper secrecy planned for those proceedings.
      Among the topics listed for discussion in Closed Session are
        "Asset Allocation Discussion and Review for GEP and UCRP"
        "Proposal to Resume the Responsibility for the Venture Capital and Private
          Equity Distributions"
and others which indicate that these are matters of general investment policy, discussion of which properly belongs in Open Session.
      If you agree with my criticism, please take immediate action to correct this error.
      In any case, please provide me with details of the standards and guidelines which are used in determining which meetings of The Regents and their Committees (including the IAC) concerned with the broad subject of "Investment matters"   may - under law and University policy - be held away from public observation.
August 6, 2001
Dear Mr. Schwartz,

The General Counsel has reviewed the proposed agenda of the Investment Advisory Committee in relation to The Regents' policy with respect to notice and meetings of the Committee.  That policy calls for application to the Commmittee of the open meeting law  provisions applicable to meetings of The Regents.  As a result, meetings of the Committee are by Regents' policy open subject to being closed for consideration of "investment matters."  The General Counsel has determined the proposed subject matter division between open and closed sessions is in order.

Leigh Trivette
Secretary of The Regents
August 7, 2001
Dear Secretary Trivette;

     Your reply to my August 3 email responds only part way to my inquiry.
     You state that "meetings of the Committee are by Regents' policy open subject to being closed for consideration of 'investment matters'."
     However, the policy on open and closed meetings which is provided in Regents' ByLaw 14.6 states something quite different.  That policy (quoting from state law) does not even contain the phrase "investment matters", which you rely upon.
     Rather, this ByLaw states that meetings may be closed for discussion or consideration of: "Matters involving the purchase or sale of investments for endowment and pension funds."  This, it seems clear, is a much narrower specification than that implied by the broad phrase "investment matters".
     Therefore, I repeat my request - from my earlier email inquiry - that you provide (or have the General Counsel provide) the details of the standards and guidelines which are used to determine the "subject matter division between open and closed sessions" in regard to the general topic of investment matters.

     I never got any further response on this question, despite a subsequent re-mailing of this inquiry directly to General Counsel James Holst.

More Recent Inquiries - Some Responses

     At the March 13, 2002, Regents' meeting the Committee on Investments had a scheduled Open Session with the agenda item: "601 Discussion; Portfolio Analyses and Investment Transactions (Quarterly Report)".  This was followed by a Closed Session with the very same agenda item listed.  I was in the public section of the auditorium when the open session concluded and the closed session was announced.  As I started to leave my seat, I took advantage of the regents' pause to ask out loud: "Is the report you will be discussing in closed session the same document that is already posted on the Treasurer's web site?"  The chair of the Investment Committee (regent Judith Hopkinson) answered, "Yes";  and the University Treasurer (David Russ) answered, "Yes."  I then left the building, in some bewilderment.

     A similar episode occurred at the September 18, 2002, Regents' meeting.  Regent Gerald Parsky was presiding as chair of the Committee on Investments.  They were discussing agenda item "Portfolio Analyses and Investment Transactions (Quarterly Report)" and at some point Regent Parsky said that they would discuss it in more detail during the closed session to follow later that day.  From my seat in the auditorium I piped up, "Why is that in closed session?"  Parsky replied, "Because ... individual investments are going to be discussed," which was a plausible answer.  A short while later, another regent asked about their policy on voting of shares held by the University; Parsky replied that they would discuss that in closed session.  I spoke up, "Again, why in closed session?  That's a policy issue."  This time Regent Parsky remained conspicuously silent.

     The May 15, 2002, regents' meeting was held in Los Angeles and so I only got to listen via the internet to the open session of the Committee on Investments.  What I heard led me to write the following letter, dated May 30, 2002.

