Political Gifts Reflect His Influence : Treasurer Unruh: The Game Is Called Power

Power. Jesse M. Unruh has become synonymous with the word, first as Democratic Assembly Speaker, the “Big Daddy” of the Legislature, and now as state treasurer cruising into his fourth term without major opposition in the fall election.

The 63-year-old son of a sharecropper, ridiculed as a boy because his family couldn’t afford money for haircuts, has become a power among the pin-striped barons of Wall Street, courted and cultivated--some say even fawned over by those seeking lucrative contracts that Unruh as the state’s chief banker can dispense or influence.

In an extensive examination of Unruh’s dealings as treasurer, The Times has found wide praise for his mastery of the functions of his office, but concern by many about the way he has used his growing power to maintain himself in his post.

Officers of major investment houses, banks and other firms that do business with the treasurer have courted him with Rose Bowl and Super Bowl tickets, lavish meals, chauffeured limousines, flights in corporate jets, accommodations while traveling in Europe and political fund-raising receptions.

As state treasurer, Unruh can decide or influence which companies are chosen to sell billions of dollars in tax-exempt government bonds, which brokers will invest billions of idle government funds and which banks will handle billions more in state deposits.

Embroiled in the competition for a share of the state’s burgeoning bond and investment business, officials of many of these firms believe that they have no choice but to make sizable contributions to Unruh’s campaign committee.

That state business can mean millions of dollars in fees to the firms that are selected.

After scores of interviews and a detailed examination of public records, what emerges is a portrait of Unruh as a savvy, exacting, intimidating politician, someone who can, without public explanation, award contracts to some firms while disciplining others, barring them from state business for months at a time.

Unwilling to Comment

He has become so powerful that officials close to Republican Gov. George Deukmejian are unwilling to comment on the Democratic treasurer’s performance. “There’s no percentage in it,” said one longtime Deukmejian adviser.

“I never like to pass judgment on sitting statewide elected officers with whom I do business,” said Deukmejian’s finance director, Jesse Huff.

The public records show a clear pattern: The firms that have done the largest share of the state’s bond and investment business are generally those that have given the most to Unruh’s campaign committee, which last reported $1.6 million in the bank. Unruh had no opponent in the June Democratic primary and, with no Republican running against him, he will face only minor party candidates in the November election.

In several instances, the timing of gifts and contributions has coincided with the awarding of contracts by the treasurer’s office or by one of the 44 commissions, boards or authorities that Unruh serves on or chairs.

Links to Donations

While no one accuses Unruh of choosing incompetent firms to handle state business, some investment bankers complain that he has tilted toward those who contribute to his campaign or who are willing to spend money on him.

In some cases, according to documents filed by Unruh himself, he received gifts or income in excess of $250 from those that later benefited from decisions by the treasurer’s office in apparent violation of the conflict-of-interest provisions of the California Political Reform Act. However, the statute specifically exempts elected state officials from the penalties it provides for all others who violate the conflict-of-interest provisions.

A few of those private interests have paid Unruh substantial speaking fees. In late 1984, for example, Dow Chemical Co. paid Unruh $2,000 for a speech. In early 1985, the company applied to an authority chaired by Unruh and won approval for $10.7 million in tax-exempt bonds for pollution-control equipment.

Dow spokesman Jack Jones denied any connection between the two matters, and said that Dow would have won approval for its bonds whether it had hired Unruh or not. “We had to jump through the hoops just like everybody else (to qualify),” he said.

A second example is USC, Unruh’s alma mater, which has paid the treasurer a total of $26,848 in lecture and teaching fees since 1978. During that period, the university has benefited from a sizable share of the bonds issued by the California Educational Facilities Authority, which Unruh chairs. Over the last two years, when USC paid Unruh $6,750 in fees, records show that the authority sold $110.6 million in bonds for the university.

“If Jesse got mad at USC, it might cause us some trouble. We’re not stupid. We try to maintain good relations with the treasurer’s office, as we do with a number of people,” said Houston I. Flournoy, a Sacramento-based special assistant to the USC president. But Flournoy--a former Assembly colleague of Unruh’s, a former state controller and the unsuccessful 1974 Republican candidate for governor--said he was not aware of Unruh’s speaking fees and insisted that they had no connection to the bond funds, which were used to build dormitories and parking structures.

