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[Expo and Fair] - Review of Operations and Management of the CA State Expo and Fair, Part II (1 of 2)
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[Expo and Fair] - Review of Operations and Management of the CA State Expo and Fair, Part II (1 of 2)
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Ronald Reagan Presidential Library
Digital Library Collections
This is a PDF of a folder from our textual collections.
Collection: Reagan, Ronald: Gubernatorial Papers,
1966-74: Press Unit
Folder Title: [Expo and Fair] - Review of Operations
and Management of the CA State Expo
and Fair, Part II (1 of 2)
Box: P36
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https://reaganlibrary.gov/archives/digital-library
To see all Ronald Reagan Presidential Library inventories visit:
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Contact a reference archivist at: [email protected]
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REVIEW OF OPERATIONS AND
MANAGEMENT OF THE CALIFORNIA
STATE EXPOSITION AND FAIR
PART II
HEARING
BEFORE THE
COMMITTEE ON
EFFICIENCY
AND
COST CONTROL
STATE
COMMON GREAT GREAT LEGES ATORUM
ECC 72 . 5
MAY 1, 1972
CALIFORNIA STATE ASSEMBLY
COMMITTEE ON EFFICIENCY
and
COST CONTROL
ASSEMBLYMAN MIKE CULLEN, CHAIRMAN
ASSEMBLYMAN ERNEST MOBLEY, VICE CHAIRMAN
ASSEMBLYMAN KENNETH CORY
ASSEMBLYMAN VINCENT THOMAS
ASSEMBLYMAN RAYMOND T. SEELEY
ASSEMBLYMAN BOB WILSON
JOHN W. BILLETT, SENIOR CONSULTANT
JAN SHARPLESS, ASSOCIATE CONSULTANT
JUDY CHAIX, RESEARCH ASSISTANT
DEAN CROMWELL, LEGISLATIVE INTERN
MARGARET CUMMINGS, COMMITTEE SECRETARY
TERRY STATHOS, STAFF SECRETARY
STATEMENT OF PURPOSE
The Assembly Committee on Efficiency and Cost Control shall
exercise general legislative oversight in order to determine
the extent to which programs, policies and actions of govern-
ment fall within and adhere to the expressed intent of the
Legislature, including but not limited to the:
I.
Determination of programs which duplicate
or overlap other programs in existence; the
II. Determination of programs which no longer
fulfill an intended or necessary need; the
III. Determination of agencies which are conduct-
ing programs or functions not within the
intent of the Legislature; and the
IV.
Determination of agencies failing to conduct
programs or functions intended by the Legis-
lature.
LETTER OF TRANSMITTAL
State Capitol
Sacramento, California
May 1, 1972
The Honorable Robert Moretti
Speaker of the California Assembly
State Capitol
Sacramento, California 95814
Dear Mr. Speaker:
Your Committee on Efficiency and Cost Control hereby
transmits its second hearing record on the subject of
the California State Exposition and Fair.
M.b.Cullan Respectfully,
MIKE CULLEN
Chairman
CONTENTS
Hearing on
Page
Tuesday, January 18, 1972
1
Statement of
Clifford, Jack, Member, California State Exposition
and Fair Executive Committee
43
Nissen, Ralph, Chairman, California State Exposition
and Fair Executive Committee; accompanied by Mr.
Thomas Bair, Manager, California State Exposition
and Fair, Mr. Dave Kelts, Controller, California
State Exposition and Fair, and Dr. H. C. Sanderson,
Member, California State Exposition and Fair
Executive Committee
49
Payne, William, Executive Officer, Public Employees'
Retirement System; accompanied by Mr. Stan Fowler,
President, Board of Administration, Public Emp-
loyees' Retirement System, and Mr. Carl Halterman,
Mortgage Loan Officer, Public Employees' Retire-
ment System
1
Robinson, Lawrence, Jr., Director, Department of
General Services; accompanied by Mr. Arthur
Collins, Assistant Director, Department of
General Services, and Mr. Emil Relat, Chief
Counsel, Department of General Services
65
Hearing on
Tuesday, February 1, 1972
82
Statement of
Melarkey, Dr. Pat, Chairman of the Sacramento
County Board of Supervisors
82
APPENDICES
Appendix A -- Property Acquisition Division, Depart-
ment of General Services, Appraisal Report - Point
West, January 2, 1968; John E. Day, Property Ac-
quisition Division, Preliminary Estimate of Value -
Point West, December 12, 1969; Stanley Goode, Goode
and Goode Real Estate Appraisers, Consulting Ap-
praisers Report - Point West, January 2, 1968
96
Appendix B -- Development Research Associates, Recom-
mended Marketing Program for the old fair site and
Point West Subdivision
97
Appendix C -- Department of General Services, Appraisal
Review Point West Subdivision, January 8, 1968;
Property Acquisition Division, Department of General
Services, Valuation Review, Point West, November 13,
1970
98
Appendix D -- Statement of Dr. Pat Melarkey, Chairman
of the Sacramento County Board of Supervisors
104
Tuesday, January 18, 1972
The Committee met at 2:00 p.m. in Room 6028, State Capitol,
Chairman Cullen presiding.
Present: Assemblymen Mike Cullen, Raymond Seeley, and Vincent
Thomas.
Staff Present: John Billett, Senior Consultant, Jan Sharpless,
Associate Consultant, and Dean Cromwell, Staff.
Also Present: Senator Albert Rodda, Don Benedict, Principal
Program Analyst, Office of the Legislative Analyst, Jerry Bassett,
Deputy Legislative Counsel, Office of the Legislative Counsel,
Walter Quinn, Manager, Office of the Auditor General, and Jack
Watson, Administrative Assistant to Senator Albert Rodda.
CHAIRMAN CULLEN: We will commence the hearing now, our third
in this Committee's review of the operations, management and future
outlook for the California State Exposition and Fair. Today we
requested the attendance of two witnesses from the Public Employees'
Retirement System on the subject of the disposal of real property
at Cal Expo commonly known as Point West. So if Mr. Fowler and
Mr. Payne would come to the witness table with anyone else that you
may have with you, we will proceed.
APPEARANCE OF MR. WILLIAM PAYNE, EXECUTIVE OFFICER, PUBLIC
EMPLOYEES' RETIREMENT SYSTEM; ACCOMPANIED BY MR. STAN FOWLER,
PRESIDENT, BOARD OF ADMINISTRATION, PUBLIC EMPLOYEES' RETIREMENT
SYSTEM, AND MR. CARL HALTERMAN, MORTGAGE LOAN OFFICER, PUBLIC
EMPLOYEES' RETIREMENT SYSTEM.
1
CHAIRMAN CULLEN: Last week the testimony turned to the
transaction whereby 230 acres at Point West are now held by a
partnership known as Kaiser-Aetna a general partnership, and during
the course of the hearing it was established that this title had
been passed to the Public Employees' Retirement System Board from
the State in return for a sum of money to be used in the capital
construction of Cal Expo, and that the -- the agreement of convey-
ance vested in the State a ten-year option for repurchase and
established the repurchase price. Subsequently the property was
reconveyed to the State by Grant Deed and then by the State to
Kaiser-Aetna by way of Quitclaim, a Quitclaim Deed. The legal
effect of a Quitclaim Deed is that there are no restrictions
contained in it. The State surrendered any interest that it might
have in the property. Overriding the transaction are two statutes
one which authorizes the Director of General Services to dispose
of surplus lands for commercial and industrial purposes, and the
other authorizes your Board, or the Director to utilize by way of
lease or sale in conformance with the master plan --
Now, what piqued the interest of the members of the Committee
and prompted Mr. Thomas to ask for your attendance today is that,
after these legal papers were executed and the title to the property
had passed, two things were significantly missing when compared to
the prior status of the property. One, the holder of a promissory
note did not have any collateral as your Board had when you loaned
2
money to the -- to the State. And the other -- the other thing
escapes me, that's --
ASSEMBLYMAN THOMAS: What's that?
CHAIRMAN CULLEN: What was the other thing? No, the other
question was whether or not it is in accordance with your established
practices to invest money or loan money without having any collateral
or any security interest in any property. So would you care to re-
spond to that, either of you?
MR. WILLIAM PAYNE: I'm quite willing to start. Mr. Cullen,
I'm William A. Payne, Executive Officer of the Public Employees'
Retirement System. I'm sorry I wasn't here at the other meeting.
Pretty much all I know about it is what I read in the press and
some conversations from people who were here. I think we have to
examine, and I'm sure you know what a promissory note is, I think
we have to examine a note situation, and the security that goes
behind the note.
Now, notes in the particular industry that we are examining
are not uncommon, they are frequently used. Notes which are by
definition, I guess, unsecured, although the unsecured is sort of
redundant, are customarily used in the financial industry. I call
your attention to the fact that such organizations as IT&T, Standard
Oil, Shell, and others use notes as long-term investments and they
are -- and they are used extensively. And I would note that a
debenture, incidentally, is a - is a form of a note in that it is
3
not -- it is not secured by a mortgage on specific property, but
it is really in the area of a promise to pay and generally the --
a debenture has -- has a rate funding situation, it may stand in
priority to other debt securities. But essentially it is a note.