Dear President Atkinson;

     I have two sets of questions - and related requests for information - arising from the regents' meeting on May 15.
     The first topic ...
     The second topic comes from the Committee on Investments Open Session.  Just before the end of that session, a member (whom I cannot identify) asked the question, "Does the Finance Committee have a policy on what are called moral or correct investing?"  Regent Hopkinson (Chair of the Committee) responded, "Why don't we hold that for the executive session, the closed session."
B1.  Don't you agree that it was wrong, a mistake on the part of the committee chair, to put that matter into the Closed Session, thus preventing public observation of discussion of a policy question?
B2.  Please provide me with a copy of the tape recording, as well as Minutes, covering that portion of the subsequent Closed Session when the matter identified above was discussed.

     There ensued a protracted correspondence with staff in the General Counsel's Office, culminating in a letter from University Counsel Steven G. Rosen (dated 9/10/02), from which I present the following excerpt.

You also appear to inquire about the propriety of addressing investment policy concerns in closed session. ... Regents' meetings related to "matters involving the purchase or sale of investments" are broadly protected by California Education Code section 92032(b)(4).  Other statutory provisions similarly permit closed sessions for discussions that could have an effect on financial matters entrusted to public bodies.  See, e.g., Cal. Gov't Code §11126(c)(16).
     Here, at last, we have some official response that takes up the issues of law.

The Law
(disclaimer:  I am not a lawyer; I merely try here to assemble data and logic.)

     The Bagley-Keene Act, California's Open Meetings law applicable to most state-wide agencies, is given in  Government Code Sections 11120-11132 and starts out with the following language.

11120.  It is the public policy of this state that public agencies exist to aid in the conduct of the people's business and the proceedings of public agencies be conducted openly so that the public may remain informed.
   In enacting this article the Legislature finds and declares that it is the intent of the law that actions of state agencies be taken openly and that their deliberation be conducted openly.
   The people of this state do not yield their sovereignty to the agencies which serve them.  The people, in delegating authority, do not give their public servants the right to decide what is good for the people to know and what is not good for them to know.  The people insist on remaining informed so that they may retain control over the instruments they have created.
This is a powerful statement of legislative intent and policy, which ought to guide the interpretation and application of the open meetings statute.

     How does this law apply to the University of California, given the particular autonomy given to the UC Regents by the California Constitution?  A 1974 Constitutional amendment treats this question directly:

Article 9 Section 9 (g)  Meetings of the Regents of the University of California shall be public, with exceptions and notice requirements as may be provided by statute.
     The Legislature then enacted Sections 92020-92033 of the Education Code to implement this Constitutional provision;  The central portion is
92030.  All meetings of the Regents of the University of California shall, except as otherwise provided in this article, be subject to Article 9 (commencing with Section 11120) of Chapter 1 of Part 1 of Division 3 of Title 2 of the Government Code.
Which refers directly back to the Bagley-Keene Act, starting with Government Code §11120, which is  quoted above.

     The central issue here is the list of exceptions, provided in both sets of laws, allowing the Regents and other public boards to hold closed sessions in specific circumstances.  The most common exception to the open meetings rule is for personnel matters,  where there is a competing interest - protecting the privacy of individuals being discussed - that stands against the general public interest of open government.  Some other exceptions allow for closed sessions when a board confers with counsel on pending litigation, when public discussion of negotiations on some business transaction might be financially detrimental to the public interest, when collective bargaining matters are discussed, etc.

     Regarding investment matters, we find the following specific exceptions written in the open meetings laws (both of these were cited by Mr. Rosen):

Government Code Section 11126(c): Nothing in this article shall be construed to do any of the following: ...  (16) Prevent a state body that invests retirement, pension, or endowment funds from holding closed sessions when considering investment decisions. ...

Education Code Section 92032.  Notwithstanding any provision of Article 9 (commencing with Section 11120) of Chapter 1 of Part 1 of Division 3 of Title 2 of the Government Code: ...  (b) The Regents of the University of California may conduct closed sessions when they meet  to consider or discuss:... (4) Matters involving the purchase or sale of investments for endowment and pension funds.

     I have underlined the key phrases defining the scope of topics permitted for closed meetings on investment matters; they are: investment decisions in Government Code §11126(c)(16) and the purchase or sale of investments in Education Code §92032(b)(4).  We note that the second phrase (applying to the UC Regents) appears  more specific and restrictive than the first one (applying to other state agencies).

