Earlier today the Kentucky Auditor of Public Accounts (APA) released a special examination evaluating the transparency, administration, and compliance with Senate Bill 2 (2017 Regular Session) of Kentucky Retirement Systems (KRS), the Teachers’ Retirement System of Kentucky (TRS), and the Judicial Form Retirement System (JFRS). Unfortunately, the examination is highly flawed and contains several factual errors which led the Auditor’s Office to misinterpret the true status of the Systems’ efforts to comply with the provisions of Senate Bill 2.
Here are a few of the most troubling inaccuracies:
- In Finding 1 of the examination, the APA claims that “KRS has Abdicated its Responsibility to Abide by the Open Records Act.” KRS has a fiduciary obligation to act on behalf of more than 386,000 members, and to assert the Systems have formally relinquished this authority is both demonstrably false and highly inflammatory. To the contrary, KRS has diligently sought compliance with the requirements of Senate Bill 2 even in the face of industry pressures such as existing managers terminating business rather than complying with the policies mandated by Senate Bill 2. In addition, KRS 61.645(20) prohibits the Systems from furnishing information that is exempt from the Open Records Act, or information that would detrimentally impact KRS’ ability to invest.
A previous Kentucky Office of the Attorney General ruling (16-ORD-273) addressed this issue, and led KRS to conclude any determination of what constitutes proprietary financial information must occur on a case-by-case basis. Seeking another Attorney General opinion would require the expense of both significant time and money, in direct contradiction to the APA’s Mission to “… act as a vigorous guardian of taxpayer dollars…”, to verify what is already known. However, if a stakeholder questions an investment manager contract, a legal remedy already exists: KRS 61.880 outlines a process by which any aggrieved party under the Open Record Act can appeal to the Attorney General or directly to the courts.
- In Finding 2 of the examination, the APA claims that, “KRS Does Not Post Contracts as Required by Senate Bill 2.” The APA severely overstated the number of contracts not reported on the KRS website. The Systems provided a spreadsheet to the APA with a list of managers, the fund or funds (Pension and Insurance) they participated in, and the number of contracts for each manager. Some managers have one contract that covers both the Pension and Insurance Funds, while some managers require a separate contract for each fund. The spreadsheet was misinterpreted and many of the contracts were duplicated in the count, causing an overstated number to be reported. Additionally, the number of investment managers is not static and changed over the period under review. The Auditor requested this information multiple times, during which time many external managers were hired, terminated, or funds were redeemed.
To clarify the misstated number of contracts, as of August 13, 2019, KRS had 197 contracts not on the website. Of those, 189 were signed prior to the passage of Senate Bill 2.
- In Finding 3 of the examination, the APA claims that, “KRS is Not Monitoring its Investment Managers Consistent with its Investment Policy.” According to the KRS internal policy, KRS staff is required to attend at least one meeting at the managers’ location each year. However, due to a severe reduction in investment department staff (from ten staff members in 2009 to four staff members today), the KRS Board has voted to suspend this requirement. Instead, in addition to internal efforts, KRS uses two alternatives until it can increase the number of staff. First, the KRS investment consultant Wilshire meets with and/or actively monitors the majority of KRS managers on its behalf. Second, for managers with whom there are long-standing relationships, KRS relies to some extent on routine conference calls and reporting to ensure due diligence.
The Investment Committee of the KRS Board will be reviewing its investment policy to update it appropriately with current practices.
- Finally, in Finding 7 of the examination, the APA claims that, “TRS Uses Fee Caps in Some Contracts; KRS Does Not.” The APA has misinterpreted the TRS language: TRS is not capping the fees, but is instead merely reserving the authority to delay fee payments from one quarter to the next. However, KRS is willing to consider the recommendation to utilize language similar to TRS’ “annual cap”, where appropriate.
KRS takes its fiduciary responsibility and transparency efforts very seriously, and strongly objects to any assertion to the contrary. In fact, in a December 2017 report issued by the American Legislative Exchange Council (ALEC), KRS was recognized as one of four public pension “Transparency Leaders” and was cited as an example “…for every pension system to emulate in order to improve transparency.”
The Systems fully intends to officially respond within the APA’s 60-day timeframe to correct, to the extent possible, the many errors contained in the examination, and to reassure our members and retirees that their benefits are well managed and the Systems is in full compliance with both the spirit, and the letter of, the law.