Now, to answer your question specifically, then the -- the
Board does have authority to invest in notes and has invested in
notes of -- of such organizations as this. Now, this is not to
necessarily compare IT&T and Standard Oil and Shell with the
Kaiser-Aetna partnership that -- I'm not trying to make that
comparison but only to point out that notes are customarily a
form of paper for investment purposes. And in developing an opinion
as to whether or not a note provides adequate security for the
investment, you have to look at other things, just as you would
have to look at a bond, which is a form of a mortgage. Incidentally,
you have to look at other areas to determine your security. In the
case of ---- in the case of the Kaiser-Aetna note, which I grant you
came about under unusual circumstances, in the case of the Kaiser-
Aetna note, looking at it from the staff position now, and looking
at the long period of negotiations that we had with Kaiser-Aetna,
and they were quite extensive and occurred over a period of quite
a number of months, we -- we first looked for security at the
partners, recognizing that the partnership agreement had provisions
which made it impossible or difficult, if not impossible, to have
each of the partners on the hook directly, which we wanted. But
4
you have to first look at the -- at the stature of the partners
of Kaiser-Aetna Life Insurance Company, which we did. I don't
think you have to look at them very long because they are well
established corporations -- companies with a good credit rating.
It was our conclusion that - at the start of this negotiation
that despite the other circumstances we looked first to Kaiser-
Aetna because we recognized what they were doing with the -- with
the Kaiser-Aetna partnership, what their objectives were, what
their purpose was. We recognized that Kaiser-Aetna partnership
was for a profit motive and that these companies were going to be
involved with the -- with the sponsorship of Kaiser-Aetna --
Kaiser and Aetna and that we were involved with what appeared to
be and certainly is a long-term association with an objective of
becoming a leader in the land development operation. And from
that you look at the -- at the assets of the partnership then to
determine whether or not you feel that the assets of the partnership
are going to be -- and the credit rating of the partnership, but
particularly the assets are going to be adequate to meet the --
to meet a realistic investment.
Our conclusion was that this was true, Kaiser-Aetna was a good
concern, and that we had no great concern about using a note as an
investment medium with Kaiser-Aetna.
ASSEMBLYMAN THOMAS: May I ask a question first? I think --
CHAIRMAN CULLEN: Before you ask -- before we get too far in
5
the transcript, I want to make a correction. I said two elements
were significantly missing from the new arrangement and the second
one failed me for a moment, and that is the -- the restriction of
the use of the Point West to commercial and industrial was missing
or omitted. Mr. Thomas.
ASSEMBLYMAN THOMAS: Before we go into the note, and the
Kaiser-Aetna partnership, let's go back first, when this 230 acres
of land was declared surplus, who declared it as surplus property
and let's take it from step to step. First -
MR. PAYNE: Okay.
ASSEMBLYMAN THOMAS: Who declared it as surplus property?
MR. PAYNE: I would rather have somebody else answer that.
ASSEMBLYMAN THOMAS: Mr. Fowler.
MR. STAN FOWLER: Mr. Thomas, I'm -- I can say this from casual
knowledge, but I think you need to have the officials of the
Department of General Services or the Executive Committee tell
you the steps that way.
ASSEMBLYMAN THOMAS: First of all, you are President of the
PERS Board?
MR. FOWLER: Maybe for the record -- it depends on what point
in time you want to talk. As I am sitting here today, I'm an
Assistant Director, Civil Service, of the Department of General
Services. I'm an elected member of the Public Employees'
Retirement System.
6
ASSEMBLYMAN THOMAS: And you are a member of the Board, the
Committee?
MR. FOWLER: I'm President of the Board, elected by the members
as I sit here today.
ASSEMBLYMAN THOMAS: Then you are on the Executive Committee
of the Cal Expo.
MR. FOWLER: Now, backing up --
CHAIRMAN CULLEN: Is that right, Mr. Fowler?
MR. FOWLER: Yes.
CHAIRMAN CULLEN: You are on the Executive Committee, which is
the -
MR. FOWLER: No.
CHAIRMAN CULLEN: You've never been on the Executive Committee
of Cal Expo?
MR. FOWLER: I've never been on the Executive Committee of Cal
Expo -- Exposition and Fair. I was Executive Officer of that
Committee prior to the time that Governor Reagan was elected.
ASSEMBLYMAN THOMAS: My point is, let's start from the beginning,
step by step. Tell us what happened. Who sold the property? Does
General Services under the statute have the right to sell all surplus
property?
MR. FOWLER: Well, you better ask the Director of General
Services, because I never acted in any capacity selling the property.
I'm an Assistant Director of General Services, and as I understand,
7
you have the Director and his staff coming up later on. And I
don't like to get out of my sphere now because if I'm -- Mr. Thomas,
if I'm going to talk from my capacity on my positions in this, but
I do not intend to get into somebody else's field.
ASSEMBLYMAN THOMAS: All right. Now --
CHAIRMAN CULLEN: What is your sphere, sir, in the Department
of General Services?
MR. FOWLER: I'm an Assistant Director of the Department of
General Services.
CHAIRMAN CULLEN: As an Assistant Director do you handle
procurement or operations or --
MR. FOWLER: I don't have anything to do with this side of
the field you are talking about.
CHAIRMAN CULLEN: What do you have to do with?
MR. FOWLER: I have the State Printing Plant reporting to me.
I have the Communications Division reporting to me. I have the
Transportation Division reporting to me, and what we call Off
Services.
CHAIRMAN CULLEN: Okay, Mr. Thomas.
ASSEMBLYMAN THOMAS: Were you President of the Board when the
transaction, this 230 acres too -- all right, came about?
MR. FOWLER: Yes, sir.
ASSEMBLYMAN THOMAS: How did the PERS Board get into this,
could you tell us, as President? How did you get involved in this
8
230 acres?
MR. FOWLER: Well, first of all, the legislative branch of
government passed enabling law that made it possible for PERS to
get into it.
ASSEMBLYMAN THOMAS: But tell us who made the approach? Who
asked you -- did you buy this property?
MR. FOWLER: Oh --
ASSEMBLYMAN THOMAS: Did the PERS buy -
MR. FOWLER: I think Mr. Payne can tell you about the sequence
of that.
MR. PAYNE: Factually, yes, Mr. Thomas.
ASSEMBLYMAN THOMAS: Okay.
MR. PAYNE: PERS bought the property.
ASSEMBLYMAN THOMAS: You had title?
MR. PAYNE: Had title.
ASSEMBLYMAN THOMAS: Wait a while, just go slowly.
MR. PAYNE: : Right.
ASSEMBLYMAN THOMAS: What did you do after you took possession
of the property?
CHAIRMAN CULLEN: Excuse me, if I may interrupt. Once again,
Mr. Thomas, you asked Mr. Fowler how PERS became interested or the
owner of this property. Mr. Fowler responded to you that there was
enabling legislation. You asked another question and he referred
you to Mr. Payne. Now, I'm advised that Mr. Fowler requested
9
Senator Rodda to introduce that enabling legislation, is that correct,
Mr. Fowler?
MR. FOWLER: Yes.
CHAIRMAN CULLEN: Then would you be more responsive to Mr. Thomas
when he asks you a question as to how your Board became interested
in the acquisition of this property?
MR. FOWLER: Let's say I wasn't acting in the respect of being
a Board member.
CHAIRMAN CULLEN: But you were on the Board?
MR. FOWLER: Yes.
CHAIRMAN CULLEN: All right. And Mr. Thomas is asking you why
the Board became interested.
MR. FOWLER: The PERS Board had nothing to do with the conver-
sation that I had with Mr. Rodda with respect to getting the legis-
lation, at all.
CHAIRMAN CULLEN: That clarifies the answer.
MR. FOWLER: As far as -- let me say this very clearly. At
the time I went and talked to Senator Rodda about the legislation
there was no member of the staff of PERS that I knew of that even
had any idea that this was even contemplated at that point in time.
ASSEMBLYMAN THOMAS: Let's make it simple then. How did the
PERS Board become the owners of this property? How did you purchase
it? Tell us the background. Who approached you to buy it and how
did you become the holder of the title of this 230 acres? Who
10
negotiated the deal? The purchase deal?
MR. PAYNE: Would you like to have me try, Mr. Thomas?
ASSEMBLYMAN THOMAS: Yes, I know ---
MR. PAYNE: I'm not sure I can, you know, give you the full
information, but let me try by noting that the legislation was
passed and was signed into law. And let me note that there was a
substantial - substantial interest in -- at that point in time,
in the Retirement utilizing this -- this permissive legislation
to make an investment into property. And that the reasons that
were advanced are many fold, including the general belief that
Cal Expo was going to be a great success, and from everything that
we looked at, this was supposedly going to occur. And that thus
the property would enhance in value.
So, after the legislation was developed, I reviewed the legis-
lation with the Board of Administration, noting that it was permis-
sive and noting that - I think you have a lot of the documents
that we have there, noting it was an unusual transaction, noting
that -- that if the Board wished to pursue the matter that it was
essential that an agreement be reached with the Director of the
General Services and the Department of Finance which in -- at
least my opinion, protected the integrity of the Retirement System's
investments. We noted that the legislation called for $13.5
million as a maximum investment and quite a number of other things.
The Board directed me to negotiate with the Director of General
11
Services or his representative to ascertain if an agreement could
be reached which would reasonably protect the System and the
investment.
Now, in that context, I negotiated and worked with people
from General Services, particularly Mr. Relat, and particularly an
attorney in General Services whose name escapes me right now, but
he was also directed to participate in the negotiation. We started
out on the premise, as far as I was concerned, that one, we had to
have a realistic appraisal of the property.
