Parsky's Party
The UC regent whose pension fund overhaul may have cost the university billions is now in a position to play with even more of the public’s money.
By Chris Thompson, East Bay Express, May 9, 2007
Last December, Governor Arnold Schwarzenegger created a new panel to figure out how to solve what may be California's worst-ever budget crisis. The state's two biggest retirement funds will owe at least $49 billion they don't have, and Californians will be paying this bill for decades. The man Schwarzenegger chose to lead this historic undertaking is commission chairman Gerald Parsky. But for the hundreds of thousands of teachers and state employees who depend on these funds, his appointment should be cause for alarm. Just ask the employees of the University of California.
Parsky's reputation as a financial genius is undisputed, at least among the people who count. A former official in Richard Nixon's Treasury Department, Parsky made a fortune in real estate, junk bond, and venture capital investments. In the 1990s, he gradually rose through the ranks of the California Republican Party until he became one of the state's most important power brokers. He raised millions to organize the 1996 Republican National Convention in San Diego, and chaired the state presidential campaigns of George W. Bush in both 2000 and 2004. Today, he reviews candidates for California US Attorney positions on behalf of the Bush Justice Department. He has been appointed senior economic adviser to presidential candidate John McCain; if McCain is elected president, Parsky could well become the next secretary of the Treasury.
But it was in his capacity as a regent of the University of California that Parsky made his greatest impact. In the ten years before he took over as chair of the Regents' Investment Committee, the university's pension plan, which provides retirement benefits for more than 190,000 employees, made a small fortune playing the stock market and investing in long-term bonds. The fund earned so much money that it literally paid for itself — in fact, employees haven't had to pay into their pension plan since 1990. These generous retirement benefits have been critical in attracting renowned professors and researchers, who draw considerably lower salaries than they would at top-tier public or private universities. Without the pension plan and other benefits, the university would be starved of talent.
In 1999 and 2000, in a series of secret meetings, Parsky spearheaded an effort to radically remake the pension fund's investment philosophy. Under his leadership, the regents gave hundreds of thousands of dollars to a Los Angeles investment firm to recommend and implement changes to the way the university invests tens of billions of dollars. At the same time, the president of that firm, Wilshire Associates, gave tens of thousands of dollars to the very Bush presidential campaign chaired by Parsky.
Wilshire, Parsky, and the Regents' Investment Committee farmed out control of the investment fund to an army of pension consultants and money management firms, ending the decades-long practice of using university staff to trade stocks themselves. Along the way, they humiliated and destroyed the reputation of Patricia Small, the UC treasurer who had managed the investments for years and strenuously opposed their plans. Billions of dollars in stock were bought and sold in the midst of a massive stock market crash.
Seven years later, what was once one of the most lucrative pension plans in America is in desperate trouble. Before Parsky and his colleagues restructured the investment strategy, the university's fund easily made more money than the average pension plan. Now, it ranks among the country's worst performers. Before Parsky's reforms, the university paid nothing to outside money management companies, aside from a small venture capital arm. Last year, the UC treasurer's office paid at least $32 million to forty different money management companies whose investment advice may have cost the fund billions of dollars.
Now, faced with sharply declining investment revenue and rising retirement benefit costs, university officials have asked their employees to start paying money back into the pension fund for the first time in seventeen years. The amount is projected to steadily rise over the next few years until it constitutes 8 percent of each employee's paycheck. Many claim that they can't possibly afford such a blow, especially those who are struggling to pay California's record mortgages. From professors to secretaries and janitors, more than 120,000 university workers now face one of the worst personal financial crises in the institution's history.
Gerald Parsky led a campaign to remake the university pension plan from top to bottom, and the retirement future of almost 200,000 people has been profoundly damaged. Thanks to Governor Schwarzenegger, this same man has now been asked to reform two of the largest public pension plans in the country. Hundreds of thousands of people now depend on him to make the right decisions. In the last seven years, the employees of the University of California have learned what happens when he makes the wrong ones.
In the late '90s, Patricia Small ran the UC treasurer's office, supervising a modest staff of analysts. A lifer with 28 years in the system, she oversaw the university's pension portfolio, mostly stock in 65 to 80 big companies, plus some bonds and venture capital. Small's investment performance was remarkable even by the standards of the go-go 1990s. According to university records, the retirement fund earned an average of 15.6 percent per year from 1990 to 2000, while the median performance for comparable multibillion-dollar portfolios was 13.5 percent. In a 2000 San Francisco Examiner story, former regent Glenn Campbell sang Small's praises: "Her rate of return has been outstanding, higher than almost any other university."
Parsky's rise began around the time Small started at UC. In 1971, he became a special assistant in Richard Nixon's Treasury Department. There he met his future business partner William Simon, and was promoted at age 32 to become an assistant secretary of the Treasury. The two went on to build an investment firm that made both of them rich, but Simon left in 1991 following an acrimonious business dispute. Parsky renamed his company Aurora Capital Partners, buttressed his fortune with lucrative investments, and became a player in the California GOP. He was appointed to the UC Regents by Governor Pete Wilson and he headed the host committee when the Republicans held their 1996 convention in San Diego, securing the party millions in donations. Later, as a Bush fund-raiser, he proved second only to Texas campaign chair Kenneth Lay.
In February 1999, when Parsky chaired the Investment Committee of the UC Regents, he convened a series of closed-door meetings with a select panel of regents, at which the regents hired Wilshire Associates to analyze the UC pension fund's performance. For this, the Los Angeles investment firm was paid nearly $350,000. A few months later, its analysts returned with a dire forecast: The fund had serious problems.
