Audit demands investment reform, we hope

With the Joint Legislative Audit Committee’s recent approval of State Senator Leland Yee’s University of California audit request, the UC Board of Regents and other university executives are once again suffering backlash from the November fee hikes and furloughs. Students can only hope that this audit sends the message that playing fast and loose with student funds will result in greater state oversight of UC management. Not that state control is preferable, but the threat could help.

Among the audit’s targets will be the profits of the $63 billion portfolio controlled by the Treasurer of the Regents. The portfolio is suspicious for several reasons, not the least that the Treasurer’s Office is run by veterans of private investment firms and not, as one would expect, the votes of the low-paid workers whose pensions comprise the portfolio.

A more inflammatory issue is whether Gov. Arnold Schwarzenegger and other Regents are profiting illegally from university investments. Schwarzenegger owns stock valued at over $1 million in Dimensional Fund Advisors, a finance firm. He could potentially have much more than $1 million invested in the company, but his financial disclosure statements don’t specify anything beyond that mark. Alongside Schwarzenegger’s personal investment, it so happens that the UC has placed hundreds of millions of dollars in DFA market funds since 2006, including a 2008 UCLA investment of $82.3 million.

UC Regent Paul Wachter brushes this conflict of interest aside, claiming that DFA’s vast size makes its appearance in any endowment or pension fund all but inevitable.

The company does manage more than $164 billion in assets. But bear in mind that Wachter has been Schwarzenegger’s business partner and personal investment advisor since the early ’90s, not to mention a DFA investor with stock valued, once again, at over $1 million.

But regardless of whether Schwarzenegger and Wachter are culpable in these investments, the DFA issue calls attention to the problem of staffing the Board of Regents with multimillionaires. Every regent is potentially invested in stocks that might be of interest to the UC, so to avoid channeling public funds to the board, the Treasurer’s Office must, under the present system, invest where the regents have not. You can see how it would be preferable that the regents not own these stocks in such high volume in the first place. The audit, then, would hopefully discourage such investments and send the message that the UC’s portfolio is not a stimulus package for the board’s favorite companies. The Treasurer’s Office needs to be able to invest in the university’s favor, without the shadow of any potential conflicts of interest obscuring its judgment.

In a tweeted response to news of the audit, UC President Mark Yudof said, “We have nothing to hide, and embrace opportunity to illuminate once more the work and finances of UC.”

If past precedent is any indicator, however, they probably do have something to hide. A 2006 audit turned up multiple infractions, including $130,000 in overpayment to a single employee and recurrent exceptions to university compensation policy. If similar ethical lapses are uncovered this time around, public opinion of the university might sour. The state’s generosity may wane in the face of the possible embezzlement. The UC’s best option to lobby for more funding would then be to guarantee allocations that favor the students and low-paid staff and punish the guilty parties.

A point of contention, though, is whether fierce fiscal scrutiny might impact the university’s ability to hire top-notch faculty and executives in the future. If the end result of the audit is slashed bonuses, for instance, UC employment isn’t going to be as attractive as it could be. Nor does an administrator want to worry that the state will one day rule a week of his paid leave illegal. But while the audit could end up promoting paranoia among the innocent, the people we want working at the executive level are those who would willingly sacrifice perks in the name of the student experience and endure a little transparency for the sake of integrity.

If, on the other hand, the audit fails to turn up any noteworthy corruption, UC executives will see the pressure to reform diminish. In this way, the audit could end up granting tacit approval to trends like furloughs and lecturer layoffs simply because the UC conducted itself by the book, even when the book condoned ridiculous executive bonuses and Cal’s $321 million vanity project. Regardless of the audit’s results, the regents and university budgetary committees need to get the message that their past spending habits won’t be tolerated.

E-mail Dosaj at [email protected]. Send general comments to [email protected].