ASSEMBLYMAN THOMAS: Was the appraisal made --
MR. PAYNE: Well, the appraisals that were alluded to were
made by -- by a concern that indicated that the net worth of the
combined properties, the old State Fair and Point West, was a
value of something like $13.5 million.
ASSEMBLYMAN THOMAS: Was that Coldwell Banker, the banker
corporation? Was that the name?
MR. PAYNE: Perhaps, I think so, but we felt, Mr. Thomas,
that in order to get a base to start from you had to have a valid
appraisal. Not an estimate, but a valid appraisal.
ASSEMBLYMAN THOMAS: Who made the appraisal?
MR. PAYNE: We also felt -- and we felt that we weren't
willing to rely upon staff appraisal of General Services, not
because we doubted their integrity or their ability, but because
we felt that there had to be two separate appraisers functioning
12
together -- we felt that there had to be a fee appraiser because
it is my experience that there is more reliance placed in a fee
appraiser than in a staff or a State appraiser. And SO that
appraisal was conducted.
ASSEMBLYMAN THOMAS: Who was the appraiser?
MR. PAYNE: A gentleman by the name of Goode, as I recall.
And he was with -- you mind if I ask Carl Halterman -- Carl, was
it Coldwell Banker? No, Mr. Goode --
MR. CARL HALTERMAN: No, Mr. Goode is a private appraiser,
M.A.I.
MR. PAYNE: Yes, a private M.A.I. appraiser. Incidentally,
we are involved with mortgage investments and we have appraisers
on our staff.
ASSEMBLYMAN THOMAS: How many appraisals were made, I'm trying
to slowly --
MR. PAYNE: At that point in time and the only ones that we
were interested in, Mr. Thomas, were the appraisers -- appraisals
made by General Services and by Mr. Goode. And they were made
concurrently, incidentally.
ASSEMBLYMAN THOMAS: Did this Coldwell Banker make an
appraisal of the property?
MR. PAYNE: I don't recall that they did. They could have.
But we had looked at -- at estimates of $13.5 million and we felt
that we had to have something that was in the form of appraisals
13
conducted by well recognized fee appraisers.
ASSEMBLYMAN THOMAS: All right, to make the thing short,
because it is not going to be a long meeting today on this subject,
how many bids were offered for the purchase of this property from
you? Who bid? Who bid the purchase of the property?
MR. PAYNE: Well, I thought you wanted to explore the conditions
of the --
ASSEMBLYMAN THOMAS: I know --
MR. PAYNE: -- of the purchase of the property. Presumably
you know.
ASSEMBLYMAN THOMAS: But you are missing a lot of points there.
I can't understand -- you had title to the property.
MR. PAYNE: Oh -- oh, I --
ASSEMBLYMAN THOMAS: I want to know, how did you sell it?
How did you become -- how many bids did you get?
MR. PAYNE: I was going back to the original purchase of the
property.
CHAIRMAN CULLEN: I'm going to depart from that. Mr. Thomas,
if we can hold that question just for a moment and pick up when
you required independent appraisals of the property in order to
protect the interests of the fund administered by your Board, is
that what you said?
MR. PAYNE: Yes, I did say that.
CHAIRMAN CULLEN: All right, and in deliberating on whether
14
or not to -- to make this investment, who were you making the
investment with? What party, what entity?
MR. PAYNE: Well, specifically the Department of General
Services, its Director and the Department of Finance and its
Director.
CHAIRMAN CULLEN: I see. Now, what happens when you make an
investment or a loan to a public entity and they default on the
loan? Then what does the Board do? Do they proceed against the
public entity for payment?
MR. PAYNE: Well, if it is your employer it is a little difficult,
Mr. Cullen. I was trying to note that we started out insisting that
we wouldn't loan more than 60 percent of appraised value and we
swapped that for 70 percent of the appraised value plus an agreement
on the part of the Directors that once the accumulated loan, which
included the interest, got to 90 percent, that they would keep the
loan to 90 percent of appraised value. We relied upon the Directors.
CHAIRMAN CULLEN: Why did you require a security interest in
making a loan to the State of California?
MR. PAYNE: Why did we --
CHAIRMAN CULLEN: Yes.
MR. PAYNE: Well, I think we can start out by noting that the
terms of the law and the agreement gave the State, through the
Directors, an option to repurchase within a ten year period. We
had no rights to sell the property ourselves and never did have
15
until the ten year period had elapsed. We were trying to keep the
value of the property in some relationship to the appraisal of the
property and that's specifically what we were doing.
CHAIRMAN CULLEN: Well, earlier, Mr. Payne, you told Mr. Thomas
that taking an unsecured note from highly reputable private corpor-
ations is not uncommon because you can always look to them for re-
payment. Yet with respect to the State of California, which someone
has told me is the sixth largest corporation in the world, you advised
the Board, in order to protect the fund, that the legislation ought
to provide for a security interest in this property, is that correct?
MR. PAYNE: That's correct, except that I didn't get to finish
my statement to Mr. Thomas.
CHAIRMAN CULLEN: Go ahead.
MR. PAYNE: Because I was noting that a note has recourse to
the assets, the total assets of the company. That's what I was trying
to note, as opposed to a mortgage which might have only recourse to a
specific piece of property or a defined piece of property. I was
trying to illustrate that a note can be as highly secured and many
instances more secure than a mortgage.
CHAIRMAN CULLEN: Yes, it can be, but we are not talking about
a mortgage here. The State of California by Grant Deed conveyed
230 acres to your fund. There wasn't any mortgage, there was a
conveyance of title.
MR. PAYNE: That's right.
16
CHAIRMAN CULLEN: Now, I assume that there was an agreement
that accompanied this conveyance.
MR. PAYNE: Yes.
CHAIRMAN CULLEN: This deed. There was an agreement describing
this conveyance as a security interest?
MR. PAYNE: Correct.
CHAIRMAN CULLEN: And describing a sum of money?
MR. PAYNE: Correct.
CHAIRMAN CULLEN: That was passed from the Board to the State
of California?
MR. PAYNE: Right.
CHAIRMAN CULLEN: All right. So is that by way of a note?
Was there an agreement that the State of California would repay
this money?
MR. PAYNE: No, these were conditions surrounding the purchase
of the property, Mr. Cullen. And the conditions were -- placed
there - I grant you that the - that the security was in the
property because the Board had title to the property, I grant that.
But in order to make certain that we were going to come out whole,
I felt that these -- that this kind of an agreement was necessary
to protect the System and that the Directors would make certain
to the extent of their ability to maintain our -- our purchase price,
because we had no right to sell the property at any time, the law
didn't give us that -- if we had had the absolute right to sell the
property at any time without just sitting there and holding it, I
wouldn't have felt so concerned about it, but we never had that
right.
17
ASSEMBLYMAN THOMAS: May I ask a question?
CHAIRMAN CULLEN: Mr. Thomas.
ASSEMBLYMAN THOMAS: Who sold the property to Kaiser-Aetna?
MR. PAYNE: The State did, sir, through the Department of
General Services.
ASSEMBLYMAN THOMAS: And did the PERS sign an unsecured note
with Kaiser-Aetna?
MR. PAYNE: Yes, we -- we took an unsecured note from Kaiser-
Aetna.
ASSEMBLYMAN THOMAS: And wait -- wait now. Isn't it true that
in that note you waived all liability?
MR. PAYNE: No.
ASSEMBLYMAN THOMAS: Even if a default - even if there was
a default?
MR. PAYNE: No, the note gives recourse by its very nature,
Mr. Thomas, to the assets of the corporation if there is a default.
ASSEMBLYMAN THOMAS: No, to the partnership.
MR. PAYNE: The partnership, the company.
ASSEMBLYMAN THOMAS: You mentioned a corporation all the time.
MR. PAYNE: The partnership, the note gives --
ASSEMBLYMAN THOMAS: What assets did they have, the partnership?
MR. PAYNE: Well, our --
ASSEMBLYMAN THOMAS: You couldn't go to the corporation and
hold them liable.
MR. PAYNE: No.
ASSEMBLYMAN THOMAS: You couldn't go to Aetna Insurance, you
couldn't go to Kaiser for any kind of recourse. The only recourse
18
you had in that note was against the partnership assets, and what
assets did they have?
MR. PAYNE: Well, our -- our review was that they had something
in excess of $200 million in assets.
ASSEMBLYMAN THOMAS: In the partnership?
MR. PAYNE: In the partnership.
ASSEMBLYMAN THOMAS: Is that evidenced in the note that you
signed?
MR. PAYNE: No, but it is evidenced in the -- in the statement
that was provided by -- by Kaiser-Aetna, certified to by Haskins and
Sells.
ASSEMBLYMAN THOMAS: Yes, but you waived all liability against
those corporations in your note.
MR. PAYNE: Our problem was that --
ASSEMBLYMAN THOMAS: It is clear as -- you want to read the
note? I think you should read that.
MR. PAYNE: No, Mr. Thomas, I concur with your statement. I
was -- I was at one point noting that we wanted each of the partners
and the several partners on the hook. I was noting that the --
that the partnership agreement precluded this. I was noting that
it was our understanding that Aetna Life Insurance Company could not
go this route because they were a life insurance company. I was
noting that I felt that then -- and we felt then that the -- that
the fact that Kaiser Industries and Aetna were good partners and
the fact that the partnership had more than adequate assets to
protect our investment --
ASSEMBLYMAN THOMAS: I have a Legislative Counsel's opinion,
19
and I'm not going to present it today, it will be presented next
week. The Legislative Counsel held that the PERS Board actually
waived all action or all liability against anyone. Have you got
that opinion?
