Insisting on transparency in state investments

Austin American-Statesman
Friday, October 22, 2004

In an editorial this week, the Wall Street Journal wrote that the huge California state pension fund — Calpers — owes its employees an account of its investments. Transparency, noted the Journal, "is a cornerstone of good corporate governance."

That is true as well for Texas's employee pension funds and the huge University of Texas endowment. Yet UT System Regents and administrators insist on hiding their investments of public money.

In an article on the facing page, UT Regent's Vice Chairman Woody L. Hunt argues that investment secrecy is necessary for the UT and Texas A&M systems to reap large returns.

Maybe. But what Hunt does not address is that UTIMCO also could lose its hide by shoving more of its holdings into high-risk private equity funds.

The Journal's look at Calpers found numerous instances of investments in businesses connected to directors and political favorites. Calpers managers invested millions in companies whose owners donated to the political campaigns of its board members. In many cases, those investments produced negative returns.

"Perhaps all of these investments only look like conflicts of interest . . ., " the Journal wrote. "But they certainly do raise specific questions that warrant disclosure: For example, whether the investment returns are high enough to justify the deal on economic grounds, and whether the fees are in line with the returns — or, at the least, in line with other fees on similar investments or even to other investors."

The University of Texas Investment Management Company, the private company created to invest the university's endowment, has suffered allegations of conflicts of interests in its investments over the years. Before the formation of UTIMCO, the system's failed $10 million investment in a fruit import company, whose owners had ties to regents and its investment advisers, raised questions of propriety.

Hunt, who is also chairman of UTIMCO's directors, praises it for its recent record of openness. He's right — although investigations by the American-Statesman, the Houston Chronicle and The Dallas Morning News played a prominent role in the newfound openness.

UTIMCO shouldn't return to its bad old form now. As Hunt notes, private companies, particularly hedge funds and venture capital firms, fear their financial health might revealed if information is disclosed. Which is exactly why the investors — in this case, the people of Texas — ought to know where their money is going and if it's being used in crony capitalism or high-risk ventures.

Hunt argues that the venture capitalists salivating over UT's $16 billion endowment will look elsewhere if Texas requires transparency. But as Texas Attorney General Greg Abbott said recently, the state should have no trouble finding lucrative investments for its billions.

Hunt also cites Harvard University's growing endowment. But Harvard, too, has been accused of conflicts among its money managers and is the target of an alumni backlash for paying outrageous salaries and bonuses to its managers.

The primary difference is that Harvard is a private institution investing its own money. UTIMCO is playing with the public's money. Returns aren't the only issue when it's public money; Texans should know what is happening with their birthright.

Finally, there is no guarantee that the returns Hunt is longing for will materialize. Harvard is already predicting a decade of lower returns. If the regents and UTIMCO are going to gamble public money with venture capitalists, it should be done in the open.

Secrecy in public investments is not only bad policy, it's dangerous. It increases the opportunity for bad investments and conflicts of interests. UTIMCO and the regents must be accountable to the people of Texas for their money.