UC regents Schwarzenegger and Wachter – are they making a profit from university investments?

[photos/video by Monica Jensen, multimedia editor, SF Public Press]Picture 1

This is an update on the progress of the Spot.us-sponsored investigation into possible conflicts of interest among the regents of the University of California. Please consider donating to this crowd-funded reporting project. On January 8, the regents held their bimonthly meeting at the Mission Bay campus in San Francisco. The building bristled with armed guards—both uniformed and in plain clothes.

The regents, many of whom are multimillionaire financiers (view the regent’s form 700s online), appeared worried that students and workers might engage in acts of civil disobedience because the governing board had recently raised tuition by 30 percent, while continuing to spend hundreds of millions of dollars on such non-educational projects as a sports stadium retrofit.

 

Incensing furloughed employees, the regents have rewarded top university executives with $3 million in bonuses—on top of 25 percent pay raises—while the salaries of professors and instructors are reduced, and core educational programs are eliminated or cut to the bone. The pay of janitors and service workers has been slashed by 15 percent, causing further hardship to families already afflicted by recession. From Los Angeles to Berkeley, workers, students, and professors are accusing the regents of union-busting and de facto privatization of a public institution. They complain that corporate and military research and multinational investment agendas are being funded at the expense of the general curriculum and student admissions. The university has discarded its mandate, they say, of educating the masses, affordably—and is transforming a publicly-funded institution into a school of the elite.

State senator Leland Yee has been asking hard questions of the regents—questions about excessive pay scales for executives while education is being cut back, and questions about how the regents invest UC’s pension and endowment portfolios–worth$53 billion. Before the meeting began, Yee was in the lobby chatting with Lakesha Harrison, president of the service worker’s union, Local 3299.

I had a chance to ask Yee and Harrison how they felt about the regents investing billions of public dollars with financial firms with ties to some of the regents (see Yee interview near the bottom).

But, first, some background information.

Let’s start with Regent Paul D. Wachter.

Since the early 1990s, Wachter has been Governor Arnold Schwarzenegger’s main business partner and personal investment advisor. One of the governor’s first acts in office was to appoint Wachter as a regent. Since then, he has been a leading force on the board’s investment committee, which currently oversees $53 billion in public and private equity investments.

The governor is himself an ex-officio member of the board of regents. This means he does not vote on matters before the board, but he has access to information available to the regents and their staff (but not to the public). He clearly has the ability to privately lobby his fellow regents. Many of these regents are campaign donors who Schwarzenegger rewarded by appointing them to the powerful board. But he is obligated by law to influence them in a manner that does not conflict with his private financial interests, which are valued at more than $100 million.

Thickening plot

It turns out that Regent Wachter is paid to administer Schwarzenegger’s blind trust. In theory, placing a government official’s assets in a blind trust prevents him from knowing what changes are made in his investment portfolio after he assumes office, so that he will not be tempted to use his governmental power for personal benefit. However, as a Salon.com investigation (by yours truly) showed a few years ago, it is not ethically logical to put your business partner in charge of your blind trust, especially when that partner is a close friend and political advisor.

Interestingly, many of Schwarzenegger’s real estate and business partnership holdings are not in the blind trust (which is mostly composed of publicly traded stocks). According to his annual financial disclosure statements, Schwarzenegger has a large ownership stake in a financial firm called Dimensional Fund Advisors (DFA). And since 2004, the regents have invested a third of a billion dollars in DFA.

DFA is an “index” fund (a type of mutual fund) created in Santa Monica, California during the early 1980s. It’s claim to fame was putting three Nobel Prize-winning economists on the board of directors. The Big Brains designed algorithms for efficiently pumping pools of public assets — combined with money fronted by wealthy, private clients — in and out of the stock market with (sometimes) better than average returns.

Wachter’s and Schwarzenegger’s financial disclosure statements from 2004 to the present show that each owns stock worth “more than $1 million” (no upper limit is specified) in the privately owned DFA, which controls a $160 billion investment portfolio, much of it funded by public pension funds. Schwarzenegger discloses “more than $100,000” in annual dividends from his ownership stake in DFA. He is reported to own five percent of DFA.

Indexfunds.com DFA Article

DFA stock is not publicly traded and ownership is available only to select institutions, company employees, and a few private investors.