In an interview, Unruh defended his record as treasurer and denied that he has been influenced by contributions.

“Obviously we do business with lots of people that do not contribute to us,” Unruh said. “We’d like everybody to contribute to us and we certainly solicit everybody, right across the board, everybody--any legitimate business in the state of California . . . (whether) we do business with them, (whether) we don’t do business with them, whether we do a lot of business with them, whether we do a small amount of business with them. We try our best to get campaign contributions out of them.”

Later he observed that without public financing of campaigns--which he said he has supported for 30 years--the alternative to soliciting money is losing elections. “In this success-oriented society, losing is not an acceptable alternative,” he said.

Has Refused to Vote

During his early tenure as treasurer, Unruh sometimes distanced himself from decisions, refusing to vote on issues affecting those who had contributed to his campaign committee--a step that goes beyond what is required under state law.

But no longer.

“I can’t disqualify myself from everything that I might touch in this business anymore,” Unruh said, “otherwise I couldn’t have a personal bank, I couldn’t have . . . a personal broker. I probably might run into conflicts where I couldn’t have an attorney. . . . So I can’t keep track of those things anymore. My attitude has been the other way and to try to get everybody in (to get them to contribute).”

Unruh and his top staff members contend that by getting all the major investment bankers, bond attorney firms and financial printers to contribute to his campaign, the treasurer’s office is beholden to no one and thus free to choose the firms best qualified to conduct state business.

And, among investment banking firms that sell state bonds, virtually every one has given a large amount to Unruh’s campaign kitty.

Unruh insists that these matters are trivial alongside his list of achievements as treasurer. He proudly points to increases in earnings on idle state funds resulting from aggressive trading of bonds, mortgages and bank notes; improvement in the state’s bond rating, reversing a costly slide that began after the passage of Proposition 13 and continued during the state’s 1983 fiscal crisis, and his role in launching the Council of Institutional Investors, a nationwide organization of pension funds that have banded together to protect their investments from the costly effects of corporate takeover battles.

Bests Predecessors

The various funds controlled by the treasurer’s office earned $1.3 billion in 1985--an amount that equals 87% of the total earnings of all 25 of Unruh’s predecessors, according to his office.

Whatever the accomplishments, Unruh critics in the investment banking community point to a pervasive pattern of accepting gifts and speaking fees, as well as contributions from those seeking business from his office.

In 1983, for example, E. F. Hutton gave Unruh the use of its guest apartment in Paris for six days--a gift Unruh reported to be worth $900. During the same period, Hutton was a member of teams underwriting bond issues for the Pollution Control Financing Authority and the Health Facilities Financing Authority, both chaired by Unruh.

In 1985, Hutton’s investment bankers helped sell $1.5 billion in bonds for state and local governments in California. And its brokers, in the year ending June 30, 1985, handled more than $500 million in transactions for the investment funds directly controlled by the treasurer and his staff, treasurer’s office records show.

Although it is not possible to place an exact figure on Hutton’s income from these deals, it is clear that the business meant millions of dollars in revenues to the firm.

Donated $35,000

Over the last year, Hutton donated $35,000 to the Unruh campaign, but Steve Nelson, a spokesman for the firm, denied that the gift or contributions helped Hutton gain state business.

Unruh ended an interview with The Times before a number of questions could be asked about the treasurer’s possible conflicts of interest in accepting gifts or income from Hutton and other sources.

Subsequently, Unruh, through his press spokeswoman, Christina Youngblood, and general counsel, Thomas Aceituno, declined to answer specific questions about potential conflicts of interest. Aceituno would say only that Unruh has “on occasion refrained from voting on certain matters.”

However, Michael S. Gagan, a deputy treasurer from 1982 until mid-1985, said that Unruh “never disqualified himself.”

“Neither he nor I ever felt that by virtue of going to dinner (at the expense of a private company) or by virtue of getting a Super Bowl ticket, we should be rendered powerless to make a decision that firm may be involved in,” Gagan said.

