Kentucky Retirement Systems (KRS) and Teachers' Retirement System (TRS) have failed to comply with a law passed two years ago requiring increased transparency in Kentucky's public retirement systems. That's the conclusion reached in a special examination released recently by Kentucky Auditor Mike Harmon's office.
The examination evaluated KRS, TRS, and the Judicial Form Retirement
System (JFRS) which covers the judicial and legislative branches, and
the report identifies 10 issues relating to transparency,
administration, and compliance with Senate Bill 2, which passed
unanimously during the 2017 Regular Session of the General Assembly.
"With the tremendous amount of attention that has been given in
recent years to our public retirement systems, stakeholders and
taxpayers have a right to know how funds are being invested, and who
is investing them," said Auditor Harmon during the release of the
examination in Frankfort. "That is why Senate Bill 2 passed in a
bipartisan manner. Yet, KRS and TRS have failed to fully keep with
the spirit of SB 2, which requires the retirement systems to operate
in a more transparent manner."
Among the 10 findings contained in the examination, are issues
relating to the posting and redaction of information within
investment contracts with KRS and TRS:
• Both KRS and TRS have fallen drastically short of what Senate Bill
2 required on the public posting of investment contracts.
• Additionally, KRS provided inconsistent data that made it
impossible to calculate the exact percentage of unposted contracts.
• Based on data provided on August 13, 2019, KRS has failed to post
86 percent of 281 investment contracts.
"Because of the inconsistent data, it is very difficult to have
confidence in the information that KRS has pertaining to the number
of contracts, and their classifications. It is critical for KRS to
resolve these discrepancies and fulfill their legal obligation to
post contractual information in a manner that is transparent to the
public," Auditor Harmon said.
• At TRS, roughly 81 percent, or 136 contracts, of the total
investment contracts TRS had as of July 24, 2019, were not posted for
public review on the TRS website.
• KRS allows external investment managers to control access to
public information, which includes letting investment managers redact
information including conflicts of interest, expenses and fees,
incentive allocation, and management fees. KRS management admitted
they do not redact anything from the contracts, but instead allows
individual managers to redact anything they consider a "trade secret."
• KRS started a so-called "gating process" for all investment
contracts with the system from April 2017 going forward to meet SB 2
requirements. However, investment managers redacted fee terms, and
KRS has made no effort to ensure that information is disclosed to the
public.
• TRS has a process in place to handle redaction requests in writing
from managers/vendors, but TRS is also redacting other information
without requests.
• Both KRS and TRS failed to post side letters that contain
information relating to the agreement between KRS, TRS and their
vendors. Many of the items KRS and TRS deemed as potentially
proprietary are required to be disclosed under SB 2.
• KRS has $16.1 million in delinquent balances from state agencies,
the only one of Kentucky's three retirement systems to have
delinquencies. The Kentucky State Police (KSP) has the highest unpaid
balance to KRS at $6.1 million. The top unpaid invoice type to KRS is
for standard sick leave, which totals more than $9 million.
"Simply put, it is vital for the retirement systems to meet all
requirements of Senate Bill 2, not just some. Our employees, retirees
and taxpayers deserve nothing less," Auditor Harmon said. "I urge the
leadership and boards for all three of Kentucky's public pension
systems to take transparency seriously and follow the recommendations
made in our exam report.
The full examination is available for review on the auditor's website.
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