Auditor Says Kentucky Pensions Not Compliant with Transparency Laws

KRS says the report is ‘highly flawed’ and ‘unfairly slammed’ its efforts.

Kentucky’s auditor of public accounts released a report that accuses the Kentucky Retirement Systems (KRS) and Teachers’ Retirement System (TRS) of failing to comply with a law passed two years ago that requires increased transparency in the state’s public retirement systems. KRS responded by calling the findings “highly flawed.” 

The auditor’s examination evaluated KRS, TRS, and the Judicial Form Retirement System (JFRS), and identified 10 issues relating to transparency, administration, and compliance with Kentucky’s Senate Bill 2, which passed unanimously during the 2017 regular session of the state’s 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 Kentucky Auditor Mike Harmon at a press conference during the release of the examination. “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.”

Harmon said that among the 10 findings contained in the examination were issues relating to the posting and redaction of information within investment contracts with KRS and TRS. He said both systems have “fallen drastically short of what Senate Bill 2 required on the public posting of investment contracts.” He also said KRS provided inconsistent data that made it impossible to calculate the exact percentage of unposted contracts. Additionally, he said KRS has failed to post 86% 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,” said Harmon in his report. “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.”

However, KRS has taken exception to the report, saying in a statement that it “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.”

David Eager, executive director of KRS, told CIO that he was “very upset” by Harmon’s report. “We have worked so hard to establish credit and transparency and he just very unfairly slammed us.”

In the report, Harmon said KRS allows “external investment managers to control access to public information,” including allowing investment managers to redact information including “conflicts of interest, expenses and fees, incentive allocation, and management fees.” He said KRS management acknowledges they do not redact anything from the contracts, but instead allow individual managers to redact anything they consider a trade secret.

However, Eager said the state’s attorney general has previously issued an opinion that the managers, not KRS, must determine which information to redact in order to protect from divulging proprietary information to competitors.

“It’s their [the manager’s] discretion, not ours,” said Eager. He said KRS cannot be the one to decide what to redact, otherwise it risks being slapped with lawsuits for improper disclosures, which he said could cost the state millions of dollars.

“The auditor said we should do the redacting, but the AG says we don’t have to, and our legal counsel said it puts us in a liability position if we are the arbiter of redactions,” said Eager. “If we decide something doesn’t need to be redacted and then it causes a situation for a manager and they get sued, then we get sued.”

He also said the Public Pension Oversight Board (PPOB), of which Harmon is a member, the state general assembly’s Government Contract Review Committee, and the Auditor of Public Accounts all have full access to the unredacted version of every contract.

“We have three state agencies that have full access to the contracts,” said Eager. “It’s not like we lock them up some place. It’s not like nobody can see them.”

Eager also took exception to the report’s complaint that the KRS has failed to post the vast majority of its contracts on its website. He said the request to have every contract that it had prior to the passing of Senate Bill 2 on its website simply isn’t feasible.

He said KRS has been compliant with traditional investor contracts, but added that KRS had well over 100 private equity contracts in place when the bill was passed. Eager added it would be impossible to get the required permission from managers, general partners, and all of the limited partners to allow them to post what would otherwise be confidential.

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