Quote Unruh Line

Gagan, along with other Unruh associates, scoffed at the notion that the tough-minded treasurer could be influenced by gifts or campaign contributions, and they quoted a line that Unruh as Speaker of the Assembly periodically delivered to new lawmakers many years ago: “If you can’t eat their food, drink their booze, (make love to) their women and then vote against them, you have no business being up here.”

Unruh has long surrounded himself with appointed officials who are bright, politically astute and fiercely loyal. Few entered their jobs with a background in the intricacies of high finance.

They insist that Unruh has been able to master his office, not by Machiavellian maneuvering, but by the strength of his intellect and the energy that he pours into his office.

“He does it full-time; other people don’t work as hard. I mean day and night,” said his longtime aide, Larry Margolis, appointed by Unruh as executive secretary to the Pooled Money Investment Board. “He’s uncanny. He’s larger than life in perception. Nobody can believe it; they can’t fathom it. They think it must be sinister.”

‘A Brilliant Man’

“Nothing makes him madder than someone cheating the state or indirectly pulling a fast one,” said Barbara Gordon Smith, Unruh’s appointee as executive secretary to the California Health Facilities Financing Authority. “They get punished and they don’t do it again.”

But a prominent investment banker, who agreed to be interviewed only on condition that he not be identified, observed: “Jesse is a brilliant man. He can have an ulterior motive and still accomplish what he wants. He has the extraordinary ability to do what may be right for the state and profit from it personally.”

It is his profiting personally--travel costs, speaking fees, football tickets, gifts and the like--that may have run Unruh afoul of the California Political Reform Act, which was approved by voters in 1974 in the wake of the Watergate scandal.

The act bars all government officials from participating in decisions that affect those who have given them $250 or more in gifts or income in the previous 12 months. Not only must the officials publicly declare the nature of the conflict, but they must even refrain from giving advice to decision makers on such matters.

However, a sizable loophole in the law prevents punishing elected state officials. And vague language permits those officials to act in spite of conflicts when “their participation is legally required for the action or decision to be made.” Since 1978, under both Democratic and Republican administrations, the state Fair Political Practices Commission, which enforces the act, has simply refused to investigate charges of conflict of interest against those elected to state office.

Unruh and his staff, along with his many staunch defenders in the financial community, insist that he has used his broad discretion to squeeze the most for the state from companies competing for business with the treasurer’s office. These firms are frequently called on to give the treasurer free advice on financial matters. Also, investment bankers who want a piece of lucrative state deals often must be willing to take on smaller, less-profitable business as well.

Summarily Dismissed

Underwriters who fail to sell their share of state bonds, or who ignore Unruh’s admonitions, can be summarily dismissed from syndicates handling bond issues for the treasurer’s financing authorities.

His judgment can be handed down swiftly upon those who fail to meet his standards. A brokerage firm that failed to deliver an investment at an agreed-upon price was “put in the penalty box”--given no more state business--for six months, said Kenneth R. Cramer, chief of the treasurer’s investment division. Cramer would not name the firm.

“Power begets power,” said a former treasurer’s office official, one of many who agreed to be interviewed only if he was not identified. “He knows how to use it. Jesse is nice and sensitive and cares a lot about people, but he must have a survival instinct. He’s a very hard ball player.”

In a 1971 interview, out of office and with his political career at a low ebb after an unsuccessful gubernatorial race against Gov. Ronald Reagan the year before, Unruh confessed: “I’ve never got used to the rich and powerful. I’m not comfortable with them.”

After almost 12 years as treasurer, he appears to have made the adjustment. Investment bankers with incomes considerably higher than his own now speak in awe of Unruh, who in his career in public office has become a political legend--friend to the Kennedys and the Legislature’s most renowned power broker.

Salary Is $42,500

Unruh receives the relatively modest salary of $42,500 a year--scheduled to rise to $87,551 in January. But among the perquisites of his office is a $10,000 fund that pays for entertainment and other unbudgeted expenses, and the use of a 1984 Lincoln, purchased for $24,000.

Increasingly in recent years, Unruh has been giving speeches to supplement his state income. Last year, he was paid $42,400 in fees, much of it from trade groups that have an interest in the state’s bond or investment business.

