The Kentucky Chamber Board of Directors has voted to call on state auditor Adam Edelen to conduct a performance audit of the Kentucky Retirement System (KRS). While Kentucky has made progress in recent years in addressing the challenges facing its public employee retirement systems, serious problems persist that pose a significant threat to the state’s financial future.
The state’s pension debt, an estimated $13.9 billion in unfunded liabilities, has been cited as a key factor as national bond rating agencies have downgraded Kentucky in recent years. The lower rating means it costs more for the state to borrow money; that, in turn, can limit public building projects that create private sector jobs and grow the economy.
The KRS, which covers most state government employees, excluding teachers who are covered under the Kentucky Teachers’ Retirement System (KTRS), was reviewed by a task force in 2012. The task force concluded that several things contributed to the state’s system becoming one of the worst funded in the country. One of contributing factors was the system’s use of flawed actuarial assumptions.
Legislation in 2013 put important reforms in place, but concerns persist about KRS investment practices, including such things as fees paid to investment advisors and placement agents, questionable hedge fund investments, below average investment returns and an overall lack of transparency regarding investment fees.
To provide objective information about these and other matters, the Kentucky Chamber Board of Directors is calling on Edelen to conduct a performance audit that would include an examination of:
- How the investment performance of Kentucky’s system compares to that of other states as well as the Kentucky judicial and legislative retirement plans.
- The reasons for any below-average performance in investment returns, such as: general investment strategy, allocation of assets, costs incurred in the investment process and other factors.
- How the cost of Kentucky’s use of investment advisors, placement agencies and other investment personnel compares to that of other state systems.
- The policies in other state systems regarding the public disclosure of fees paid to investment advisors.
- The accuracy of the assumptions made by the Kentucky system’s actuary about current liabilities and the amount of the actuarially required contribution compared to actual experience.
- Policies regarding the use of actuaries and other outside experts, particularly with respect to the number of years the same expert can be used.