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Is UC regent's vision for higher education clouded by his investments?

Richard C. Blum's ownership of about $700 million in stock of two firms that run for-profit schools raises the question of whether his holdings are consistent with his role as a UC regent.

July 13, 2010

Conflicts of interest almost always involve money, but sometimes they raise more questions about the subjects' perspective than about their wallets.

Consider the large investments University of California Regent Richard C. Blum has made in two for-profit higher education companies, Career Education Corp. and ITT Educational Services Inc.

Blum's San Francisco investment firm is the largest shareholder in both firms, owning nearly 20% of Career Education and more than 10% of ITT Educational.

The firm's combined holdings in these two stocks is valued at about $700 million, based on their recent market prices. That sounds like a lot of money, but I think we can concede as a matter of courtesy that Blum, who is a billionaire and the chairman of the real estate firm CB Richard Ellis, probably wouldn't take any action as a regent merely to juice the value of those holdings.

But what do these investments say about Blum's vision for higher education? Should an important official of what is arguably the most prestigious system of public higher education in the world also be a leading financial backer of an industry that has been coming under intense regulatory scrutiny because of persistent allegations of fraud?

Or put another way: If the chairman of the World Wildlife Fund held significant investments in, say, BP, wouldn't people wonder exactly what he thought about how to balance environmental protection and oil industry regulation?

Blum, who was appointed to an unpaid 12-year term as regent by Gov. Gray Davis in 2002 and is the husband of U.S. Sen. Dianne Feinstein, holds two degrees from Berkeley and has been a generous donor to the school. He has been especially outspoken about the role of UC and shortcomings in its strategic planning and administrative structure.

It may be inevitable that the holdings of a professional investor such as Blum would create the appearance of a financial conflict with some of UC's own financial dealings. UC's endowment pool and retirement fund have also held shares in Career Education and ITT Educational Services. UC says the peak value of the two stocks in the portfolios it outsourced to professional managers was about $10.3 million.

As of the end of 2009, those managers had sold off those shares, although both stocks are still held in the university's passively managed portfolios, which are the equivalent of index funds.

"It's misguided to assume that there's a conflict of interest simply because there's an overlap between personal investments by University of California regents and investments made by the UC treasurer's office," Lynn Tierney, a UC spokeswoman, said last month. Her statement was issued in response to an inquiry by Peter Byrne, a Northern California journalist who has written about Blum's investments, including those in the for-profit educational sector.

Tierney said UC has strict policies designed to inoculate the decisions of its investment managers from interference by regents. "The real issue is whether regents communicate with the treasurer's office about specific investments," her statement said. "They haven't and wouldn't, period."

Yet that raises the question of whether Blum's ownership in Career and ITT is entirely consistent with his role as a UC regent. The question arises because these companies belong to an industry with a reputation for placing profits before educational attainment.

Blum's office didn't respond to my request for a comment.

As Sen. Tom Harkin, D- Iowa, observed in a recent report following a hearing, "evidence suggests that for-profit schools charge higher tuition than comparable public schools, spend a large share of revenues on expenses unrelated to teaching, experience high dropout rates, and, in some cases, employ abusive recruiting and debt-management practices."

More than 90% of students in bachelor degree programs at for-profit schools graduate with federal loans outstanding, compared with 60% at public universities — and they default on those loans at three times the rate, Harkin noted.

Federal prosecutors investigated ITT in 2004, looking for evidence it had falsified grades, attendance and post-graduate employment rates; the investigation was closed the following year.

As for Career Education, last year, the inspector general of the U.S. Department of Education noted that the company's flagship institution, American InterContinental University, got full accreditation from a professional oversight body, the Higher Learning Commission of the North Central Assn. of Colleges and Schools even after the commission found that AIU inflated credit hours assigned to some of its undergraduate and graduate programs. The inspectors found the accreditation to be "not in the best interest of students" at AIU and suggested that the department consider whether it should "limit, suspend, or terminate" its recognition of the accreditation body.

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