CSUN Lost $2.3 Million on High-Risk Investments

NORTHRIDGE â€”  Cal State Northridge lost $2.27 million this year after risky investments discovered during a state-mandated overhaul of the university’s accounting system were liquidated, campus officials acknowledged Tuesday.

The money, which had been invested in fiscal 1990-91 by the then-acting finance director at CSUN, belonged to several nonprofit auxiliaries providing services on the campus, including the Associated Students and the University Student Union.

All have been reimbursed, with interest, for their losses, with university savings accounts absorbing the $2.27-million loss, said CSUN Controller Robert J. Kiddoo.

CSUN was not alone in making the high-risk investments during the early 1990s but was the only campus to lose money in the venture, according to the CSU system’s chief accountant.

Kiddoo said the derivative, mortgage-backed securities were sold in April because the campus needed money for earthquake rebuilding. But the risky nature of the investments themselves was another factor, he and CSUN spokesman Bruce Erickson agreed.

“The quality of the securities is not what I would have chosen,� said Kiddoo, a veteran accounting professor who became interim university controller in January and was officially named to the post in July.

He also questioned the wisdom of tying up the money in a long-term investment.

“We should not have been making investments of operating capital in long-term investments,� Kiddoo said.

Despite his 11-month review of the university’s books, Kiddoo said he could not provide details about the investments such as how many mortgage-backed securities were bought and sold over the seven-year period, which brokers handled the transactions, and how much more money was invested after the initial sum he estimated at between $1 million and $1.5 million.

“I’m interested in today, you’re interested in yesterday,� Kiddoo said, when pressed for details.

He called the figure of a $2.27-million loss “preliminary,� and said he expects the final figure in January when an external audit is complete.

Kiddoo and university President Blenda J. Wilson said the decision to invest in derivatives was made unilaterally by the campus’ former director of finance and logistical services, Karen Hoefel, who was transferred out of the department about the time Kiddoo was named interim controller.

At the time, Hoefel and her staff operated virtually without oversight, in accordance with university procedures, Kiddoo said.

Hoefel, in an interview late Tuesday, said: “There was nothing secretive, illegal. Everything was done within government codes.� She added that she reported to her supervisors on a regular basis and that in her opinion the portfolio was liquidated prematurely.

“They should not have liquidated the portfolio. There were other options if they needed cash,� Hoefel said.

Wilson, who became campus president in September 1992, said she did not become aware of the risky nature of the investments until last year.

“She was within her authority to make the investment,� Wilson said. “I’m uncomfortable with the ad homonym nature of it though.�

Wilson said the risky investment showed “poor judgment. [It] was not illegal, not bad, not against policy.�

In February or March, according to Kiddoo’s account, soon after he assumed the helm of CSUN’s finances, Hoefel was transferred from CSUN to the CSU chancellor’s office to work on a “special project.� Kiddoo sold the remaining securities in April.

But Wilson declined to say directly whether Hoefel’s transfer occurred as a consequence of the poor investments.

“I think the [transfer] decision was made before the decision to liquidate the investment,� Wilson said. “You’re asking cause and effect. They were not in my mind.�

The money-losing portfolio was sold through Tejas Securities Group Inc., of Austin, Tex., Kiddoo said.

The portfolio, whose peak market value was estimated at $10 million to $15 million was sold for about $7.7 million, Kiddoo said.

CSUN was not the only CSU campus to make investments in derivatives.

But while a number of Cal State campuses have invested in mortgage-backed securities, only CSUN has suffered an actual loss, said George Pardon, accounting director for the 23-campus university system.

Pardon said that these securities--which are paid off as homeowners repay their mortgages--remain worthwhile if the investor can afford to hang onto them for the long term.

The reason CSUN got into trouble, he said, was that the campus was forced to sell them prematurely to meet short-term needs for cash.

Indeed, Cal State Sacramento and San Francisco State continue to hold about $20 million in mortgage-backed securities, Pardon said. Although these investments show a paper loss of 30% to 40%, both campuses plan to keep the securities until they recoup their entire value.

“There never will be a real loss,� Pardon said.

In January, the Cal State board of trustees revised its investment policies so that individual campuses pooled their money into one central $150-million fund.

The change did not occur because of CSUN’s loss. Instead, the new policy was recommended by an outside auditing firm, which pointed out the university could save money by consolidating all the investment managers into one. The university system’s investments are now managed by a private firm.

The board of trustees in January also accepted its auditors’ recommendations “to establish limits on the duration of investments and the use of derivatives and establish investment policies for short-term and long-term investments.�

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Hill-Holtzman is a Times staff writer and Radha Krishnan Thampi is a special correspondent. Times staff writer Kenneth R. Weiss contributed to this story.