May 18, 2007

Parsky's Party

The UC regent whose pension fund overhaul may have cost the university billions is now in a position to play with even more of the public’s money.
By Chris Thompson
Published: May 9, 2007

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.
[Read the full article here.]

LLNS Board of Governors Chairman Gerald Parsky
“LLNS is dedicated to delivering the best in science and technology, management and operations at Lawrence Livermore. Through LLNS’ collective of expertise, Livermore Laboratory will continue its long and proud tradition of security and service to the nation for decades to come. We look forward to working with Department of Energy, the National Nuclear Security Administration and the employees at Lawrence Livermore to provide as smooth a transition as possible in order to ensure the Laboratory’s continued success.”
[From May 11, 2007 LLNL Newsline.]


kurt vonnegut said...

"And so it goes."

- Kurt Vonnegut

Anonymous said...

For more on the Wilshire Associates/Parsky incompetence and other items on University of California finances see:

Anonymous said...

You get better access (easier access to more info) if you go in this way:

Anonymous said...

It's time for a revolution. But don't count on the weak-kneed employees of Los Alamos National Laboratory. Their gonads were sacrificed for the almighty buck a long time ago. Whack!...yes sir, may I hava another!...Whack!!!

K. Boland said...

My apologies to Bill Maher, but this blog needs a NEW RULE:

If you lack the courage to sign your post with your own name, then you can't call anyone else a coward!

Anonymous said...

KB is so brave. Please sir, will you make me brave like KB?...Wack!Thank you sir, may I have another! Wack! --Sign Me Another LANL Gonadless Wonder Longing To Be Brave Like KB (Kiss Butt)

Anonymous said...

Parksy is chief among equals on the LANS governing board. After making his 'advisor' friends rich with the UC pension biz (and sinking the UC pension returns to boot), just imagine the candy he can now dole out to his rich GOP buddies using his position as LANS governor with control over LANL's TCP1 assets. Make no doubt about it, this man is a snake. You can probably kiss a portion of your TCP1 assets good-bye. His position as governor on both the LANS and the LLNS LLC gives him a rare opportunity to make lots of new 'friends' in the investment advisor community.

Follow the money if you want to get the full story on the rush to 'privatize' the national labs. Your pension money is now Parksy's private play-ground, and there will be fewer eyes to watch him work behind the scenes with the lab's pension business. In fact, I find it amazing that most of the employees at LANL seem to have no idea what is currently going on with TCP1. Many foolishly assume that everything is just fine when, clearly, it is not.

Anonymous said...

I have been astounded that LANS managers keep proclaiming that TCP1 is "fully funded" (e.g. Seestrom's recent newsletter, also stating 14, not 10, employees terminated as a result of the drug testing program). TCP1 is not fully funded. It is the LANL inactive portion of UCRS that is now fully funded in the recent transfer agreement between UCRS, DOE, and LANS. TCP1 simply got the remainder. Thus TCP1 has received the "full funding" it will ever receive from UCRS. That's a world of difference from "fully funded."

The Executive Summary of the pension transfer analysis clearly states that TCP1 is at least $120M underfunded, by UCRS's calculations, as of June 1, 2006. They note that LANS will need to do its own analysis to determine the amount of underfunding. We're still waiting for that formal analysis.

In the meantime, another year has passed, and another $100M should have been deposited into TCP1 by LANS, so the underfunding is only worsening. A pension crisis is looming.

Ref bottom of 5th page (Page i):

Anonymous said...

Forget the sweet sounding promises that DOE made to all of us during the RFP pension meetings. TCP1 is already moving into crisis mode and the future payoffs it makes may be significantly less than what UC would have paid out. DOE may have played the LANL workforce for a bunch of suckers and many of us complied.

Of course, Mikey and his boys are all protected from any harmful outcomes. They got a special deal that insures that they will suffer no pension losses if the LANS pension goes belly-up. Why do you think they insisted on this clause in their management contracts? Because they probably know the true risks associated with the LANS TCP1 pension.

Eric said...

There are ways to hedge your TCP1 risk.

Anonymous said...

Yes, there are ways to hedge our bet with TCP1. Just don't any money in.