MR. JERRY BASSETT: No, I don't have a copy with me, sir, but
that's a correct statement.
ASSEMBLYMAN THOMAS: Is that a correct statement?
MR. BASSETT: Against the partners as individuals.
MR. PAYNE: Against individuals, yes, but not against the
partnership, right. Okay, but not against the partnership. And
we felt that the extent of our note, which, if you -- if you look
at it, is a five year note deliberately developed as a five year
note because we wanted to shorten the -
ASSEMBLYMAN THOMAS: Why was the property sold to Kaiser-Aetna?
I can't get these answers from anyone. I can't get them from
General Services. I can't get them from you. I can't get them
from the Executive Committee of Cal Expo.
MR. PAYNE: Let me answer --
ASSEMBLYMAN THOMAS: Why was it sold and how many bids were
offered and were there any bids turned down for the same piece of
property? These are the questions we can't get answered. Now,
where would I go to get that answer?
MR. PAYNE: Not from me, sir. We had no authority to sell
the property. And we could not sell the property.
MR. FOWLER: Mr. Thomas, we had no -- or we weren't out
selling the property. You need to talk to the Director of General
Services who is the agent.
20
ASSEMBLYMAN THOMAS: Did you have anything in this -- did you
have anything to do in this transaction?
MR. FOWLER: No, sir.
ASSEMBLYMAN THOMAS: Who did? Who were the persons involved?
There were eight people that handled this piece of property, who
were they?
MR. FOWLER: To be honest with you --
ASSEMBLYMAN THOMAS: You don't know?
MR. FOWLER: I frankly don't know. I can say who the Chiefs --
the Director of General Services at that time, who he was, and who
the Assistant Director and also on that line, but as far as the
individuals, you are going to have to ask the Director of General
Services.
ASSEMBLYMAN THOMAS: You don't know?
MR. FOWLER: No, sir.
ASSEMBLYMAN THOMAS: You haven't corresponded by letters?
CHAIRMAN CULLEN: If I may interrupt once again, Mr. Fowler,
are you a member of the Board?
MR. FOWLER: Of which Board?
CHAIRMAN CULLEN: The PERS.
MR. FOWLER: Yes, sir.
CHAIRMAN CULLEN: How long have you been a member?
MR. FOWLER: Well, I guess 17 years.
CHAIRMAN CULLEN: Are you President now?
MR. FOWLER: Yes.
CHAIRMAN CULLEN: Do you attend all the meetings?
MR. FOWLER: Yes.
21
CHAIRMAN CULLEN: And at any of the meetings did you ever
discover or discuss the Kaiser-Aetna proposal to purchase this
land?
MR. FOWLER: Oh, yes, we have public Board meetings, Mr. Cullen.
We -- the Board doesn't do anything in a vacuum. When we bought the
land from the State and enabling legislation of Mr. Rodda, we had
public meetings and discussions and we had at that time on the
Board, which you'll find in the transcript at the time of purchase,
a very eminent attorney by the name of Joe Wyatt, and Joe was a
very active participant in all the determinations of the Board,
with a public setting with a hundred odd people in attendance, all
the rest, just like you have here.
CHAIRMAN CULLEN: In 1970-71 did your Board discuss the Kaiser
note?
MR. FOWLER: Yes, sir.
CHAIRMAN CULLEN: And the Aetna note?
MR. FOWLER: Yes, sir.
CHAIRMAN CULLEN: At any time during these meetings were there
any discussions of a security interest as collateral for the invest-
ment of $7.3 million?
MR. FOWLER: Oh, yes, I think that there were some people --
some members of the Board that raised questions as to the kind of
paper -- you might say -- no question, no different than others
that we have had before, who -- that don't technically fit the
run-of-the-mill investment setting. It is like Mr. Payne said,
we have got others of similar nature.
CHAIRMAN CULLEN: Did Kaiser-Aetna approach you before the
22
Department of General Services published their public invitation
to bid on Point West?
MR. FOWLER: I don't know that.
MR. PAYNE: You are talking about the Department of General
Services?
ASSEMBLYMAN CULLEN: I'm talking about Kaiser-Aetna coming
before your Board or submitting a proposal.
MR. FOWLER: I don't know when they went to General Services.
MR. PAYNE: I can partially respond, Mr. Cullen.
CHAIRMAN CULLEN: Mr. Payne. May I point out, Mr. Fowler,
that contrary to what you told Assemblyman Thomas, you know a great
deal about Kaiser-Aetna and Point West because of your membership
on the Board.
MR. FOWLER: Oh, there is no question, and all the meetings
with respect to the Retirement Board -- all these discussions, I
was present.
CHAIRMAN CULLEN: That's true, but your statement that only
the Department of General Services has this knowledge is not factual.
MR. FOWLER: No, as far as discussions of the Board, I have
complete knowledge. I was there and all, if that's what you are
talking about. I misunderstood because I thought, Mr. Cullen, you
were talking about Department of General Services.
CHAIRMAN CULLEN: Well, Mr. Payne, the question is, was the
Board through you or any of its members approached by Kaiser-Aetna
to discuss a loan of perhaps in excess of $6 million prior to the
public invitation to bid published by the Department of General
Services?
23
MR. PAYNE: The answer is yes. Even before we were aware that
a bid was going to go out.
CHAIRMAN CULLEN: All right, were you approached by any other
people interested in --
MR. PAYNE: In this process?
CHAIRMAN CULLEN: -- a similar loan?
MR. PAYNE: In this process?
CHAIRMAN CULLEN: Yes, sir, in a similar loan.
MR. PAYNE: In the same kind of a loan, yes.
CHAIRMAN CULLEN: Did Kaiser-Aetna mention the purpose of
the -- of the $6 million loan?
MR. PAYNE: In general terms they wished to purchase it in
connection with the objectives of Kaiser-Aetna for development
purposes.
CHAIRMAN CULLEN: They described Point West, is that right?
MR. PAYNE: Yes.
ASSEMBLYMAN CULLEN: Is that right?
MR. PAYNE: Yes.
CHAIRMAN CULLEN: Did the Board reject proposals from any
other corporation, partnership or business company?
MR. PAYNE: No. No, factually, different groups in pursuing
their interest in purchasing the property usually went to the
Director of General Services because he had the authority to make
the decision to sell. And usually in one way or another it came
to us because all of them were interested in financing. It is the
name of the game, to finance this kind of purchase rather than to
use capital in most instances. Kaiser-Aetna approached us through
24
Coldwell Banker quite early in the game. They had discussions with
us after having discussed it with the Director of General Services
-- they approached us to ascertain if we would be interested in
developing some sort of an investment so that we could finance it
and be what -- be secure in our investment.
CHAIRMAN CULLEN: What was the name of the party contacting
you from Coldwell Banker?
MR. PAYNE: It was Mr. Didion at the outset.
CHAIRMAN CULLEN: Didion or Gideon?
MR. PAYNE: Didion. Didion is right, isn't it?
CHAIRMAN CULLEN: Didion.
MR. PAYNE: Didion with a "D". At the outset I even was
skeptical that he was representing Kaiser-Aetna, but subsequent
events indicated that he was. Our initial exploration with Kaiser-
Aetna then was to develop negotiated terms of a note -- to parti-
cipate in order to have Kaiser-Aetna have financing for the property.
We were quite willing to do this if the terms of the note were
such that we felt secure with it, and we indicated that. There
was a process of negotiation that started before -- before I
felt that the property was going to be placed up to bid. As
you will recall, the previous Director had invited proposals.
I felt that the Director could sell the property without the bid
process. I didn't think it was necessary, but that perhaps was
my error. We negotiated prior to and all the way through the
process with Kaiser-Aetna. We were quite willing to negotiate
with any substantial concern that we felt secure with insofar
as the investment was concerned.
25
CHAIRMAN CULLEN: And this was Mr. Didion with whom you were
having these negotiations?
MR. PAYNE: Initially, yes, but subsequently we began negoti-
ating directly with Kaiser-Aetna.
CHAIRMAN CULLEN: What was the amount of the note or loan
sought by Kaiser-Aetna?
MR. PAYNE: Initially it was, as I recall, $6.5 million, but
we --- we were never willing to participate in approving a sale.
We had the authority to approve a sale, Mr. Cullen, if we couldn't
get our investment back on the proceeds of the sale. We also had
the authority to approve segmented portions of the sale. We had
no authority to sell. The initial --
CHAIRMAN CULLEN: Now, you said previously that the Rodda
bill didn't permit you to sell.
MR. PAYNE: That's right.
CHAIRMAN CULLEN: And now you said you had authority to sell.
MR. PAYNE: No. No, I'm saying that we had authority to
approve the sale of portions of the property. The reason for that
was quite obvious. We didn't want portions of the property sold
off at less than realistic market value and leave us holding a
portion which we couldn't come out whole on.
ASSEMBLYMAN THOMAS: May I ask a question at this point?
MR. PAYNE: Nor did we want -
CHAIRMAN CULLEN: Mr. Thomas.