“After 40 years in politics and having taught and lectured at almost every major university in this nation and participated for almost 28 years in California government, I think mostly I’m underpaid as a Speaker,” Unruh said in an interview. “Somebody said to me at a meeting the other day, kind of jokingly, I think, ‘You don’t come cheap,’ and I said, ‘You should try getting Henry Kissinger sometime.’ ”

Despite relatively low pay over his long political career, Unruh has managed to accumulate considerable property, his economic disclosure statements show.

He holds an 11% share in Pacific Holiday Towers, a high-rise apartment building in Long Beach on property that Unruh and several others acquired in 1965. The property today has an estimated market value of $20 million to $25 million, according to a spokeswoman for the county assessor’s office.

Major Investments

His current holdings, according to his own economic disclosure statements, also include substantial shares in Alaska housing bonds, a shopping center and two mobile home parks--each investment worth in excess of $100,000.

The power of Unruh’s office has grown in part because of his close ties to the Legislature, particularly the Assembly, where he is regarded by many as an 81st member, according to Gagan and others. From 1982 on, he solidified his standing with elected officials by transferring $200,000 from his campaign coffers to other campaigns--including $25,000 to Assembly Speaker Willie Brown (D-San Francisco) and $20,000 to oppose Republican Gov. Deukmejian’s 1984 reapportionment initiative that threatened the Democratic majority in the Legislature.

Unruh’s influence is generally behind the scenes. Only rarely does he make an appearance before a committee or on the floor of the Assembly or Senate. Late to an interview with a reporter several years ago, he apologized: “Sorry I was late. Frankly, I forgot about it. I was over trying to kill a bill without leaving any fingerprints.”

When the Legislature in 1982 authorized $1.25 billion in tax-exempt bonds to develop a high-speed railroad line, or so-called bullet train, between Los Angeles and San Diego, the lawmakers created a commission, chaired by Unruh, that had virtual veto power over the project.

Project Died

After promoters of the bullet-train idea helped pay for two trips to Europe and one to Japan to study high-speed systems, Unruh soured on the idea, which died in 1984 when its chief American backers could not raise the money to pay for engineering studies.

More recently, two Unruh-chaired authorities gave their initial approval to the sale of more than $500 million in tax-exempt bonds to provide part of the costs for building a privately owned, $1.9-billion oil pipeline between the Port of Los Angeles and Midland, Tex.

The project developer, Arizona-based Pacific Texas Pipeline & Transportation Co., contributed $4,500 to the Unruh campaign over the last year.

Unruh’s influence over bond issues extends far beyond his mandated authority.

“He is the straw that stirs the drink with respect to every bond sold in California,” former deputy Gagan said. “If there were a proposed bond being issued in Imperial County and it struck the treasurer as egregiously wrong, he could just call up (the financial press) and say, ‘This is a rotten bond,’ and it would obviously have a deleterious effect on the salability of those bonds.”

‘Kick Ass, Take Names’

Boasting in a series of interviews that it was his job “to kick ass and take names,” Gagan gained a reputation among Wall Street financiers as a combative enforcer for the treasurer’s office, someone who demanded the same sort of attention given to the elected official he worked for. Gagan admitted in an interview that he sometimes got into loud arguments with investment bankers who did not deliver what they had promised.

His own economic disclosure statements show that in 1983 and 1984, investment bankers and others with an interest in treasurer’s office business took him to lunch or dinner at their expense a total of 150 times.

Gagan, who left the treasurer’s office in 1985, is now a political consultant in Sacramento.

Just how tough the treasurer’s office could be was illustrated in 1982, when Unruh and his staff struck out at Dean Witter Reynolds Inc., which had been working with several Northern California cities to issue $60 million in bonds to build single-family homes in their communities.

Although supported by a legal opinion from a prestigious law firm, the deal circumvented the new Mortgage Bond Allocation Committee, which was established to ration out the limited amount of tax-exempt mortgage bonds permitted in California under a 1981 federal law. As treasurer, Unruh chairs the committee.

