Audit knocks Pinnacol Assurance on bonuses, travel; defends it on reserves, claims

Denver Business Journal - by Ed Sealover
June 7, 2010
http://www.bizjournals.com/denver/stories/2010/06/07/daily8.html

Pinnacol Assurance pays out executive bonuses that are far higher than any other Colorado state agency and has approved travel expenses so contrary to its policy that they are "bordering on abuse," according to a performance audit on the workers’ compensation insurer released Monday.

State Rep. Dianne Primavera, a Broomfield Democrat and member of the Legislative Audit Committee that received the report, said it "raises serious concerns about ethics and extravagant spending and bonuses."

Pinnacol president and CEO Ken Ross responded that the quasi-governmental agency already has begun taking steps to fix some areas of concern and has agreed to address all 14 recommendations by the end of this year.

The audit came after state legislators unsuccessfully tried to use $500 million of Pinnacol’s reserve funds to balance the state budget last year but settled on doing extensive financial and performance investigations of the mutual insurance company instead.

And it was released less than a month after a legislative session in which Pinnacol beat back several legislative attempts to tighten regulations on the company while also failing to get the Colorado Senate behind its proposal to pay the state $330 million to become a private entity.

DOWNLOAD the Pinnacol performance audit here.

DOWNLOAD the Pinnacol financial audit here.

The most damning findings, according to committee members, came in the areas of travel expenses and executive compensation. The issue of travel expenses is particularly timely, as Ross and the Pinnacol board are coming under fire from a number of legislators for taking top-selling agents on an expensive trip to California’s Pebble Beach golf resort as the legislative session was ending.

State auditors found that a full 75 percent of entertainment and travel expenses violated Pinnacol’s policies on what was reimbursable, including several expenses that contained multiple violations. Those included unallowable expenses like alcohol purchases without a business partner present, no proof of payment of expenses and missing evidence of prior justification on large expenses, such as $500-per-night hotel rooms in Colorado Springs.

The 75 percent error rate "borders on abuse under government auditing standards," legislative auditor Vickie Heller told the committee. Sen. Dave Schultheis, a Colorado Springs Republican and the committee chairman, responded: "If you’d have been in my house when I read this, you’d have heard me three blocks away."

"At a time when businesses are having to tighten their belts, spending money above and beyond what the going rate is bothers me," Primavera said.

In the area of executive compensation, the audit found that the combined salary, bonuses and perquisites to Ross — about $500,000 in 2009 — was roughly $150,000 higher than the compensation earned by the CEO of the Regional Transportation District and more than $200,000 above the heads of the Colorado Housing and Finance Authority and Public Employees’ Retirement Association. All four are political subdivisions of the state.

Also, Pinnacol’s vice presidents in 2009 received average bonuses of about $102,000 — an amount roughly 76 percent higher than the next largest average bonus paid to vice presidents of any of the state funds in the sample, the audit found.

Plus, the bonuses for both executive and non-executive employees seemed abnormally easy to get, the audit stated. Bonus-triggering results in areas like net income were actually below the previous year’s income in some years, the audit found.

Gary Johnson, president of the Pinnacol board, explained that because the insurer has dropped premiums for policyholders for five years in a row, the targeted numbers must reflect a drop in income that the company expects to get from its actions. Still, Johnson agreed with an audit recommendation to obtain professional expertise in developing performance targets that reward only superior performance.

While a number of Democrats on the committee criticized Pinnacol officials over the performance results, some Republicans said the comparisons to other state agencies bordered on irrelevant.

Sen. Shawn Mitchell, R-Broomfield, noted that Pinnacol is chartered to operate not as a government agency but as a mutual insurance company and should be compared to the private companies against which it competes. Also, he said, the audit ignored that fact that while most businesses and government departments are struggling to bring in revenue, Pinnacol is bringing in "such profits that they make legislators want to commit larceny."

"What we’re left with is an extensive financial and operational examination of a company but without real-world context," Mitchell said. "That’s a missed opportunity on the part of the Legislature [that ordered the audit] and perhaps the agenda that drove this audit."

Auditors also questioned whether Pinnacol was overcharging premiums to some high-risk industries and why the board had set up high-dollar compensation packages for any executive let go without cause in the next two years.

The audit found far less fault with Pinnacol in some other areas, however. Pinnacol’s sometimes criticized $733 million reserves are not out of whack with industry standards, and its handling of claims by injured workers also did not present major problems, the audit reported.

Committee members asked Pinnacol officials to return in September to explain what progress they are making on the 14 audit recommendations.

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