Firms Pick Up Travel Tab for State Pension Officials

For the past four years, banks and investment firms seeking billions of dollars in state business have quietly paid to send California pension board officials to “educational seminars” in such exotic locations as London, Munich, Tokyo, Paris, Venice and Melbourne.

At least 16 state officials, who control the investment of $80 billion in public trust money, have received free air fare, lodging and meals for a series of seminars hosted by a profit-making institute bankrolled by international money managers.

Representatives of the financial houses, which could profit from state investments overseas, tagged along on the trips, which involved a week of instruction on foreign investments for board and staff members of the Public Employees’ Retirement System (PERS) and the State Teachers’ Retirement System (STRS).

While the sales representatives were prohibited from promoting their individual firms during the trips, the seminars made a strong case for investing public pension fund monies in foreign assets. Even some of the participants saw it as a not-too-subtle effort to encourage the type of investment that would have the potential of providing more business for the trips’ behind-the-scenes sponsors.

“Nobody’s going to take somebody someplace without some hidden agenda. No one is going to take me to Europe without trying to sell me something,” said Wahaken Vanoyan, a State Teachers’ Retirement System member who attended a seminar in Japan in 1987. “Their whole (message) was that there are opportunities in foreign markets. All the money managers are looking at is to convince you to diversify. As soon as you invest, they get a portion.”

Interviews and public records show that during the years pension officials accepted the trips:

* The seminars had their desired effect, helping to persuade both Public Employees’ Retirement System and State Teachers’ Retirement System board members to take the plunge into overseas investments. The public employees board has decided to devote 16% of its portfolio, or an estimated $9 billion, to foreign investment during the next five years. The teachers board is only in the preliminary stages of making overseas investment decisions, having still to determine how much of its assets it will allocate abroad.

* Three board members failed to disclose the trips on their economic interest statements in apparent violation of state law.

* Board members have continued to participate in the seminars, although Shirley Chilton, secretary of the State and Consumer Services Agency, which oversees the pension boards, has advised them not to accept the trips. So concerned was Chilton about the propriety of the trips that her agency recently rejected a request by Bill D. Ellis, president of the Public Employees’ Retirement System board, to attend one of the seminars.

Informed by The Times about the overseas trips, Assemblyman Dave Elder (D-San Pedro), chairman of a legislative committee that monitors pension board activities, expressed shock.

“I think it is inappropriate for unpaid members of a board to have the continual attention--whether it be on trips or at dinner, at lunch or at seminars or retreats--of sales personnel who have millions of dollars at stake in commissions and other fees (and are) trying to convince them of how prudent it is to purchase securities and other assets in foreign countries,” said Elder, who is chairman of the Assembly Public Employees Retirement and Social Security Committee.

However, most board members and the executive directors of the two funds disagreed with his position. As fiduciaries or trustees with responsibility for protecting and investing the assets of state workers, they contended, the seminars--hosted by the Institute for Fiduciary Education--provide valuable education that helps them make more informed investment decisions.

They insisted that they were not influenced by their contacts with the money managers, although most acknowledged that the seminars made them more comfortable with investing public trust funds in foreign assets. Several board members also noted that it is not uncommon for corporate pension officials to be wooed by investment houses that regularly treat them to free dinners and trips.

“We have essentially a lay board. That is to say none of us are financial experts as such,” said Charles Valdes, a Public Employees’ Retirement System board member since 1984. “It is terribly important as fiduciaries we have as much information and background as we can.”

But why, ask Elder and Chilton, does the education have to be provided in exotic locations by financial houses interested in state business?

“It used to be join the Navy; see the world,” Elder said. “Now it’s join PERS, join STRS and see the world.”

‘Need Education’

Said Chilton: “They need education, but I feel quite strongly if there is education to be provided to our board members about investment, these seminars could be conducted here in California. This would be a very appropriate way to do it and better policy.”

She said that she advised the executive officers of the two funds about her concerns and was told that they had opinions from their attorneys that the trips were legal.

“They decided that this superseded my concerns,” she said.