ASSEMBLYMAN THOMAS: Mr. Fowler, Mr. Payne seems to be doing
all the talking. Is he the only one that knows anything about
this property? You are the President of the Board. Now tell us
26
your story. What did you do in this transaction?
MR. FOWLER: Well, let me say this. There is no question
that anyone in the City of Sacramento in a variety of places
didn't know that as far as my relationship with the -- with the
Executive Committee, and the Retirement Board, and that I probably
was an individual every day trying to find somebody to buy it,
regardless of where they -- you know what.
ASSEMBLYMAN THOMAS: What offers did you get?
MR. FOWLER: Well, I never got any. Anybody I could ever
get I sent over to the staff of the Retirement Board to do the
work. I don't -- if I can stir up an interested party, take it
over to Bill and the staff to do the --
ASSEMBLYMAN THOMAS: Well did E. F. Hutton Company make a
bid?
MR. FOWLER: Who?
ASSEMBLYMAN THOMAS: E. F. Hutton.
MR. FOWLER: I never talked to anybody of E. F. Hutton
Company.
CHAIRMAN CULLEN: Who did you talk with, Mr. Fowler?
MR. FOWLER: Oh, there's a man by the name of Shack from up
in Washington and - I don't know who he was related to.
CHAIRMAN CULLEN: Did he mention the --
MR. FOWLER: I also talked to the --
CHAIRMAN CULLEN: Did he mention a purchase price or just -
MR. FOWLER: No, interest. Also talked to the President of
Kaiser Realty Company who came out here and Bill and I went out
and wandered through the land to try to see whether they would be
27
interested in it.
ASSEMBLYMAN THOMAS: Wait a while, I want to pursue this,
Mr. Chairman.
CHAIRMAN CULLEN: Mr. Thomas.
ASSEMBLYMAN THOMAS: Did Chrysler Corporation file a bid?
MR. FOWLER: Not to my knowledge, when the bids were up.
ASSEMBLYMAN THOMAS: You never heard of it?
MR. FOWLER: No, not -- not to my knowledge.
ASSEMBLYMAN THOMAS: And, Mr. Payne, you don't know whether
E. F. Hutton Company filed a bid?
MR. PAYNE: No, I don't -- I don't think so.
ASSEMBLYMAN THOMAS: So the only person that you knew that
was interested is Kaiser-Aetna?
MR. PAYNE: Well, I thought that the two gentlemen from the
Chrysler Realty Corporation, a subsidiary of Chrysler, were
tremendously interested. They spent a whole day and a half a
day with me.
ASSEMBLYMAN THOMAS: Did they make a bid?
MR. PAYNE: No, no, I think finally the decision was not to.
ASSEMBLYMAN THOMAS: Now, prior to this time, the brochure
that went out by the General Services called for a cash sale,
am I right?
MR. PAYNE: That's right.
ASSEMBLYMAN THOMAS: Did the other bidders know that a
transaction could be made on an unsecured note or any other deal
or any other terms?
MR. PAYNE: The individuals that came to us did. This included
28
Chrysler. This included --
ASSEMBLYMAN THOMAS: They knew this?
MR. PAYNE: Yes. They knew this, if we could work out the
proper arrangement and they were willing to negotiate those if
they got to the point of making a bid, yes.
CHAIRMAN CULLEN: At what purchase price?
MR. PAYNE: Because we had respect for Chrysler.
CHAIRMAN CULLEN: At what purchase price?
MR. PAYNE: Our interest was not to determine the purchase
price, but to state that the purchase price had to be -- because
we had approval of the purchase price, if it didn't bail us out,
to state that the purchase price had to be at least enough to
bail out the Retirement System. And that was our only voice in
the purchase price, sir. We couldn't set the price, but we could
approve it if it didn't bail us out and that's all we ever said.
We had no interest in -- well, we had an interest, but no parti-
cular interest in having the purchase price in excess of what
would bail us out in the sense that - that we would disapprove
it if it bailed us out, because our agreement was we could approve
- we could only disapprove if we didn't come out whole.
CHAIRMAN CULLEN: Did Mr. Didion ever say to you that he
thought that he could purchase the property for approximately
$7 million?
MR. PAYNE: Well, I can't recall. I can say that I would have
said to him that we wouldn't approve a purchase price unless it
was at least enough to get us out.
CHAIRMAN CULLEN: But Mr. Didion conveyed a proposal to your
29
Board for a loan. What was the amount of that loan?
MR. PAYNE: Well, the eventual amount was $6.8 million.
CHAIRMAN CULLEN: All right, $6.8 million.
MR. PAYNE: Plus money put up to make up the difference.
CHAIRMAN CULLEN: All right. Did Mr. Didion ever convey to
you in any manner that he had been told that the property could
be acquired for $7.3 million or any figure close to that?
MR. PAYNE: Oh, I don't know whether he conveyed it. I
think he was confident that a price of this amount would be
satisfactory. It would certainly have been satisfactory to us
for the reasons that I indicated. We wanted to get out whole.
ASSEMBLYMAN THOMAS: May I ask just one question?
CHAIRMAN CULLEN: Mr. Thomas.
ASSEMBLYMAN THOMAS: Was anyone in the Governor's Office
involved in this sale of this 230 acres to your knowledge?
MR. PAYNE: Not to my knowledge, sir.
SENATOR ALBERT RODDA: Could I ask a question?
CHAIRMAN CULLEN: Yes, Senator Rodda.
SENATOR RODDA: I'm trying to refresh my memory and maybe
Mr. Fowler can respond. As I recall, subsequent to the passage
of legislation which authorized this loan, is it not true that
you did budget $7.5 million to pick up that loan? Did the State
not budget that amount and was it not vetoed?
MR. FOWLER: Well, yes.
SENATOR RODDA: Or am I talking about the same --
MR. FOWLER: No, you are talking about the same piece of
property.
30
SENATOR RODDA: And so conse-
MR. FOWLER: It was in pre-conference that they put the
sum of money in for - which would have paid for what the
Retirement System had in plus the interest up to June 30th because
that's when it was. And the item was vetoed by the Governor.
SENATOR RODDA: Was that the year that we had the surplus,
1968?
MR. FOWLER: It was the year after, Senator Rodda -- after
the transaction that this took place.
SENATOR RODDA: So that put you back in the position that
you had been when the loan was eventually negotiated because the
State had refused to pick up the loan. All right, thank you.
ASSEMBLYMAN THOMAS: Just one more question.
CHAIRMAN CULLEN: Mr. Thomas.
ASSEMBLYMAN THOMAS: PERS had title to this property, didn't
they? You had fee simple title.
MR. PAYNE: We had title to it, yes, sir.
ASSEMBLYMAN THOMAS: And you couldn't sell the property?
MR. PAYNE: No, sir.
ASSEMBLYMAN THOMAS: Would you say that whatever property is
owned by PERS is State property -- who does all that belong to,
the members or the State?
MR. PAYNE: Well, it is my reaction that it is a trust
account representing not only the State but the hundreds of
contract agencies and thousands of employees.
MR. FOWLER: I'm sure we feel that way, as you know, Senator
-- I mean Assemblyman Thomas. The PERS owns these new office
31
buildings such as this one down here at 9th and 0 Streets, and
San Francisco, Oakland, Fresno, Bakersfield, San Diego and Los
Angeles. And the State is paying those off by rent. And in that
instance, why, if the State doesn't pay the bill, why it will
probably be very tedious to foreclose on those office buildings.
But nevertheless, that's the factual situation.
ASSEMBLYMAN THOMAS: You had title, but you didn't sell to
Kaiser-Aetna, am I right?
MR. PAYNE: That's right, we had no authority to sell, sir.
ASSEMBLYMAN THOMAS: You had the title to the property,
though?
MR. PAYNE: That's right.
ASSEMBLYMAN THOMAS: Why did you sell to Kaiser-Aetna under
that kind of a note?
MR. PAYNE: Well, we --
ASSEMBLYMAN THOMAS: Who asked you to?
MR. PAYNE: We didn't sell. The Director of General Services
conducted the sale. We transferred title to him because -- to the
State because he had the only authority to sell.
ASSEMBLYMAN THOMAS: Now, you said that the Standard Oil
makes similar deals on unsecured notes.
MR. PAYNE: No, I said that various corporations issue notes
and notes by definition are secured not by specific property but
by assets.
ASSEMBLYMAN THOMAS: This is public property you are selling,
you are not selling private property, so forget what Standard Oil
does. This is State property, and the only thing that our Committee
32
is interested in is why did the PERS make such an agreement with
General Services and we will read the agreement next week.
MR. PAYNE: Yes.
ASSEMBLYMAN THOMAS: It is in our documents, but I'm just
trying to find out why you would make that kind of an unsecured
loan without any liability whatsoever, according to the Legislative
Counsel.
MR. PAYNE: Can I --
ASSEMBLYMAN THOMAS: Even in the case of a default --
MR. PAYNE: Can I answer?
ASSEMBLYMAN THOMAS: Yes.
MR. PAYNE: To begin with, from my point of view, Mr. Thomas,
I was getting uncomfortable with the property. I was eager to see
the Director of General Services negotiate a sale that would bail
us out, for a variety of reasons which I don't need to necessarily --
ASSEMBLYMAN THOMAS: Were you interested in the -- in the other
bids, too, that were made?
