CSUN Loss Seen as a Sign of the Early ‘90s

Former Cal State Northridge President James Cleary set tongues wagging in the early 1970s with his outlandish-to-some suggestion that schools in the state college system start raising their own cash.

After all, beating the bushes for money had always been the province of private schools and, to a lesser extent, of the crown jewel in California’s higher educational hierarchy--the UC system.

The notion that the lowlier CSU schools shouldn’t live within the steady stream of public funds the Legislature proudly provided was thought almost unseemly by some--and contrary to state policy by others, Cleary recalled in a phone interview from his Idaho home.

Since then, CSUN and some other CSU campuses have come a long way from shyly dunning alumni for a few bucks to getting caught up in risky investments starting in the calamitous early ‘90s, when state funding plummeted and panic ensued.

By July of this year, the CSU system had re-centralized its investment pool and sworn off risky security ventures.

Today, CSUN officials, including President Blenda Wilson, criticize the high-flying moneymaking venture that turned sour, but say the current flap over a $2.37-million investment loss should be viewed in the context of the tumultuous turn of the decade.

With the state’s economy mired in recession, the Cal State system’s budget was slashed several years running. Hundreds of classes were cut--more than 500 in the 1991 fall semester at CSUN alone. That year, $12 million was stripped from the CSUN budget. Fees went up 30% in two years.

Teachers were laid off and those remaining faced dirty campus bathrooms without toilet paper, and shortages of basic supplies.

“We were guarding a box of chalk like our life,” recalled Shahid Ansari, a CSUN accounting professor and president of the faculty education resources committee. “We took two pieces of chalk to class and took them back.”

By that time, Cleary’s once-radical notion of fund-raising in the state university system had already given way to a certain amount of campus fund-raising, Ansari said. With the need for money suddenly so acute, efforts at raising money on campus rather than in Sacramento were stepped up at the urging of then-CSU Chancellor Barry Munitz and the Board of Trustees.

“No institution has built excellence on state tax dollars alone,” Munitz said in a 1991 speech at Cal State Fullerton.

Accordingly, CSU system universities were given more financial autonomy and flexibility. It became every campus for itself.

“My impression is people panicked at the notion money wouldn’t be flowing as it always had,” said Wilson, who took over at CSUN in 1992.

Raising money at CSUN was not, then or now, a monolithic undertaking.

One entity, now called the University Corp., runs campus concessions such as the bookstore, invests some of its profits, and turns over a bundle to the university each year.

But investments were also being made within the school’s finance department, using various pots of money on hand from the Student Union, the Associated Students and other funds. For a time, the University Corp. also contributed to the finance department’s investment pool.

The person in charge of that investing was Karen Hoefel, a veteran CSUN employee who had worked her way up the ranks to become director of finance and logistical services. She is now appealing the university’s firing of her.

It was Hoefel, along with her counterparts at several other campuses, who separately invested money in risky, mortgage-based securities. The securities she chose were among a broad category of investments known as derivatives, so named because their only value is derived from the success of the primary asset, which the derivatives investor does not own directly. Extremely risky, they can also be highly profitable--in CSUN’s case, bringing in tens of thousands of dollars each month at the height of the market before they were sold off last April at a $2.37-million loss.

CSUN Controller Robert Kiddoo and Vice President of Administration and Finance Arthur Elbert say Hoefel acted independently when she made the investments and that they did not come to light until years later, when Kiddoo undertook an unprecedented review of the university’s accounts. Both administrators are scornful of the judgments made.

“No one in the world, who has any brains,” would entrust so much investment discretion to one person or university funds to derivatives, Elbert said recently.

But some affiliated with the campus find that contention difficult to believe. Cleary, for instance, said he doesn’t recall Hoefel having that kind of authority.

And Hoefel insists she reported everything to her superiors, specifically former Assistant Vice President Dick Wells and later Assistant Vice President Jane Chatham, who in turn reported to former finance chief Elliot Mininberg.

“There was nothing secret,” Hoefel said in a Times interview.

Accounting professor Jan Bell is among those skeptical of claims that Hoefel acted on her own in buying the risky securities.

“No question, Elliot Mininberg ran the ship tightly,” Bell said. “He had such a tight fist on everything . . . I can’t believe Karen Hoefel could have done it without the knowledge of Mininberg.”

If she did, echoed accounting professor Ansari, that points up “a fundamental flaw in our accounting system.”

Mininberg has not returned numerous calls seeking comment.

Before the ‘90s money crunch, the kind of investments made by Hoefel were not allowed under CSU policy. But at the time she made them, even CSUN officials acknowledge, they were perfectly legal and within system investment policy.

They also were quite successful for the first few years, a time during which CSUN’s finance department underwent numerous changes, especially after Wilson arrived.

Mininberg’s departure in 1994, months after the Northridge earthquake, was part of heavy staff turnover. His second-in-command, Jane Chatham, was forced out after the discovery that employees of the construction firm overseeing earthquake reconstruction on the campus did work on her home.

After Mininberg left to return to the classroom, Hoefel was named an acting vice president in the finance department and became a candidate for the job ultimately won by Elbert, who took over in fall 1995.

By this time, the CSU system had decided to take a closer look at its then-22 campuses’ investment portfolios. The campuses were also under orders to change over from an accounting system traditionally used by nonprofits to the accounting system used by all other businesses.

The business accounting system is far more revealing. For instance, under the traditional campus system, reporting annual investment losses was not required. But both gains and losses must be disclosed in the new accounting system.

While CSUN lagged behind other campuses in the changeover, two searches to hire a controller--the official who would oversee the accounting system change, would peruse the campus books and ready them for an audit--ended with no one being hired.

Hoefel’s detractors suggest, though not for attribution, that she was responsible for the delay, possibly because she did not want a new pair of eyes reviewing the books.

But documents obtained by The Times show that Hoefel in late 1995 and in 1996 was sending written reports to Elbert.

The reports detailed the nature, amount and progress of the investments and whose money was invested. In one document, Hoefel warned of diminishing returns and recommended selling two of the securities in fall 1996. The advice was taken, one high-ranking official acknowledged.

But Hoefel says she also bought more risky securities in 1996.

Meanwhile, facing mounting pressure from the CSU chancellor’s office to submit to an audit using the new accounting system, Elbert and Wilson recruited accounting professor Kiddoo for the unfilled job of controller.

It was in that capacity, Kiddoo said recently, that he discovered the existence early this year of the risky derivatives investments and, with approval from Elbert and Wilson, sold them at a loss in April.

Hoefel--who had been transferred to the chancellor’s office on a temporary assignment--says now that she opposed the sale, and contends that campus officials are trying to make her the scapegoat. Two other CSU campuses--Sacramento and San Francisco State--made similar investments, Hoefel noted, but hope to ride out the market loss by holding on to them--rather than selling prematurely, as Hoefel says CSUN did.

By then, making such an investment was no longer considered acceptable by the CSU system.

The panicky days of the early ‘90s were over. The CSU system had rethought its divesting of investment authority to individual campuses and adopted a more conservative policy favoring a centralized system of short-term investments with maximum liquidity--the antithesis of the risky portfolio at CSUN.

Hill-Holtzman is a staff writer. Thampi is a correspondent.