Flouted Intent of Law

Unruh and his staff pressed Dean Witter to back out of the deal, which they were convinced flouted the intent of state and federal law.

“It was the first time that the state treasurer had gone nose-to-nose with one of the top 10 firms, the biggest in California,” Gagan said.

When Dean Witter went ahead anyway, the treasurer’s office responded.

“We simply removed Dean Witter from all state contracts for 10 months,” Gagan said. “And when we removed them, other jurisdictions followed.”

Dean Witter, Gagan said, was restored to the treasurer’s good graces only after a top manager in the firm’s New York office widely distributed an apology for having bypassed the mortgage bond rationing system.

Current Dean Witter management refused to comment on the incident.

However, the firm has greatly increased its contributions to the Unruh campaign committee--from $5,000 in 1982 to $30,000 in 1985, among the largest payments made to Unruh’s reelection effort.

Won’t Talk Specifics

Unruh refused to discuss specifics of how he decides which investment banking firms get a share of state or authority bond sales. Aceituno, his general counsel, said there were no written standards for picking or for dropping these underwriters.

“I’m not going to talk to you about any firms on the basis of why they are chosen, why they are not chosen, why they are put in deals, why they are put out of deals. I consider that to be internal management,” Unruh said. “I do it on the basis of what is best for the people of California, and beyond that, I’m not going to bad-mouth anybody.”

He also asserted that “in very, very few cases is it (the decision) totally discretionary. There are other members of every authority that I sit on. There are a number of authorities I don’t even have numerical control of.”

Defer to Unruh

But even where Unruh shares the decision-making with members of the numerous state-chartered authorities that he chairs, the others say that they defer to the treasurer in the appointment of staff, underwriting teams and bond attorneys. For example, when Dr. Robert Tomfohrde, one of nine members of the California Health Facilities Financing Authority, was asked how the authority chose its underwriters, he said: “Jesse chose them. . . . The authority is not really that involved with underwriters and underwriter selection.”

Unruh’s power goes beyond the issuance of government bonds. In 1983, the treasurer was added to the boards of the state’s largest public pension funds--the Public Employees’ Retirement System and the State Teachers’ Retirement System. When these funds are added to the amount in the Pooled Money Investment Program, Unruh is now in a position to affect the investment of almost $75 billion in assets.

Sid McCausland, who was recently fired as chief executive officer at the $37-billion public employee system, said that he unsuccessfully fought for 2 1/2 years to block Unruh from dominating the system’s board.

“Just after I came in (as chief executive in January, 1984), Unruh told me it had never taken him more than two years to take over a board,” said a bitter McCausland, who said that it was his unwillingness to go along with Unruh that cost him his job.

Began Contributing

In 1983, within weeks after Unruh joined the two pension system boards, the financial consultant to the boards, Wilshire Associates, began contributing to Unruh’s campaign--$1,000 in November of that year, followed by $2,000 in 1984 and again in 1985. The firm’s contracts with the two pension funds total $170,000 a year, said Wilshire’s Allan Emkin.

In March, 1985, Emkin hosted a fund-raising reception for Unruh in Santa Monica.

“Mr. Unruh in his capacity was treating this company very fairly,” Emkin said. “We were asked to put together a small function. I agreed to do that. There’s nothing less or more to it.” Emkin could not recall who had asked him, but said that Unruh aide Larry Margolis was his contact with the Unruh campaign.

POLITICAL CONTRIBUTIONS TO THE UNRUH CAMPAIGN

Investment Bankers’ Contributions (Since the 1982 treasurer’s race)

Government Contributions bonds sold in Investment Jan.1, 1983- California, 1985 Banking firm May 17, 1986 (State and local) Merrill Lynch $52,750 $2,828,182,844 PaineWebber 53,000 1,866,051,406 First Boston 33,000 1,719,583,859 E.F. Hutton 50,000 1,534,964,031 Smith Barney 63,000 1,489,894,766 Shearson Lehman 49,000 1,434,828,313 Salomon Brothers 39,700 1,428,924,406 Security Pacific 9,700 1,104,071,063 Kidder Peabody 45,000 1,062,093,953 Miller & Schroeder 7,500 1,058,441,531 Stone & Youngberg 5,200 1,046,218,445 Dean Witter Reynolds 49,500 1,029,523,766 Goldman, Sachs 30,500 962,175,305 L.F. Rothschild, 37,000 875,008,109 Unterberg, Towbin Bear Stearns 56,405 859,149,813

Sources: campaign contributions, Unruh committee reports; volume of business by underwriter, compiled for The Times from the Public Securities Assn. data base by McDonnell Douglas Finance and Insurance Information Systems Co.