     What, precisely, do these underlined phrases mean?  It is apparent from the whole history of correspondence which I have given above that the UC Regents and their attorneys want to keep their interpretation of these laws as vague and as broad as possible.  (Rosen's interpretation that §11126(c)(16) would "permit closed sessions for discussions that could have an effect on financial matters entrusted to public bodies" is quite a stretch.) Obviously I have a different opinion; and I would point to the legislative intent statement of §11120, quoted above, as requiring a very narrow interpretation of the exceptions to the open meetings rule.

     For purposes of discussion, here are two opposing theories about what the law allows regarding closed meetings on investment matters:

The Minimal interpretation:  Only the discussions and decisions about the intent to buy or sell particular investments (e.g., stock in XYZ Corp.) may be relegated to closed sessions; and this information is sensibly kept secret for only so long as it takes to implement the transaction. (The purpose here is to avoid "tipping" the market and to respect the SEC regulations on Insider Trading.)

The Maximal interpretation:  The Regents can make whatever choices they want regarding what goes into closed session regarding their investment activities. (This seems pretty much what Mr. Rosen claims in his letter quoted earlier.)

     In partial support of the Minimal interpretation, I note the following statute which applies specifically to the California Public Employees' Retirement System (CalPERS), which invests $135 Billion.

Government Code Section 20191.5. (a) All investment transaction decisions made during a closed session pursuant to paragraph (16) of subdivision (c) of Section 11126 shall be by rollcall vote entered into the minutes of that meeting.
   (b) The board, within 12 months of the close of an investment transaction or the transfer of system assets for an investment transaction, whichever occurs first, shall disclose and report the investment at a public meeting.
The same language in Education Code §22203.5 applies to the California State Teachers Retirement System (CalSTRS), which has $93 Billion in investments.

     In partial support of the Maximal interpretation, I acknowledge that the courts will often defer to the government agency to decide how to implement such laws, so long as their action is not arbitrary or capricious. Thus, it seems that the Regents should have some coherent set of guidelines covering why and when they go to closed sessions on investment matters; and any such guidelines would have to be based upon the principle of serving "the public interest", not merely catering to the whims or personal convenience of regents.  But when I asked the General Counsel of The Regents for information about such guidelines, all I got was a stone wall.

     It may be that ultimate resolution of this question will be decided by some court, after extensive arguments by lawyers and the concommitant expenditure of lots of money. Before we get there, however, let's look around some more.

     How does CalPERS conduct the meetings of their Investment Committee with respect to Open vs. Closed sessions?  Browsing their website, I have examined the agendas for many of their public meetings; and found that they seem to make very little use of Closed Sessions, in comparison to the UC Regents.  In particular, many topics of investment policy that I found on the agenda for Closed Sessions of the UC Regents could be found only on the Open Session agendas of CalPERS.

     Upon further inquiry, I obtained an 8-page, "Statement of Policy & Procedures, Closed Sessions", adopted by the CalPERS Board in 1997.  The key portions state:

The Board, through its Investment Committee, will meet in closed session to discuss investment matters, but only when a public discussion is likely to impair CalPERS' ability to achieve its investment objectives.  The Board affirmatively finds that public discussion of the following matters would likely impair CalPERS' investment objectives:
a. Decisions to approve or disapprove non-delegated real estate transactions, or transactions involving the direct and co-investment components of the alternative investment program.
b. Activity Reports concerning the screening and review of potential investments.
c. Decisions to terminate the contracts of external managers or advisers, when those decisions are inherently tied to the possible liquidation of an asset being managed or held by the manager/adviser. ...
This policy further provides for the release, as Public Records, of closed session  deliberations and materials at some subsequent time.

     Thus, it appears that CalPERS follows a line fairly close to the Minimal interpretation described above; while the UC Regents are close to the Maximal.


     The UC Regents have abused their authority in the excessive use of Closed meetings for consideration of investment policy issues.  They should move expeditiously to fix their practice, establish sensible guidelines for the future, and release documents related to prior closed sessions where that continued secrecy can no longer be justified on grounds of the public interest.