MR. PAYNE: I was over there to see what they were. None of
the bids that were made would have helped us and I suspect that the
Board, at least if they followed my advice, would not have approved
the other bids because it left us hanging.
ASSEMBLYMAN THOMAS: Getting back to the question I asked a
half hour ago, were any bids rejected?
CHAIRMAN CULLEN: Any proposals.
ASSEMBLYMAN THOMAS: Any proposals rejected by your Board?
MR. PAYNE: No other proposals were rejected by our Board
because we never got to the point of developing a proposal with
33
any of the interested parties that we thought would be valid.
ASSEMBLYMAN THOMAS: Were the --
MR. PAYNE: Factually, Chrysler did.
ASSEMBLYMAN THOMAS: Were these proposals made to the Board?
MR. PAYNE: Well, I think the investment - I'm not sure on
the - on this. Let me point out that Chrysler never came down to
making a proposal, Mr. Thomas. Chrysler expressed its interest,
spent a whole day, indicated that they were very much interested in
the property. They had some other things they wanted to do,
incidentally.
ASSEMBLYMAN THOMAS: Were they aware that any -- some other
deal would be made besides paying cash?
MR. PAYNE: Chrysler, this was part of their interest, sir.
I might note that -- that in this connection, and it is hard
to recall -- the thickness of the file, I quit dictating memos
because the file was getting so thick.
ASSEMBLYMAN THOMAS: Yes, that's why we are going to read
documents next week. Next week will be a reading seminar.
MR. PAYNE: Let me suggest that the one gentleman that we
felt was perhaps most likely to produce -- approach was Mr.
Wallace Dunn who had his own consulting corporation and who
developed proposals for corporations as a part of his business.
He was formerly with Dillingham Corporation, formerly with an
investment banker who was starting a land development proposal.
Mr. Dunn spent a great deal of time with us. Actually sent out
a big brochure to all of the firms that he thought would be
interested, which --
34
CHAIRMAN CULLEN: Excuse me.
MR. PAYNE: -- which tended to disturb us because, as I recall,
his brochure indicated that he had almost an exclusive and that we
would finance and we called him up short on this because we felt
that we had to select the company that we would be willing to
enter into a financial arrangement with in order to have the kind
of security we wanted.
CHAIRMAN CULLEN: You mentioned, Mr. Payne, the companies with
national reputations and that's why you feel comfortable with
Kaiser-Aetna. Let me ask, Mr. Fowler, as President of the Board,
would you similarly feel comfortable with Pennsylvania Central or
Lockheed or would you ask for a security interest before you'd
loan money? The Board, I'm talking about.
MR. FOWLER: Well, let me say the record will show that Penn
Central we ceased any interest in a long time before the rest of
the public became aware of their difficulty.
CHAIRMAN CULLEN: Yes.
MR. FOWLER: And that's because as far as I'm concerned we
have a very fine intellectual investment staff. And our staff is
way far ahead of a lot of people in the world.
CHAIRMAN CULLEN: How did you find out the value of Kaiser-
Aetna then?
MR. FOWLER: You mean as far as -- before the Board ---- what
the staff presented to us for all the Board members to agree on
this?
CHAIRMAN CULLEN: Yes, before you approved the unsecured note.
MR. FOWLER: Well, the staff developed a body of material
35
which they presented to the Investment Committee, first in relation
to the two firms and what the details of the companies were and their
operating arrangement. And based from there, then it went on to the
Board at the next public meeting that the Board had, with respect
to this kind of presentation in detail.
CHAIRMAN CULLEN: And were you advised that the aggregate worth
of the partnership was in excess of $200 million?
MR. FOWLER: Well, yes, and as I recall --
CHAIRMAN CULLEN: Then why did you require a statement from
Kaiser-Aetna that they were worth in excess of $100 million if your
staff had already told you that they were worth in excess of $200
million?
MR. FOWLER: Yes, the staff came and developed this program,
they developed a program that if the -- if these firms fell below,
then we had a callable interest with them. That's the kind of
agreement, as I understand it, we have with the corporation, which
means obviously you've got to keep track of what their over-all
operation is worth.
CHAIRMAN CULLEN: How much is it worth this month?
MR. FOWLER: I don't know, we will meet --
CHAIRMAN CULLEN: Anybody know?
MR. FOWLER: -- in two days and we will know, but --
CHAIRMAN CULLEN: How do you find out?
MR. PAYNE: Mr. Cullen, whether a statement -- a financial
statement is inflated --
CHAIRMAN CULLEN: How do you find out if their home office
is in New York or Philadelphia? Do you send people there to audit
36
their books?
MR. PAYNE: No, sir, we do not. Any more than we would send
statements on any of the other investments we have. We ask --
that Kaiser-Aetna provide us with an annual statement certified
by Haskins and Sells or similar -- similar firm. Now, the reason
for the $100 million, Mr. Cullen, is to provide some additional
security. We have an acceleration clause in the -- in the agreement
which says that if their net asset value ever drops below $100 million
we have the immediate right to accelerate the loan and demand full
payment of the balance of the loan, and that's the reason for the
$100 million. Now, in order to be sure reasonably of that, we ask
for a quarterly statement by an official of Kaiser-Aetna certifying
the fact that their net asset values are ahead of $100 million.
If they drop below, we may accelerate the loan. We also have an
acceleration clause in there which is more standard and that is
that if they -- if they are in arrears as much as 30 days on any
quarterly payment, we then again have the right to accelerate the
loan and demand full payment of the loan.
CHAIRMAN CULLEN: What happens if five or six partners decide
to dissolve the partnership and the week before dissolution they
dispose of all their holdings to third parties, then where is
your security?
MR. PAYNE: Oh, our security is always to go to the assets
of the partnership in a case of dissolution and I suspect that --
CHAIRMAN CULLEN: If they dispose --
MR. PAYNE: -- any such disposal would be not too difficult
to overcome in a legal process.
37
ASSEMBLYMAN THOMAS: May I ask a question?
CHAIRMAN CULLEN: Mr. Thomas.
ASSEMBLYMAN THOMAS: So you did have legal recourse against
Kaiser-Aetna under the agreement?
MR. PAYNE: Under the -- oh, yes, I think so.
ASSEMBLYMAN THOMAS: Let me read the Legislative Counsel's
opinion and for your information you can discuss this with your
attorney.
MR. PAYNE: Okay.
MR. FOWLER: Will we get a copy of this?
ASSEMBLYMAN THOMAS: You'll get a copy of everything. "We
think that in the event of any actual or alleged failure, breach
or default under the note by Kaiser, PERS would have no recourse
or remedy against any of the partners individually or any non-
partnership property owned by them individually." This is the
last -- this is the thing that you should remember, this comes
from the Legislative Counsel as to the note which you signed:
"In view of our opinion, number one, and our analysis, we think
that in the event of any actual or alleged failure, breach or
default of the loan agreement by Kaiser, PERS has effectively
waived its rights to proceed against the partners individually
with respect to any obligation or liability accruing emanating
from the note."
MR. PAYNE: May I ask, Mr. Thomas, if he concludes that we
couldn't proceed against the assets of the partnership, because
I think we can.
CHAIRMAN CULLEN: Yes, he -- Mr. Thomas heard the question,
38
but I already pointed that out, the assets are gone, without
consulting with you. There is no obligation on the part of the
partnership in this agreement to consult with you before disposing
of a hundred percent of their assets.
MR. PAYNE: Does it -- does the Legislative Counsel believe
that the partnership could by, you might say, almost fraud dispose
of the assets and dispose of the partnership, I think that's --
without our having recourse?
CHAIRMAN CULLEN: Mr. Bassett, Legislative Counsel.
MR. BASSETT: We were not asked to consider that question.
But without putting in the fraud element, which of course would
go to the basis of the whole contract, I don't see anything in
the agreement that would prohibit them from dissolving the partnership.
MR. PAYNE: No, I don't either.
MR. BASSETT: Or disposing of assets.
MR. PAYNE: Or changing --
CHAIRMAN CULLEN: So that you find yourself standing at the
door to an empty office, and all the furniture has been sold to
satisfy partnership liabilities and they are not bankrupt, so
they are not defrauding, they are only just dissolved.
MR. PAYNE: Well -
CHAIRMAN CULLEN: That's Mr. Thomas' point.
MR. PAYNE: Well, Mr. Thomas -- I personally don't concur
with it. It is a legal matter, I agree with you.
ASSEMBLYMAN SEELEY: Mr. Chairman, may I ask a question here?
CHAIRMAN CULLEN: Mr. Seeley.
ASSEMBLYMAN SEELEY: I really don't know what the purpose of
39
this hearing is, it's never been described to me of what we are
trying to point out. Kaiser-Aetna is a fairly large company, their
assets are good and their ability to repay any notes that they
might make I think is good. You have an opinion from a member of
the Legislative Counsel. I would assure you that if you go down
and ask a half a dozen others you can probably get a half a dozen
other opinions. You are not citing any instances on which this
opinion was based. Now, what are we doing here bickering back and
forth? Is there a possibility that Kaiser-Aetna is not going to
pay off their note, is that the purpose. I would just like to be
briefed a little bit as to what we are doing.
ASSEMBLYMAN THOMAS: May I ask a question.
CHAIRMAN CULLEN: Mr. Thomas.
ASSEMBLYMAN THOMAS: It is not Kaiser-Aetna, separate corpor-
ations, that purchased this property. They formed a partnership
to purchase this 230 acres. So when they did that the PERS waived
that no partner of Kaiser-Aetna shall be sued, named, or anything.
