OPINION: Why full disclosure isn't always in Texas' interest

By Woody L. Hunt, UT System Board Of Regents
Austin American-Statesman
Friday, October 22, 2004

At first glance, the Texas attorney general's request sounds reasonable. Why shouldn't state public funds, such as the University of Texas System endowments or the Teachers Retirement System, divulge the financial information and research activities of the private companies they invest in?

But look a little longer and think a little harder. However appealing on its face, forcing our state's public funds to disclose this information could ultimately cost Texas taxpayers billions. Does this serve the public's interest?

Already, the University of Texas Investment Management Company (UTIMCO) leads the nation in comprehensive openness about its private investments. UTIMCO was the first public institution in the country to regularly disclose which companies it invests in, the amount of investments and what those investments' rate of return is. No other state releases more private-investment information than Texas.

As UTIMCO invests in private companies, the companies provide us with highly sensitive information, such as their financial statements, business plans, technology details and other proprietary information. We receive this detailed information so we can monitor our investments - but the information is subject to strict confidentiality agreements.

Private companies insist on confidentiality because this information contains vital facts about their business strategies and financial health. If divulged, this information could harm the companies by giving competitors insight into their operations and an unfair advantage in the marketplace. In fact, forced disclosure of this information could injure the private companies' financial health - as well as that of any state fund investing in those companies.

As UTIMCO has asserted to state Attorney General Greg Abbott, we believe the law does not require this disclosure. According to the government code, a governmental body can withhold information that would give an advantage to competitors; such a competitive advantage clearly results when private companies' business plans, finances and research are disclosed.

If Texas becomes the only state in the country to force this disclosure, new investment capital and private companies will flow out of Texas and into business friendly states such as Massachusetts, Colorado, Virginia and Michigan, which have passed legislation protecting private companies' business interests. With their state funds unable to invest in private companies, which have historically performed at least 4 percent annually better than the public markets, Texans would stand to lose billions of dollars because of lower returns over the next decade.

A comparison of two higher-education endowment funds is important here. Twelve years ago, the University of Texas System held the largest endowment fund in the country - several hundred million dollars ahead of Harvard University's. Today, Harvard's endowment is the largest, by almost eleven billion dollars. Harvard surpassed UT, in large part, by investing in alternative investments such as private equity funds.

If UTIMCO were forced to move the 15 percent - or $1.9 billion of its $12.5 billion endowment now invested in private equity - into less promising investments, UT would fall even further behind. Texans would lose more than $1 billion over the next decade from UTIMCO alone. Public employees' pension funds, with assets far greater than the UT System's, could lose billions of dollars in that time.

But this is not a matter of competition or bragging rights. With UTIMCO and other state funds, we are talking about a shortfall of billions of dollars that will harm all of us - students paying higher tuition, citizens paying higher taxes to support public higher education, state employees suffering a loss of pension benefits. (To learn more about this complex issue, please read a white paper prepared by UTIMCO, which can be downloaded at www.utimco.org).

As I said, full disclosure by private companies is appealing at first glance. But a longer, harder look reveals that this forced disclosure would harm private companies' success and competitive advantage - and shift an enormous financial burden onto Texas' citizens, students, workforce and industry.

UTIMCO and other state funds such as the Teachers Retirement System are committed to earning the best returns possible so they can support the needs and expectations of Texans now and far into the future. We have a public trust to manage these funds capably and openly - and this is what we want to continue to do.

Hunt, of El Paso, is chairman of UTIMCO board of directors and vice chairman of the UT System Board of Regents.