State auditor says retirement systems not in compliance with Kentucky law

State auditor says retirement systems not in compliance with Kentucky law
Kentucky State Auditor Mike Harmon announced Aug. 27 that the Kentucky Retirement System and teachers Retirement System are not in compliance with a 2017 state law. (Source: Michael Flynn, WAVE 3 News)

LOUISVILLE, Ky. (WAVE) - Results from the auditor’s office finds the Kentucky Retirement System (KRS) and Teachers’ Retirement System (TRS) have failed to comply with a bill that was passed two years ago.

During a news conference, State Auditor Mike Harmon said the report identified ten violations relating to transparency, administration and compliance with Senate Bill 2 (SB 2), a bill that was unanimously passed by the General Assembly during the 2017 Regular Session.

“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. “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.”

Among the 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 fell drastically short of what SB 2 required on the public posting of investment contracts.
  • 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 failed to post 86% of 281 investment contracts.
  • 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 allowed external investment managers to control access to public information, which included 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 allow individual managers to redact anything they consider a “trade secret.”
  • KRS started a “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 made no effort to ensure that information is disclosed to the public.
  • TRS had a process in place to handle redaction requests in writing from managers/vendors, but TRS is also redacted other information without requests.
  • Both KRS and TRS failed to post side letters that contained 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 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.

This story will be updated.

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