As the dot-com boom went into overdrive, Small had dumped some stock and bought up long-term bonds. Because interest rates were remarkably high at the time, her move locked in a steady flow of cash as a hedge against a market crash. But Wilshire claimed that her plan exposed the pension plan to too much risk by holding so much in long-term bonds and investing in just eighty companies. The consultant recommended dumping many of the long-term bonds and reinvesting as much as half of the domestic stock in index funds: large, diversified collections of securities designed to mimic overall market performance.
Small and her staff fought back in reports and letters to the regents. Long-term bonds actually lowered the risk, she said, because their lifetimes are better synchronized with the way the fund pays out retirement benefits. And selling and reinvesting billions in assets would cost millions in brokerage commissions and fees. If the university did what Wilshire asked, it would spend a fortune just moving cash around.
But what really bothered Small was more fundamental. As she recalled in a 2004 letter to the regents, she was worried that the university was poised to radically and swiftly change its investment philosophy on the advice of a single consultant. Furthermore, she wrote, Wilshire never properly analyzed the risks of its own investment strategy. And those risks were clear to any prudent investor. By spring of 2000, the dot-com bubble was beginning to burst, and the financial press was filled with trepidation.
Wilshire's people were barely interested in her opinion, Small wrote in 2004. "The only time the treasurer's office met with Wilshire for the 'office review' was for one day in the month of February 1999," she wrote. "As treasurer I was dumbstruck that not once did Wilshire ask about portfolio risk, how it was measured and controlled. I was so startled that I complained immediately to the Investment Committee Chairman. ... I was told 'not' to pursue the issue."
In fact, according to Small's letter, her access to the regents was suddenly, inexplicably curtailed. In January 2000 she was ordered not to talk to any regents about investment matters outside of their board meetings. University vice president Michael Reese denies that Small was forbidden to talk to the regents, but refused to elaborate, citing confidentiality issues.
Former regent Ward Connerly is best known as the man who ended UC's affirmative action policy, but he also was dedicated to its finances. He chaired both the finance and audit committees and sat on the Investment Committee. Connerly recalled that Wilshire's people ruled the day, baffling regents who thought the fund was doing just fine. "The whole field of money management is surrounded by such mysteries," he said in a recent interview. "Deliberately, in many cases. They come in with all these actuarial studies and dazzle you with bullshit. ... And so these people came in and threw all this nonsense at you about what Harvard and Yale are earning, even though you believe your performance is doing a magnificent job."
Parsky made Wilshire's job easier, Connerly added, by attacking Small's job performance in ways that seemed a little too enthusiastic. "We didn't want to challenge the chair of the committee who was himself sort of involved in this area," the former regent said. "There were those, however, who were wondering whether this was a personal dispute between the chair and the treasurer."
By late spring of 2000, Small was fighting for her career. In a May 15 letter to Parsky that was copied to the rest of the regents, she said that Parsky had apparently decided her conduct was so unprofessional that he was doing a "performance review." This, she wrote, was based not upon her years of service, but the previous two months of what Parsky had allegedly characterized as "evidence of poor attitude, a lack of commitment to the Board of Regents, or incompetence."
UC vice president Reese responds that "annual performance reviews are standard practice for all employees." But judging from Small's letter, this review was anything but commonplace. Indeed, her tone was almost frantic. "I respectfully note that there seems to be a high level of miscommunication and misunderstanding as to the reasons for my recent actions, and a misconstruing of my motives," Small wrote. "I have no agenda other than the best interest of the regents, the beneficiaries of the investment portfolios, and the financial protection of the university investable assets."
Again she maintained that Wilshire was pushing major changes far too quickly. "The Board of Regents has historically moved very cautiously when making decisions of such financial magnitude," Small insisted. "While following a more open, informed, and independently evaluated process may not be as 'speedy' as consultants to the university may like, the due diligence and reasonable business judgement rules require me to advise the regents there are 'risks' of implementing a new 'Plan' with new benchmarks without following tried and true financial analysis."
Three days after Small sent her letter, the regents handed Wilshire another $350,000 contract — this time to implement the very changes it had recommended.
Why, after so many years of stellar returns, were the regents racing to put outside money managers in charge of tens of billions of dollars, and paying Wilshire handsomely to make it happen?
A story in the San Francisco Examiner may have shed some light on the mystery. In July 2000, reporter Lance Williams revealed that Dennis Tito, Wilshire's president, had donated $80,000 to the California presidential campaign of George W. Bush — the very campaign fund overseen by Gerald Parsky — just one week before Parsky and the regents granted Wilshire its second major contract. The previous year, Williams reported, Tito and a number of other Wilshire executives and their wives had given a total of $10,000 to Parsky's Bush campaign. Not long after, Wilshire scored its earlier contract to analyze the fund's performance.
Parsky denied that he was trying to fire Small, or that he'd done anything improper. "I have never had any contact with Mr. Tito about making contributions to the Bush campaign," he told the Examiner. But the story clearly rattled cages at UC. The Express has obtained a draft of an open letter written by the regents' staff that Small claimed she was asked to sign. It reads in part: "Despite misleading news reports, these steps have been undertaken with the full input of the regents, the treasurer's office, and outside investment experts. The review was conducted in a manner consistent with university practices and in the best interests of the university, its employees, and pension funds. As a result, we are confident that the pension fund will continue to provide robust and secure benefits to the university employees it serves."