Disclosure forms indicate that investment interests have treated some board members to lunches and dinners and occasional short trips within the country. None of those gifts, however, came close to equaling the foreign trips in time or value.

With assets of $55 billion, California’s Public Employees’ Retirement System is one of the largest public pension funds in the nation. Together with the State Teachers’ Retirement System, which has assets of $25 billion, its investment potential is awesome. The two funds handle the pension accounts of nearly 1 million workers employed by school districts, state universities, cities, counties, special districts and state government.

For investment houses, handling a stock or bond transaction for either pension fund can mean hundreds of thousands of dollars in fees. In California, brokers are paid a negotiated fee based on the number of securities being bought or sold.

Both pension funds are governed by a board of mostly lay people who are selected in a variety of ways, including gubernatorial and legislative appointment and election by workers participating in the pension system.

The 13-member Public Employees’ Retirement System board includes as ex-officio members the state controller, treasurer and personnel director. The state controller, treasurer, superintendent of public instruction and finance director are ex-officio members of the 12-member State Teachers’ Retirement System board.

Incorporated in 1985, the Sacramento-based Institute for Fiduciary Education was founded by former legislative aide Bob Toigo and his wife, Susan. Toigo once served as chief of staff to then-Assembly Speaker Leo T. McCarthy, who now is lieutenant governor. In addition, Marilyn Woods, a former deputy chief executive officer for the State Teachers’ Retirement System, is the institute’s vice president.

Woods said the company provides an important educational service to pension funds by exposing board members to foreign corporate leaders, foreign governments and experts in international investment, all “in a dynamic learning environment.” She said by holding the seminars abroad, the pension board members not only have access to foreign officials who would not be available in this country but can also obtain a firsthand look at foreign companies and stock exchanges.

The institute, which has expanded rapidly over the years, derives its profits and expenses for the overseas travel from fees paid by financial institutions. The fees entitle the institutions to send a representative to two of the three international investment seminars the institute conducts each year for pension fund executives from throughout the nation.

Besides state pension fund board members, Woods said, many California city and county pension fund officials have also attended the seminars.

Remember Names

A partial list of the companies contributing to the institute was gleaned from board members who could remember the firms sending representatives to their particular seminars. They included Brown Brothers Harriman & Co., Daiwa International Capital Management, J.P. Morgan Investment Management Inc., Morgan Grenfell Investment Services Ltd., Nikko International Capital Management Co. Inc., Rowe Price-Fleming International Inc., State Street Bank & Trust Co. and Warburg Investment Management International Ltd.

Since the trips began, at least three of the firms doling out “participatory fees”--Morgan Grenfell, State Street and Warburg--have received state business from the Public Employees’ Retirement System.

Foreign governments and foreign companies provide “in-kind contributions” to the seminars by hosting lunches and dinners and plant tours for the visiting pension dignitaries.

Board members who have participated use terms like “first class, luxurious and very elegant” to describe the accommodations, travel arrangements and meals provided for the foreign seminars. One attending a seminar in Japan recalled staying at the Imperial Hotel in Tokyo and being served sumptuous dinners with wine and sake.

“Susan and Bob (Toigo) really know how to throw a nice seminar,” quipped Keith Chun, a State Teachers’ Retirement System board member since 1986. “I don’t think I could ever have experienced that on my own. That one week has got to be my example of how the rich and famous live.”

Valdes, who took two trips hosted by the institute, said nearly all the investment house representatives attending the seminar contacted him afterward. Most often, he said, they were seeking procedural information about the board.

“You got to know them on the trip as individuals,” he said. “Then about a month later, they would give you a call, and then you would get together.”

Board members said typical seminar sessions would begin early in the morning with classroom lectures and then switch to plant tours and meetings with corporate executives in the afternoon. Usually they involved visits to two cities.

The trip to Japan included travel to Tokyo and Kyoto. Board members attending one seminar visited London and Munich, while a later seminar went to London and Venice.

