21 September 2009

Administrative rot

We have already commented on the administrative bloat at the University of California, for instance the fact  that admistrative positions in the $200K/year and above range doubled between 2006 and 2008. But sometimes adminstrative bloat rises to the level of administrative rot. Here is a story worth telling, all of whose pieces mentioned below are available in the public domain, but perhaps more can be uncovered with some more thorough digging (FIA, anybody?).

Once upon a time, there was an incredibly weathy, impeccably managed, multi-billion-dollar pension fund. This was, of course,  the UCRP, which provides the defined benefit plan for all UC employees, and the person who had been managing it for a long time was Patricia Small. Armed with a BA in Economics from Marymount, Patricia Small had served as the Treasurer of the Regents for many years, managing $58 billion's worth of assets, and ensuring stellar returns for the UCRP fund, year in and year out. Working out of her office at UCOP, she managed the UCRP funds based on a simple but effective strategy: invest in long-term bonds, which are more appropriate for the defined benefit nature of the plan, and in stock from a small number (65 to 80) of companies, and all of this with a small in-house staff and at a minimal cost to the University. The strategies had been so successful that UCRP started requiring no contributions from employees beginning in the early 1990's until, well, next April.

As one might expect, the prospect of untapped millions of dollars in potential brokerage fees sent investment managment firms salivating all across the great State of California.

Enter Gerry Parsky who was, at the time, Chairman of the Board of Regents (he was also at some point an official in Nixon's treasury department, a real estate, junk bond and venture capital investor, as well Chair of G.W. Bush's 2000 and 2004 California Presidential campaigns; Parsky is also the Chair of Schwarzenegger's Commission on the 21st Century Economy whose highly regressive proposal for tax overhaul has just been released).

In 1999, Parsky spearheaded the Regents' effort to remake UCRP's investment philosophy. They contracted Wilshire Asociates (at a cost to the University of $350,000) to analyze UC's investments and recommend changes. By pure happenstance, in July 2000 space tourist Dennis Tito, Wilshire's CEO and Chairman contributes $80,000 to G.W. Bush's California campaign.

Not surprisingly, Wilshire found the UC strategy "risky" and recommended that UC disinvest in long-term bonds to invest in domestic stock index funds. When Patricia Small objected to these changes, she found herself blackballed by the Regents and effectively forced to resign. Three days after her resignation letter, the Regents appointed — surprise! — Wilshire to implement the changes.

As a result, by 2002 UC was paying millions  to external fund managers to oversee the University's stock portfolio. This led to a decline in profits, partly because of the cost, but partly also because of some stupid and risky choices (such as riding Enron stock all the way down from $140.00 to $0.07 at a $145M loss to UC). Wilshire was subsequently awarded a contract to serve as general pension consultant ($1.3M over 3 years),. It was during this period that the Regents instituted the Treasurer's Annual Incentive Plan (AIP), which awards up to 150% of base salary for exceptional performance, as determined by the Regent's consultants. Wilshire was later involved in the fast-trading scandal  and they were finally dropped in 2004 favor of Richards & Tierney (now Nuveen), which in 2008 was in turn replaced by Mercer Investment Consulting. This is the first part of the story: details can be found in an East Bay Express article from which much of the above information is derived, as well as Charles Schwartz' exemplary and thorough treatment.

But let's go back to Patricia Small's position as Treasurer of the Regents. After she resigned, the position went to DeWitt F. Bowman (former chief investment officer for the California Public Employees Retirement System) on an interim basis, and then to David H. Russ, who was hired in 2001 at a salary of $275K, which rose to $325K (gross pay) by the time he retired in 2006. David Russ was succeeded in the position by Marie N. Berggren, the current Treasurer and CIO. And this is where things get a little strange: Berggren was hired at an initial base salary of $375K, which however rose to $470K by 2008, with extra pay of $340K for total compensation of $810K.

Why did Berggren's compensation almost double between 2006 and 2008? Was it because of the stellar performance of UCRP funds (which led to the resumption of employee contributions?) Was it because of her participation in the the UC Treasurer's Office Incentive Plan?

One wrinkle in all this is the potential conflict of interest involving Mercer: as evidenced here, the firm acts both as consultant as regards the Treasurer's Annual Incentive Plan (AIP) and as general investment consultant. It seems likely that Berggren's outlandish raises were recommended by the very same firm that was later hired to oversee the University's investments. Note that Mercer's appointment in this latter capacity was enacted in a closed meeting of the Regents in September 2008, at which the newly appointed President Yudof was also present. One wonders, how long did it take Yudof to smell the stench and decide to along with it?

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