The corporations are out of it completely. It is this little
partnership we are talking about, and in this partnership they
waived all liability for default, everything. And here's the
agreement. Would you like to see the agreement?
ASSEMBLYMAN SEELEY: No, not necessarily, I don't belong to
PERS. If I did, I'd have a little more of an interest in it, but
I think these people probably have an interest and I don't quite --
ASSEMBLYMAN THOMAS: Mr. Seeley, we have been working on this
for six months and if you didn't hear the arguments last week, we
tried to point out this is not against Aetna or Kaiser Corporation.
40
It is -- we are not dealing with them as a corporation. They
formed a special partnership to purchase this one piece of property
and when they sell it they can sell it for residential purposes
contrary to the proposed plan of industrial -- and what's the other?
CHAIRMAN CULLEN: Commercial.
ASSEMBLYMAN THOMAS: Commercial.
MR. PAYNE: Mr. Thomas, could I make a comment?
CHAIRMAN CULLEN: Mr. Payne.
MR. PAYNE: Kaiser-Aetna partnership -- partnership of Aetna
and Kaiser Industries were in existence before this property was
purchased. This is their business. They didn't form it specifically
to purchase this property.
ASSEMBLYMAN THOMAS: Would you say this is a good agreement for
some security note?
MR. PAYNE: Yes.
ASSEMBLYMAN THOMAS: It is?
MR. PAYNE: Yes, indeed.
ASSEMBLYMAN THOMAS: Why did you waive all of your rights?
MR. PAYNE: I tried to explain why, sir. The reason we started
out trying to insist that we had the two major partners on the hook.
Their partnership agreement precludes this and my understanding is
that Aetna can't enter into this situation. Aetna can't. However,
we felt and do feel and do believe that Kaiser and Aetna as partners
are reliable partners and that you start right there with your
security.
ASSEMBLYMAN THOMAS: Yes, but you have excluded every other
proposal that came before your board, and we are going to introduce
41
documents to show much more than what you are telling us. Now,
the only reason that we are having this preliminary meeting is,
before we introduce the evidence, we want you to know we want to
hear your story. Was this a conspiracy just to sell to one buyer?
MR. PAYNE: No.
ASSEMBLYMAN THOMAS: It wasn't?
MR. PAYNE: Absolutely not.
ASSEMBLYMAN THOMAS: Were the other proposals considered?
MR. PAYNE: Not from out standpoint. We had no - we never
had a valid proposal presented to us that we rejected.
ASSEMBLYMAN THOMAS: Well, how did you happen to sell to
Kaiser-Aetna?
MR. PAYNE: In the first place, we didn't sell. We entered
into an agreement to finance. Simply because Kaiser-Aetna was
the only valid firm that was willing to meet reasonable conditions
and meet the purchase price that would bail us out. Kaiser-Aetna
was the only one to come forth to us.
ASSEMBLYMAN THOMAS: I think we should continue our meeting
till we get our witnesses, I suppose.
CHAIRMAN CULLEN: All right. All right, gentlemen. Thank
you for appearing. As you may know, we have subpoenaed the escrow
records of this transaction from Transamerica Title Insurance
Company. We have gathered information through General Services,
your system and other State agencies. So I would -- I wish to
announce that I have appointed a subcommittee to pursue the Point
West transaction separately from the future of Cal Expo.
Assemblyman Thomas will chair the subcommittee and the membership
42
will comprise the other members of the full Committee. I've
already discussed this with Assemblyman Thomas and he's convening
his first meeting at 1:30 next Tuesday afternoon. I'm sure you
will all receive letters so that you may be present, observe the
documents and respond to questions from his subcommittee at that
time. Thank you very much.
MR. PAYNE: Thank you.
MR. FOWLER: Thank you.
CHAIRMAN CULLEN: We will recess for ten minutes.
RECESS
CHAIRMAN CULLEN: All right. Gentlemen, before I take
questions from the Committee, is there anyone who wishes to
respond or say anything relevant to the hearing of last week?
Mr. Clifford.
APPEARANCE OF MR. JACK CLIFFORD, MEMBER, CALIFORNIA STATE
EXPOSITION AND FAIR EXECUTIVE COMMITTEE:
MR. JACK CLIFFORD: I was I'd just like to make a statement.
It is kind of to let you know how I feel about it.
CHAIRMAN CULLEN: All right, Mr. Clifford is a member of the
Executive Committee of Cal Expo, is that right?
MR. CLIFFORD: Yes, sir. I came on the Committee in 1968
shortly before the vote was taken on termination of the Corporation
and I forget now whether the vote was yes or no, but I voted to do
away with the Corporation mainly because, as I understood it, and
correct me if I'm wrong, when I went on the Executive Committee,
the Corporation was more or less running things at Cal Expo and
the Executive Committee had the veto power over the Corporation.
General Lolli, then head of General Services, had the veto power
43
over the Executive Committee. General Lolli served on the Corpor-
ation Board of Directors, he served on the Executive Committee and
to me it looked like an unworkable situation. Of course, I come
from a small County where there's about 17 percent unemployment,
Lake County. It is better now. And the payroll at that time, at
the Cal Expo, I believe, was $80,000 a month which I thought was
excessive. And I discussed it at length with Cap Weinberger who
was then -
CHAIRMAN CULLEN: Director of Finance.
MR. CLIFFORD: -- on Governor Reagan's staff, Director of
Finance, I believe, and he was in favor of doing away with the
Corporation Board, because he said that they were out of money
and as he explained it to me, if I remember correctly, it was
hard for any Board like the Corporation to run on State money
and seeing it become more or less not a political football, but
a political subject in town because unfortunately for Cal Expo,
I think that it wasn't completed before we had a change of
administations. I think it was hard for a new Governor to come
in and a lot of his people were a little conservative, more on the
conservative side, and I remember there was quite an uproar among
the people in agriculture when Cal Expo was first being - was
first started out there, that they were being left out of the
picture. And that's why I voted to --- against the Board, and I
had some good friends on the Board, this is one of those things
where -- where you -- whichever way you go you are going to lose
a pal, you know.
CHAIRMAN CULLEN: You mean vote against the Board, you mean
44
in favor of terminating the Corporation?
MR. CLIFFORD: I don't remember how the vote was worded.
I don't know, we voted no or yes - I remember General Lolli
abstained.
CHAIRMAN CULLEN: The Board of Directors is what you were
referring to when you say Board?
MR. CLIFFORD. Yes, I don't mean to blame General Lolli for
anything, although as a former PFC in the Marines I had a tough
time warming up to him. And I think that in my opinion, and
this is just my opinion, I don't believe that this State should
be in the amusement business. You know, I don't -- I think if --
if we are going to have a Disneyland North, I'd like to see
Disneyland do it. Of course, I realize we have started this now
and I think it is a beautiful plan, I really enjoy myself out
there, but if I had my way there would be something like a nonprofit
organization or some other type of board that would run the Califor-
nia State Fair and Exposition and our Board would be a Fair Board.
We can still have a State Fair, and I think we do have a good Fair
Board. And I think that when the Governor made the appointments
on this Board, he made it as a Fair Board. Now, he never told me
that, that's just my opinion. You know, as a Fair Board, we can
run a good race meet and keep the lawns green and keep the drunks
off the ferris wheel, and stuff like that. But when it comes down
to a -- as the original concept of the State Fair -- Cal Expo, I
think we are a little overmatched. I don't mean that as a detri-
mental statement against anybody. Some men can do some things
other men can't do.
45
I had a good friend on the Corporation Board, Pat Hyland.
He and I are still good friends and he never got out of grammar
school -- but he's Executive Vice-President of Hughes Tool Company
- Hughes Aircraft in the State of California and he's one of the
men that invented radar, and I think if this thing ever goes back
to its original concept, it is men like Mr. Hyland that should be
running it. Not men like myself. I think I'm a good Fair Director,
but not a good Cal Expo Director. I can't think of anything else
I could add to this.
CHAIRMAN CULLEN: Thank you, Mr. Clifford.
MR. CLIFFORD: Unless there are any questions, I'll try to
answer them as straight as I can.
CHAIRMAN CULLEN: I recall that the testimony last week by
some of the gentlemen present was to the effect that the original
objectives to what you just stated you'd like to go back to, are
still the goals of this administration and that the Executive
Committee working toward the fulfillment of these objectives.
Would you comment on that statement?
MR. CLIFFORD: Well, you mean the ---
CHAIRMAN CULLEN: The fulfillment of the original plan.
Yes, is the Executive Committee or has the Executive Committee
been moving toward the fulfillment of the objectives of the
original plan as modified by the --
MR. CLIFFORD: Not in my opinion. Not in my opinion, but
I went -- I will speak for only myself, I'd like to make that
clear. You know, we only meet once every two months and the
committees don't really meet all that much. We get pretty busy
46
before Fair time and I think it is an impossibility for our Board
as it is set up now with the schedule that it has to -- we are all
busy men, you know, doing something else, and my answer to that is
no.
CHAIRMAN CULLEN: Well, then who in your view - what persons
constitute management out there, of the Exposition grounds?
MR. CLIFFORD: I didn't quite understand you. You mean like
the manager?
CHAIRMAN CULLEN: Who is running that operation out there
except for the State Fair Executive Committee? Who runs it the
rest of the year?
