The State of Your Money: Luxury resorts considered "essential"
Bob Segall/13 Investigates
13 Investigates has discovered some state employees are traveling to luxurious resorts at taxpayer expense. Investigative reporter Bob Segall shows you where these state workers have been going, how much it's costing you and why they're going to so many exotic destinations.
Indianapolis - San Diego and Stockholm, Beverly Hills and Beijing, Utah and Ukraine, Las Vegas and London, Miami and Munich, Half Moon Bay and Hong Kong - those are just some of the destinations staff members at Indiana's Public Employee Retirement Fund have visited during the past two years. 13 Investigates has learned PERF employees have taken hundreds of out-of-state trips costing tax payers hundreds of thousands of dollars, including overnight stays at some of the world's most luxurious resort and spa hotels.
BILLIONS OF DOLLARS
PERF is the statewide pension fund for more than 220,000 public employees and retirees. As one of the nation's largest pension funds, PERF currently has more than $12 billion in assets and nearly all of those assets are placed in a wide variety of investments.
"Ultimately, this is the members' money," explained PERF communications director Jeff Hutson. "It is a significant responsibility to manage that money and I think it's one PERF takes very seriously. We manage it very carefully."
According to PERF, part of that management involves travel to monitor PERF's worldwide network of investment managers who are responsible for investing billions of Hoosier dollars.
"We have to get face-to-face with people, get boots on the ground, to understand what they're doing with this money," Hutson said. "We need to get into their business and say ‘what are you doing?' That's really essential."
But the travel often comes with a high price tag.
SLEEPING AT THE WALDORF
Through a public records request, WTHR inspected thousands of pages of PERF's travel expense reports. That review shows the agency's executives and investment managers frequently stay at expensive luxury hotels while conducting their business.
-Last September, on a trip to monitor private equity managers on the West Coast, PERF staff members spent $393 per night to stay at the 5-star rated Mandarin Oriental Hotel in San Francisco.
-In May 2008, PERF approved $400 per night hotel stays at Ritz Carlton's Half Moon Bay ocean view resort for PERF employees attending a meeting and exploring investment opportunities.
-A month earlier, Hoosier taxpayers paid $538 per night for a PERF worker to stay at London's trendy Hilton Tower Bridge Hotel while attending an investor meeting.
-And while traveling to meet with investment managers in 2007, another PERF employee slept two nights at the famed Waldorf=Astoria Hotel in New York at a cost of $659 per night.
13 Investigates found nearby hotels that offer far less expensive rates, so WTHR investigative reporter Bob Segall asked PERF to explain the high-priced accommodations.
Segall: "I don't think anyone is suggesting staying at a Motel 6, but is it really necessary to be staying at a 5-star, $600-a-night hotel?"
Hutson: "Well, they're expensive places. They're also in places very often that are very expensive cities. Certainly we had to evaluate on every trip
request are we getting the best price hotel that we ought to be getting..."
Segall: "Throw out a scenario where it might be OK to have a $650 hotel room. I just don't get that."
Hutson: "...I can't throw out a scenario for you because I don't have that particular scenario."
Segall: "Throw out any scenario."
Hutson: "You know, it's one that if we are going to be there we need to make sure we have a reasonably priced hotel room."
Segall: "For me, that doesn't seem reasonable."
Segall: "For PERF it does?"
Hutson: "There's no question, whether it's you, whether it's me, whether it's any Hoosier in the state, they're gonna say that's an expensive hotel
"IT SEEMS WASTEFUL"
"Of course, that's expensive," said PERF member Mary Williams. "It seems wasteful to me."
After driving South Bend school buses for 24 years (and paying into the state employee retirement fund for 24 years), Williams is now retired and caring for eight grandchildren.
To put food on the table for all those kids, the retired grandmother relies on her monthly pension check from PERF. She questions why her pension fund allows its employees to spend so much money on luxury hotels.
"I feel they could be putting that money into the retirement fund," Williams said. "I can understand them needing to travel, but that's too much for hotel rooms. Why do it at someone else's expense?"
PERF insists the travel is necessary to protect the pension funds of retirees like Williams.
"I would rather be explaining to you why we travel than sitting here explaining to you why we missed something, why it is we had some catastrophic event in the fund because we did not go out there and do our due diligence," Hutson said. "Travel to check our investments, it's essential we do this."
SEMINARS AT THE SPA
But not all of PERF's high-priced travel involves monitoring investments. Many of the trips are for PERF employees to attend conferences and seminars, and 13 Investigates found those trips also include stays at pricey top-tier hotels.
Last year, PERF staff took a week-long trip to Asia to attend an investment conference in Hong Kong. For a single attendee, the trip cost taxpayers well over $6,000, including $623 per night rooms at the 5-star JW Marriott Hotel, where the conference was held.
Other conference and seminar sites were closer to home, but no less luxurious. Last year, PERF employees attended conferences at Marriott's Doral Golf Resort and Spa in Miami, Snowbird Ski and Summer Resort and Spa in Salt Lake City, The Phoenician Resort and Spa in Scottsdale, Paradise Point Resort and Spa in San Diego and St. Regis Resort and Spa in Fort Lauderdale.
"We go to the conferences we need to go to and, unfortunately, we don't get to pick the venues where those conferences are held," Hutson said. "There's no question these are conferences held in nice places so we have to ask ourselves each time: do we believe this is something we really need to do?"
PERF admits some of the conferences are hard to explain to taxpayers, but says they are all worthwhile for the staff members who attend.
"Frankly, we would rather see something at the Marriott in Cleveland because that would be a lot easier to explain," said Hutson. "But at these conferences, we're not there to have fun. We're not there to golf. We're not there to play tennis. We're there to conduct business and if we're not there doing that, we don't need to be there."
