Ky. Chamber of Commerce calls for performance audit of state pension system; no decision from Auditor Adam Edelen

12/11/2014 12:30 PM

UPDATED WITH VIDEO: Kentucky Chamber of Commerce President and CEO Dave Adkisson called for a sweeping performance review of the Kentucky Retirement Systems on Thursday, citing concerns with underperformance at the pension plan.

Adkisson, in a conference call with reporters, said he has spoken with Auditor Adam Edelen about conducting a performance audit of KRS as well as officials at the pension system that has amassed $17.8 billion in unfunded liabilities. He said he assumes an audit from Edelen’s office would draw outside expertise in examining KRS.

“The goal of the chamber speaking out is to ensure the financial stability of the system,” Adkisson said. “We all want this system to be strong, and we all agree that we need to honor the retirement promises this state has made to public employees.

“We are not attacking the system. We simply want to put the system under a magnifying glass and compare its practices to other states.”

Part of the chamber’s call for an audit incorporates recommendations by the Public Pension Oversight Board, but it also includes an evaluation of KRS’s investments and investment fees paid to external managers compared to other states as well as the accuracy of requested contribution rates to the system.

The chamber, Adkisson said, is “concerned” about the lack of transparency in KRS’s investment fees. KRS officials have said disclosing the amounts it pays to individual managers would increase investment costs, but lawmakers, such as Democratic Rep. Jim Wayne of Louisville, have called for the pension system to publicize its investment fee agreements.

“I think by calling on Auditor Edelen to do a performance audit, we would want to find out what other states are doing and the rationale, the specific rationale by which certain fees would be disclosed, either by asset class or by individual agents,” Adkisson said. “We have not concluded that one way is the absolute right way, but we don’t have a whole lot of information.”

Adkisson said he and Edelen agree that the pension system is a sizable financial issue for state government, though he declined to speculate on the likelihood that Edelen’s office conducts a performance audit. With pension debt negatively affecting the state’s bond rating, Adkisson said that may affect the state’s ability to attract new businesses.

“The fact that we’ve been downgraded three times will affect the universities’ ability to build dormitories or the ability of a city to build a wastewater treatment plant, so while I can’t cite a particular industry that has said, ‘No we’re not looking at Kentucky,’ they wouldn’t have to look very far at all to find state and local projects that are already having to pay more money because of our bond rating,” he said.

Edelen, in a statement, said he shares Adkisson’s concerns with KRS, but he’s made no determination on pursuing a performance audit.

“At least three major review of the public pension system have been conducted in recent years, including one by this office,” Edelen said.

“For this proposed exam to add value and bring about real fixes to the system, it will require broad, bipartisan support and additional resources for our office to conduct the highly technical work. We have begun discussing the matter with stakeholders.”

The chamber has also reached out to current gubernatorial candidates about auditing KRS, Adkisson said.

The chamber has reached out “informally” to other groups about joining its call for a KRS audit, similar to their push to reform Kentucky’s pension system in 2013, Adkisson said.

“The business community was united behind trying to address these issues,” he said.

But KRS Executive Director Bill Thielen said such an extensive and costly audit is unwarranted because the pension has gone through “enormous scrutiny” in recent years, such as an audit by Crit Luallen in 2011, a two-year investigation by the U.S. Securities and Exchange Commission and regularly reporting to the newly formed Public Pension Oversight Board.

“It seems to me that all the concerns expressed by the chamber, if they have read all these reports and looked at everything, wouldn’t be as significant as maybe they’re trying to make them,” Thielen said in a phone interview. “But, again, we’re pretty much an open book with everything that’s not member confidential.”

What’s more, Thielen said he’s preparing a request for proposals to review recent assumptions by the pension system’s actuary, Cavanaugh MacDonald Consulting, by an independent auditing firm that should be issued sometime in January. He’s also planning an external evaluation of KRS’s investment program, and the agency has an asset allocation study set to begin in late December or early January, he said.

“Notwithstanding all of the other external audits and examinations that have been done on us, we typically do these things periodically for the benefit of our board so that decisions can be made about everything to compensation for our staff to investment allocations,” Thielen said.

Gov. Steve Beshear, speaking to reporters in Louisville on Thursday, said he would support a special audit of KRS if such a review is deemed necessary, but the pension oversight panel should be given time to study practices at the agency.

“We just created an oversight board just this last year for our retirement systems, and they’re getting their feet on the ground,” he said. “They are looking at the processes that go on over there. I think we ought to give that oversight board a chance to work.”

Beshear, who’s entering his final year as governor, said a number of people have expressed concerns with KRS’s private investment fees, but publicizing that information could limit the types of investments available to the pension system.

“Obviously from the system’s standpoint some of these hedge funds, mainly, that are investing some of that money, and apparently are doing very well in terms of the returns to the system, have a policy that they don’t disclose their fees,” Beshear said.

“So, you know, I think we’re going to have to look at that and make some kind of decision that we either will disclose everything and therefore we won’t be dealing with those funds, some of which are making us some money right now, or they’ll keep that same policy, so I think we’ll keep looking at that.”


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