Other Major Donors Jan. 1,1983-May 17, 1986

Contributor: American Savings & Loan Amount: $51,000 Comment: Does business with the treasurer’s Pooled Money Investment Program; handled $597 million in investments, 1984-85.

Contributor: Cantor, Fitzgerald Securities Amount: 45,500 Comment: Broker-dealer with the treasurer’s PooledMoney Investment Program; handled $3.2 billion in investments, 1984-85.

Contributor: Bank of America Amount: 41,100 Comment: Conducted $1.75 billion in investment business for the Pooled Money Investment Program, 1984-85; handled $694 million in state and local government bonds, 1985.

Contributor: Prudential-Bache Securities Amount: $37,500 Comment: Handled $775 million in investments for the Pooled Money Investment Program, 1984-85; sold $652 million in state and local government bonds, 1985.

Contributor: Drexel, Burnham & Lambert Amount: 36,450 Comment: Firm handled $1.4 billion in Pooled Money Investment Program transactions 1984-85; sold $750 million in government bonds in state in 1985.

Contributor: Orrick, Herrington & Sutcliffe Amount: 30,000 Comment: Law firm doing work on numerous state and local government bond sales.

Contributor: Donaldson, Lufkin & Jenrette Amount: 26,000 Comment: Underwriter sold $576 million in tax-exempt bonds in state in 1985, including private student loan issues, which must be approved by Unruh-chaired committee.

Contributor: O’Melveny & Meyers Amount: 19,500 Comment: Legal firm acting as bond counsel on numerous state and local government bond sales.

Contributor: Cranston Securities Amount: 17,056 Comment: Broker-dealer with Pooled Money Investment Program;handled $200 million in investments, 1984-85.

Contributor: Buchalter, Nemer, Fields, Christie & Younger Amount: 16,850 Comment: Law firm that does legal work on bond issues for state agencies and financing authorities.

Contributor: Pandick Press Amount: 16,500 Comment: Prints official statements for numerous state and local bond issues.

Contributor: United Education and Software Co. Amount: 16,000 Comment: Owns and operates technical schools; also services student loans.

Contributor: Imperial Securities Amount: 15,000 Comment: Underwriter sold $62 million in government bonds in1985.

Contributor: J.D. 333 Committee Amount: 13,829 Comment: Fund-raising committee, formed by attorney with Jones, Day, Reavis & Pogue--bond counsels on state and local government bond sales.

Contributor: Morgan Guaranty Trust Co./J.P. Morgan & Co. Amount: $13,500 Comment: Conducted $984 million in business for the Pooled Money Investment Program, 1984-85; sold $403 million in state and local government bonds, 1985. Firm provided $3,300 to Unruh for a trip to France in 1983.

Contributor: Citicorp Amount: $11,950 Comment: Handled $3.7 billion in transactions for the Pooled Money Investment Program, 1984-85; sold $793 million in state and local government bonds,1985.

Contributor: Pacific Financial Printing Amount: 11,500 Comment: Prints official statements for numerous stateand local bond issues.

Contributor: Finley, Kumble, Wagner, Heine, Underberg, Manley & Casey Amount: 10,750 Comment: Attorneys who handle government bond issues.

Contributor: Crocker Bank Amount: $10,000 Comment: Conducted $6.2 billion in business for the Pooled Money Investment Program, 1984-85; sold $437 million in state and local government bonds, 1985.

Contributor: Southern California Edison (Employees’ Committee) Amount: 9,500 Comment: Authority chaired by Unruh issued $135 million bond issue for utility’s pollution control equipment. Sources: Unruh campaign committee reports; treasurer’s office records; Public Securities Assn. data base.