Anonymous said...

Following up on my comments of 5/20/07 11:14 AM

I don't believe for a minute that TCP1 will ever go to PBGC for default; no judge will sign off on the plan being bankrupt, since DOE has too deep of pockets. We are not going to see a pennies-on-the-dollar collapse.

Under ERISA, however, as the depths of the underfunding become apparent, the plan can be altered to pay out substantially less (cut the age factor) and subtantially later (stretch the age factor past 60). Such stretch/delay was impossible under UCRS, a public pension plan, and hence the quagmire that the State of California (and many other states) finds itself in with pledged benefits to active public employees.

The other easy solution to the underfunding is to simply freeze the plan and convert everyone to TCP2, as many other private companies have already done, including bellweather IBM.

If they try to maintain the current state of TCP1 (and why should they?), then they'll have to quickly adapt UC's plan of action and start charging a hefty percentage of salary to the employee's paycheck.

Not a rosy picture in any scenario, further demoralizing the employee base, further limiting the ability to attract and retain talent.

Anonymous said...

5/20/07 1:46 PM

Please expand a bit more on your comment that "I don't believe for a minute that TCP1 will ever go to PBGC for default; no judge will sign off on the plan being bankrupt, since DOE has too deep of pockets."

LANL employees work for LANS, and before that UC. DOE reimbured these contractors for their cost in operating the Lab (i.e., salaries and other employee expenses) but did not directly pay Lab employees or manage their retirement program. What is DOE's liability for a contractor's pension plan going bankrupt. Is there any history or legal foundation for US governmental agencies (DOE, DOD, NASA, etc.) being forced to bail out the retirement program of contractor employees?

It seems to me that if I hire a contractor to build my house and that company's pension plan tanks, the employees working on my house are not my legal responsibility and can't sue me for future lost benefits. Is there case law to indicate otherwise?

Eric said...

As far as I know DOE is not on the hook for the pensions of LANS employees. The lack of being on the hook is the reason for the new contract between DOE and UC to protect UC's LANL retirees.

It is also a bit sobering that PBGC has no money from congress to cover its pension folks and there are already 44,000,000 people in line trying to get their nominal pensions.

Anonymous said...

Good question, just who does own TCP1? I thought the intent of the new contract was to make the contractor simply a caretaker of the retirement plan. DOE can swap out the contractor for a new one, while leaving the pension plan in place.

To go to PBGC, you have to convince a judge there are no other funds and no other choice. I hope I'm being optimistic that no judge would believe LANS LLC is not backed by its parents and DOE.

Anyone know for sure?

Eric said...

As far as I know (and I have done a lot of checking), the point of an LLC is to make sure that there are no reachback deals that would make the parent companies (UC, Bechtel, DOE, etc.) on the hook for pensions and many other obligations in the event of setbacks in the LLC.

As usual, the paragraph above is part of a much longer discussion that I can pass on if someone contacts me. The longer discussion would be about 50 to 100 pages worth of carefully constructed text. Not exactly blog material.

I am not a lawyer and this is not legal advice, but an LLC is usually created to control legal liabilities.

Does this help anyone?

Anonymous said...

Anonymous 5/20/07 1:46 PM does not understand something critical about DOE contractors: no one really knows what the relationship is. If you hire a contractor for your house, do you specify that the person may not have a defined benefit plan (as DOE did?). Obviously the relationship b/w the contractor and you is very different from the one b/w DOE and its M&O contractors. Again, no one knows what that relationship really is or is supposed to be... agree there is no way Congress would let DOE let it go to PBGC... DOE would happy throw us to the wolves though, left to their own devices...

Anonymous said...

Until a few years ago, some woman managed the UCRS pension fund. She did a marvelous job and there were surplus even thru the period when the market tanked. So, of course they ran her off.

Pinky and The Brain said...

That was Patricia Small.

Anonymous said...

Yo go K Dog!

Anonymous said...

5/20 - 1:46 pm. Wasn't TCP1 essentially frozen on 6/1/06?

Anonymous said...

TCP1 is not frozen, just closed to new members. The 6500 members in it continue to accrue additional years of service.