In 2006, the UC retirement fund invested $226 million in a DFA “emerging market fund.” In 2007, this investment increased to $329 million. By the end of 2008, the value of the investment had fallen to $151 million. As of December 2008, the UCLA campus endowment fund had placed $82.3 million (nearly 8 percent of its total endowment) in three market funds offered by DFA.

When the stock market tanked in 2008, it appears that UC’s investments with DFA took a substantial hit–Nobel Prize winning smart guys notwithstanding. But DFA insulates its stockholders (e.g. Schwarzenegger, Wachter) from downturns in the market by charging large management fees to its investors (e.g. UC Regents).

The law of the state of California (Gov Code Section 87100) proclaims: “No public official at any level of state of local government shall make, participate in making or in any way attempt to use his official position to influence a governmental decision in which he knows or has reason to know he has a financial interest.”

The magnitude of the University’s investment with DFA, and the magnitude of Regent Wachter’s and Regent Schwarzenegger’s stake in DFA suggest that there a conflict between their personal financial interests and their public duties.

Wachter told Spot.us that the regents do not direct university staff to select specific investment fund managers. Rather, the regents decide the types and amounts of investments that are to be made, e.g. certain percentages of the total retirement fund are slated for private equity funds or emerging market funds, etc. Considering DFA’s size, he commented, “It is not surprising to see [DFA] represented in part in any endowment or pension fund.”

Neither Schwarzenegger, Dimensional Fund Advisors, nor the Regent’s press office responded to a request for comments. But it is remarkable that Schwarzenegger and Wachter allowed the UC Treasurer to invest hundreds of millions of public dollars with an investment management firm which they partly own. The regent’s investments with DFA were not a secret: they was publicly reported to the board. And Schwarzenegger’s and Wachter’s large stake in DFA has long been a matter of public record, so the Treasurer could easily have refrained from investing in DFA.

Conflicts at CALPERS

Since 2004, DFA has been paid about $4 million a year to manage about $1.5 billion in the California Public Employees’ Retirement System. CALPERS is one of the world’s largest public employee pension funds and is periodically afflicted by scandal. Recently, an internal investigation by CALPERS revealed that certain financial firms (but not DFA) were paying two former CALPERS board members to lobby employees to invest with those firms.

CALPERS also keeps a large portfolio of investments with an investment bank run by another regent, Richard C. Blum, who is the husband of U.S. Senator Diane Feinstein. Blum and Feinstein ran afoul of federal conflict of interest prohibitions during the early years of the War on Iraq as the senator micromanaged $1.5 billion in military construction appropriations that were awarded to two companies controlled by Blum. See “Senator Warbucks” and “Blum’s Plums.”

CALPERS also pays Blum’s real estate corporation, CB Richard Ellis, millions of dollars in management fees. Nice work, if you can get it.

As our investigation of the regents continues to develop, we will plumb Blum’s political pipeline into California’s public pension investment pools and beyond. And we will examine if the regents are invested in a series of nested private equity partnerships (aka “leveraged buyout” firms) tied to Wachter, Schwarzenegger, and Blum. We will paint a detailed portrait of the financial holdings of each regent; and continue to place public record databases online for all to see.

But first let ask Senator Yee and Ms. Harrison what they think about the regent’s investing hard-earned worker pension funds with DFA:

YEE: “I’m not only surprised … its horrible, shocking … get all information out …”
HARRISON: “That’s despicable … destroying workers lives…”

Interview with Leland Yee by Peter Byrne

Interview – Senator Leland Yee by SpotUs and Peter Byrne

Interview with Lakisha Harrison.

Interview – Lakisha Harrison – President of Local 3299 by SpotUs and Peter Byrne

And now let’s visit the regents’ meeting and see what happens when members of Local 3299 implore the regents to listen to reason and stop cutting the salaries of manual workers while executives get quarter-million-dollar bonuses and politically savvy investment banks run wild with retirement funds.

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Notice Mark Yudoff, president of the university. Between 10 a.m. and noon, his Twitter account registered numerous posts, such as “UC’s research performance tells world how UC is doing as a university … Regent Dick Blum tells those unhappy w. the budget: Don’t yell at Regents. Don’t yell at Mark Yudoff. Yell at your legislators in Sacramento.”

Either Yudoff was madly Twittering away under the table, when, you would think, he could have been doing something more productive to earn his $828,000 salary, or the university is paying a public relations flack to pose as the Yudoff on Twitter.