FAILING THE SMELL TEST
Bill Styring is skeptical.
"Anytime you see a public expenditure that doesn't pass the smell test, you should be suspicious," he said.
Styring is an economic consultant and former senior fellow at the conservative Hudson Institute. As a former state employee, he used to approve out-of-state travel requests for the Indiana State Budget Agency. Styring says the travel requests submitted by PERF raise some red flags.
"I would not approve [the out-of-state travel requests] without asking a lot more questions," he said. "‘Meet with investment advisor or monitor investment manager' would, to me, not be sufficient justification because that's not the real purpose of the trip. What do you expect to learn that will improve PERF's performance?"
PERF's recent performance has not been good. Late last year, as PERF's investment managers were traveling around the world, Indiana's retirement fund dropped below $12 billion - about $5 billion less than the year before. Pension funds in other states also suffered stiff losses in 2008, but very few states did as poorly as Indiana, which lost about a third of its public retirement fund's total assets.
LESS TRAVEL, BETTER RESULTS
At the same time, public employee retirement funds in most other states spent far less on out-of-state travel than Indiana PERF.
Minnesota, Iowa and Kentucky, which have public pension funds similar in size to that of Indiana, spent $39,000, $81,000 and $137,000 respectively on out-of-state travel in 2008 - significantly less than the $180,000+ spent by PERF. WTHR found states that have much larger pension funds also travel less than Indiana PERF. North Carolina, for example, has a pension portfolio five times larger than Indiana ($60 billion compared to $12 billion) but spent about two-thirds less on its out-of-state travel last year ($64,000 compared to $180,000+).
PERF says its travel costs might be higher than those of other state pension funds because the agency has trained its own internal investment staff to perform monitoring tasks that would otherwise be assigned to outside consultants. By sending PERF staff -- not consultants -- on due diligence trips, the agency says it is saving taxpayer dollars.
But last year the agency still paid millions of dollars to outside consultants. A review of PERF's annual report shows the agency spent more than $4.3 million on private investment consulting services in fiscal year 2008. The agency also spent about $67 million on investment fees that year while watching the investments' value drop dramatically.
PERF says its investments outperformed the S&P 500 index. However, that is to be expected during a major market selloff since the S&P 500 consists solely of stocks. By comparison, pension funds have significant holdings in other asset classes such as bonds which are far less volatile and, therefore, offset losses. Comparing PERF's recent performance in equity markets with that of the S&P 500 shows PERF has actually underperformed the S&P 500 benchmark.
A BIG DEAL
"When a public pension fund loses money, that is a big deal to everybody because that pension still has to be paid and it will be paid by taxpayers," Styring said.
In Indiana, public retirees' pension benefits are guaranteed by state law - even when the retirement fund has a bad year. Because of the sharp decline in PERF's investment portfolio, PERF says it will be raising its employer contribution rate, which is the amount of money that Indiana's public universities, school corporations, municipalities and state agencies are required to contribute to the state pension fund. How much the contribution rate will rise is not yet known, but the increase will likely result in higher taxes for many Hoosiers.
Despite PERF's big losses, the agency's out-of-state travel budget in 2008 was nearly double that from the year before.
THE BIGGER PICTURE
Styring believes that is a symptom of a much larger issue affecting PERF and its members: the decision by Indiana's retirement fund executives to invest heavily in "alternative investments."
Over the past several years, PERF has been shifting some of its assets into hedge funds, private equity and real estate. These alternative investments are attractive to aggressive investors trying to achieve big returns. PERF recently quadrupled its commitment to alternative investments, earmarking more than $2 billion in funding to invest in private equity and real estate.
"They can generate gaudy numbers with big double digit gains in a good market," explained Styring. "But in a weak economic environment, if you guess wrong, you can really get hammered."
The economist says, unlike common stocks and fixed income investments such as bonds, alternative investments require a high level of monitoring to protect investors. Styring is not convinced the cost or the risk associated with those investments makes sense for PERF members and taxpayers.
"You get into these investments which are risky, they are volatile, they are very often leveraged with borrowed money, they charge very high management fees and they are very tough to value because you're not always real sure what you've got in there ... really should we be doing this?" he asked. "This out-of-state travel is being necessitated because we are in these very exotic investments and if [PERF] were not heavily into these alternative investments, any rationale for all this travel would be out the window."
PERF says its growing presence in the alternative investment arena is part of a 30-year investment strategy designed to diversify its fund portfolio while seeking maximum returns.
"What we are actually seeking to do with the asset allocation is reduce risk, not increase risk," Hutson explained. "Rather than parking it in a Mason jar and burying it in the backyard and saying we don't want anything to happen to it, what we do is come up with an asset allocation that is designed to give a good, prudent return over thirty years. It's deliberately designed to take risk out."
"These alternatives really don't, in the end, give as much diversity as they advertise," responded Styring, when he heard PERF's rationale. "I just hope we know what we're doing."
Williams hopes so, too.
"My pension, it means everything to me to help me be able to survive from month to month," she said.
PERF insists its extensive travel in 2008 to exotic destinations and overnight stays at pricey luxury hotels was all justified.
"That's the very question we have to ask ourselves every time we traveled: ‘Is this absolutely necessary? Is there another way to do this?' And that question is asked each trip," Hutson said. "We would not have taken a trip if we did not feel it was essential."
Of course, with PERF shifting billions of new dollars into alternative investments, that travel is sure to continue, right?
Since 13 Investigates first asked to inspect PERF's travel expense reports six months ago, the agency's essential travel has dropped dramatically. PERF admits its out-of-state travel costs are down about 50% during that time. Hutson says agency managers are looking for alternatives to travel that will help save taxpayers money.
"We need to put the brakes on spending because there's less money to deal with," he explained.