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.
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