General Knowledge

Some board members said they did not learn until long after a trip exactly how it was financed. Some others had a general knowledge but were vague about the details of the financing. On their disclosure forms, the estimated trip costs ranged from $3,500 to $5,500.

Typically, invitations to attend the overseas seminars were extended to officials when they were new on the board.

Over the years, at least five State Teachers’ Retirement System board members--Gary Lynes, Ralph Fowler, Cyril Fritz, Chun and Vanoyan--and five present and former Public Employees’ Retirement System board members--Robert F. Carlson, Jake Petrosino, Richard P. Fradd, Modale L. Watson and Valdes--have participated in the trips.

Also taking part were James E. Burton, who represented the state controller on the public employes board; Thomas A. Acetuno, who represented the treasurer on both boards; Nancy Sweet, representing the state finance director on the teachers board, and three staff members of the two agencies.

Some board members said they were given strict instructions to report the trips. Others said they were told reporting was not necessary.

Three board members--Lynes, Petrosino and Fradd--did not report their trips as a gift on the statements of economic interests they are required to file with the state’s Fair Political Practices Commission.

Both Lynes and Petrosino said they were advised by lawyers for the state that the reporting was not necessary because the trip was “educational.” Fradd said he decided after reading the reporting instructions on his disclosure form that the trip did not qualify as a gift.

“I just considered it a learning situation,” he said.

Sandra Michioku, a spokesman for the Fair Political Practices Commission, said that while she was not familiar with the specific cases, state laws have long required that any overseas trips be reported as a gift of travel. If an organization such as the institute actually conducts the seminar using contributions made to it by a number of sources, the names of those sources do not have to be disclosed, she said.

Elder, who himself accepts honorariums for speeches from special interest groups, which he discloses, said more detailed disclosure of the backers of the trips should be required.

“These are significant gifts,” he said. “We have to know what influences are being brought to bear on members of these boards.”

While most board members had no qualms about their interaction with the investment house representatives, a few have since expressed uneasiness with the financing arrangements for the seminars.

‘Yearly Basis’

“I felt a little bit uncomfortable after I came back,” Vanoyan said. “I would prefer for the fund on a yearly basis to allocate (money) to put on a seminar that is really worthwhile. I don’t believe money managers should foot the bill.”

Petrosino, who normally eschews offers of free travel, said he made an exception and attended the seminar in 1986 before the Public Employees’ Retirement System was actively purchasing foreign assets. He said he considered the trip “very helpful” but would not accept one now.

However, the executive officers of the two funds--James Mossman of the teachers and Dale Hanson of the public employees--and by far a majority of the board members strongly defended the trips.

“For international investing we’re very fortunate to have something like the IFE program available,” Hanson said. “It’s certainly (helped to) demystify and allay their fears about investing overseas.”

Fowler, a State Teachers’ Retirement System board member who teaches economics at Diablo Valley College in Pleasant Valley, said the seminar confirmed his belief that foreign investment would help the pension fund further diversify its portfolio.

“It sounds corny, but you don’t put all your eggs in one basket,” he said. “The reality is we are dealing with the global market, and there is absolutely no way you can get around it. What it (the seminar) did for me, it helped my rationale and thinking about it.”

But Elder, who opposes foreign investment, said seminars for board members should not be limited to one area of investment. He questioned how thoroughly the seminars explored the risks associated with foreign investment.

“There are ample investment opportunities in this country, and there are more than ample investment opportunities in this state,” he said. “If we don’t keep the economy viable for California and for the United States, there aren’t going to be the taxes paid to pay the salaries to these pensioners, let alone pension benefits.”

Nearly all board members said the seminars generally presented a favorable view of foreign investment, but they were divided on how thoroughly the pitfalls were explored.

Lynes, now president of the teachers board, said his seminar explained the extra costs associated with that type of investment and the differences between economic systems in other countries and the United States. Chun, on the other hand, believed that on his trip to Japan he learned “a lot more from what was unsaid then what was presented to us” and came away with the impression that investment in that country would not be wise.

“I think it (the seminar) was more pro-invest in Japan without bringing up the shortcomings,” he said.