12:02am

Thu June 30, 2011
Statehouse News

Lawmakers Respond to KRS Audit

Lawmakers are promising legislation addressing issues raised in a state audit of the Kentucky Retirement Systems.  The 118-page audit made 92 recommendations for strengthening Board of Trustees’ oversight and governance of the Kentucky Retirement Systems.  The board manages investments of nearly $13 billion for 300,000 active and retired state workers.  State Auditor Crit Luallen says the audit primarily focused on the use of placement agents, which she defined for House and Senate State Government Committee members.

“Typically, they would come to the retirement system and try to make a presentation, make a pitch, that you should invest with this particular fund,” said Luallen.  “Then their fees, the placement agent’s fees, are paid by the fund that is invested with, ultimately - not by the retirement system.”

Placement agents are at the center of pay-to-play scandals in California and New York, involving the alleged payment of kickbacks to insure investments with certain firms.  Luallen (above, center) says the audit found no evidence of such illegal activity in Kentucky. 

However, she says placement agent Glen Sergeon of New York had “an unusually close working relationship” with former KRS chief investment officer Adam Tosh, who resigned last year. 

In fact, she says Sergeon was involved in more KRS investments during Tosh’s tenure, than all other placement agents combined.

“Both those two individuals declined to be interviewed by our auditors and we could not access their personal financial records,” said Luallen.  “That’s why we referred the audit to the SEC.”

That would be the Securities and Exchange Commission, which is conducting an informal inquiry into placement agent activities at KRS.

Also appearing before lawmakers was Jennifer Elliott (above, right), who chairs the KRS Board of Trustees.  She says the board welcomes the audit findings and promises implementation of as many audit recommendations as possible.

“Neither myself, nor anyone on the board, or other members of the executive staff of the retirement system, have any criticisms of – in fact, we embrace the audit,” said Elliott.  “We think that the recommendations are very thoughtful.”

During the question and answer period, lawmakers zeroed in on the placement agent issue, with many agreeing with Rep. Mike Cherry, D-Princeton, that such agents should have to register as lobbyists in Kentucky. 

Cherry says that mandate will be in legislation he intends to offer next year, which mirrors a bill he tried to get through this year.

“It addressed code of ethics,” said Cherry.  “It addressed term limits.  It most importantly at the time, it seemed - certainly in the media standpoint – addressed the issue of placement agents.”

But the bill, which cleared both legislative chambers, died in the House after the Senate amended it to require all future public employees, besides teachers, to accept 401K-style retirement plans.  

Sen. Damon Thayer, R-Georgetown, still thinks the change is inevitable.

“If we continue to add new employees into a system where the state carries all the risk, and where each new employee added will increase the unfunded liability of the system if we don’t meet the investment returns,” said Thayer, “we’re going to continue to sit in these meetings and wonder, what could we have done?”

Auditor Luallen says the audit did not examine financial statements or investment performance, but it does include a detailed background on the system’s financial viability.  And it’s not a rosy picture. 

In fact, Luallen says Kentucky has one of the most troubled public employee pension funds in the nation.  And she urges lawmakers and future governors to honor commitments made three years ago, to continue increasing employer contributions over the next 15 years, to fully fund outstanding KRS obligations.