MR. CLIFFORD: I think Mr. Bair does and I think under the
circumstances he does a fine job, really. He has to -- he gets
the -- the administration demands excellence of him. He tries
to fulfill that, I'm sure, at the same time trying to pacify a
board that I'm sure on occasions has him stymied.
CHAIRMAN CULLEN: Have you been given a copy of this year's
report of the Executive Committee to the Legislature yet?
MR. CLIFFORD: Yes, sir.
CHAIRMAN CULLEN: Have you any comments on that?
MR. CLIFFORD: No, because I really didn't study it. I
didn't do my homework, I just read it very briefly and --
CHAIRMAN CULLEN: Any questions of Mr. Clifford which --
ASSEMBLYMAN THOMAS: I would just like to ask --
CHAIRMAN CULLEN: Mr. Thomas.
ASSEMBLYMAN THOMAS: I don't know too much about the Cal Expo,
but would you recommend abolishing it?
47
MR. CLIFFORD: No, sir, I think that when you get stuck with
a lemon you ought to try to make lemonade out of it and I hope
that some day this thing can go, but I just don't think that
appointees of the -- of any Governor, who are honorable men, you
know, we are -- we are dumb but honest, you know, out there. I
just don't feel that we are equipped to go ahead with that having
to -- go ahead, Mr. Thomas, I didn't mean to interrupt.
ASSEMBLYMAN THOMAS: In other words, you are trying to say
you haven't got the talent?
MR. CLIFFORD: I think that's true.
ASSEMBLYMAN THOMAS: You haven't got the talent to carry out
the original purpose.
MR. CLIFFORD: Nor the money. But it takes both. Money
without talent is a waste.
ASSEMBLYMAN THOMAS: Has any effort been made to get new
talent, I mean real talent to carry on this Cal Expo?
MR. CLIFFORD: Not in my opinion. But I feel that -- because
I feel that it's been - it's been projected as a Fair, a Fair
Board. And I think we ought to have the greatest State Fair in
the country. You know, not too many years ago we had a real State
Fair in this State and now -- now places like Dallas, Texas, and
Pennsylvania and Illinois and - I could name several more if I
thought, have surpassed us and I think this is too bad. I think
that California should have a great showplace for its -- not only
its agriculture but its industry, its people, black culture, every
kind of culture. We are a partisan Fair Board, and I think that
if you are going to go into a bigger concept that you need something
48
besides a partisan Fair Board. I think we do a good job as far
as the Fair is concerned, I didn't mean to suggest that.
ASSEMBLYMAN THOMAS: Well, would you abolish -- just keep
the Fair -- would you state the best avenue to follow is just the
Fair and develop it to what it was on the old site? I attended
the Fair there many times.
MR. CLIFFORD: I enjoyed it very much.
ASSEMBLYMAN THOMAS: I thought it was tremendous.
MR. CLIFFORD: Yes, sir. No, I would -- I would never want
to do away with the State Fair. In fact, I would like to see the
State Fair really blossom to where it is once again mentioned with
places like Dallas and Illinois.
CHAIRMAN CULLEN: All right, sir. Any other statements before
we resume the hearing? Did you have to leave?
MR. CLIFFORD: We are kind of working at the ranch and it is
good weather, I'm taking advantage of the good weather and if it
is all right -
CHAIRMAN CULLEN: I have no objection if there are no other
questions.
ASSEMBLYMAN THOMAS: You call this fog good weather?
MR. CLIFFORD: We don't have fog in Lake County. No smog,
fog or parking meters. Three things we don't have.
CHAIRMAN CULLEN: Thank you very much.
MR. CLIFFORD: Thank you.
CHAIRMAN CULLEN: Mr. Nissen, last week --
APPEARANCE OF MR. RALPH NISSEN, CHAIRMAN, CALIFORNIA STATE
EXPOSITION AND FAIR EXECUTIVE COMMITTEE; ACCOMPANIED BY MR. THOMAS
BAIR, MANAGER, CALIFORNIA STATE EXPOSITION AND FAIR, MR. DAVE KELTS,
49
CONTROLLER, CALIFORNIA STATE EXPOSITION AND FAIR, AND DR. H. C.
SANDERSON, MEMBER, CALIFORNIA STATE EXPOSITION AND FAIR EXECUTIVE
COMMITTEE.
MR. RALPH NISSEN: Mr. Cullen, could I ask you to ask him to
remain, please? I think this is one of the problems. Some of our
Board members, if they attended the entire Board meetings we wouldn't
have some of these problems. Would you please request Jack to be
here.
MR. CLIFFORD: I'll be here, I don't think I ever missed a
meeting.
CHAIRMAN CULLEN: Mr. Nissen, last week I read the 1963
statute which requires the Executive Committee to submit a report
to the Legislature and the Governor during the first 30 days of
each General Session. You may recall, you thought it read that
the Chairman of the Committee --
MR. NISSEN: Yes, sir.
CHAIRMAN CULLEN: -- should submit a report. Now, one of
the reasons given for terminating the Corporation was it was --
was that the Executive Committee determined that it was not as
efficient as was desired by the Executive Committee and we asked
Mr. Bair for copies of the reports of the last several years sent
over to the Legislature pursuant to law. We have the latest one
here addressed to the Honorable Robert Moretti, describing it as
a fourth report that you had the honor and responsibility to make.
We also -- Mr. Bair was unable to locate, and we have been unable
to locate, the report submitted to the Governor and the Legislature
in 1968.
Now, when you say the fourth report, that's 1969, 1970, 1971,
50
and 1972. Weren't you the President -- or is it the Chairman of
the Committee in 1968?
MR. NISSEN: I think I went on -- I would have gone on in
the - I believe in February of 1968.
CHAIRMAN CULLEN: All right.
MR. NISSEN: So, in other words, it would be the termination
of Bob Setrakion's year.
CHAIRMAN CULLEN: All right, who constructs this report for
you?
MR. NISSEN: Well, it's been a combination of the Manager and
I together that have worked up this report.
CHAIRMAN CULLEN: And you are pretty familiar with this report
that was just submitted to the Legislature?
MR. NISSEN: Yes.
CHAIRMAN CULLEN: It is fresh in your mind? Let me ask you
a question here. In addressing Bob Moretti, you say, "However,
your appointees to the Executive Committee feel it is their
responsibility to present their recommendations for your review".
MR. NISSEN: Sir -
CHAIRMAN CULLEN: Yes.
MR. NISSEN: May I clear one thought. What these are, they
were the -- they were actually the copies to the Governor and there
is an editing mistake in that. This is -- in other words, it is
an exact copy of the report that went to the Governor with the
difference -- the only difference in the change was on the heading.
CHAIRMAN CULLEN: I hope -- hope the Speaker realizes that.
And I suppose then that the earlier reports, none of which Mr. Bair
51
is able to give us any copies of anything addressed to the Legis-
lature, but he gave us --
MR. NISSEN: You are talking -- you said 1968 now.
CHAIRMAN CULLEN: For 1969, 1970 and 1971, he gave us copies
of the letter to the Governor. So that can I presume that copies
were sent to the Legislature?
MR. TOM BAIR: Yes, that's true. It just happened to be the
ones that I pulled out of the file. We have copies to all three
of the people who have received this in the file, but the ones I
pulled out to be photocopied for you just happened to be those.
They are all identical.
CHAIRMAN CULLEN: So you conclude this report, in which you
are required to report the financial condition, present operations
and future planned activities of the Exposition with this paragraph:
"The Executive Committee looks forward to further exploration in
alternatives in presenting a better State Exposition and Fair and
we hope and believe we will eventually have the finest event in
the nation."
What event is that?
MR. NISSEN: Finest Fair, I would say.
CHAIRMAN CULLEN: Are you talking about a two week period?
MR. NISSEN: No, I -- for the present.
CHAIRMAN CULLEN: Or 21 day period?
MR. NISSEN: 20 days, whatever it may be presently, yes, but
I certainly --
CHAIRMAN CULLEN: Well, is Mr. Clifford perhaps correct in
his view that the Executive Committee preoccupies itself with
52
21 days in the year?
MR. NISSEN: I have to very violently disagree with that
statement and that's the one reason I wanted him to sit here, SO
he could hear my remarks.
CHAIRMAN CULLEN: Let's hear your rebuttal.
MR. NISSEN: Personally, my feeling on the thing is that I,
as the Chairman, put in a lot of time down here on this thing and
the Management Subcommittee, which is equivalent to what would
normally be a - an Executive Committee of any other organization,
probably -- properly named, puts in considerable time and we do
not get into management. My feeling is we hire a manager, we hire
management to take care of the actual management. Our decisions
are in directing him, not in getting into day to day management
and I don't think that you or anybody in the State would expect us
to be in the actual management of the organization. We just, as
members of the Executive Committee -
CHAIRMAN CULLEN: You are putting words in my mouth. It is
that a Board of Directors generally requires management to do
what the Board of Directors wants done.
MR. NISSEN: Right.
CHAIRMAN CULLEN: And if the Executive Committee, for some
reason, is satisfied that there is insufficient planning or in-
adequate documentation for judgment decisions by the Board, then
the management is going to hear about it.
MR. NISSEN: That's right. And he has.
CHAIRMAN CULLEN: All right. Now, returning again to the
statute, the report respecting the financial condition of Cal Expo.
53