Ky. Chamber pension group calls for action on independent audit request in op-ed
The following is an op-ed from John Gohmann, chairman of the Kentucky Chamber Public Pension Task Force and regional president, Lexington Market, for PNC Bank.
How much longer must Kentuckians wait before we can find out whether the Kentucky Retirement Systems (KRS) is operating at the level it should – one that is producing the optimum results for state government and its retirees?
It has been months – nine months, in fact – since the Kentucky Chamber of Commerce board of directors called for a comprehensive performance audit of the KRS.
Why did we think this was needed? First, there has been no independent review of KRS operations to address troubling questions about the system’s performance, especially those regarding investment fees and performance, administrative costs, actuarial assumptions and overall management. Further, the legislative oversight committee created in 2013 to oversee the state retirement systems has relied primarily on information provided by the system itself and has not engaged independent experts to ensure the professional exercise of its responsibilities.
Those reasons alone demanded a call for action. But two recent events further underscore the urgent need for an audit.
In early September, Standard and Poor’s once again lowered Kentucky’s credit rating due to its underfunded pension systems. This credit downgrade increases the state’s cost to issue bonds, meaning taxpayers have to pay more to build roads, schools and other important public infrastructure projects.
Even more troubling is what happened within the past couple of weeks. Under pressure from the Kentucky Chamber and public employee groups to be more transparent about its operations, KRS released an independent consultant’s report that found the system’s annual investment expenses were more than twice as high than reported in 2014. While KRS reported paying investment fees of $62.4 million in 2014, the report by CEM Benchmarking found fees were actually $126.6 million, much of this increase coming from newly disclosed fees paid to private equity firms.
These investment costs were significantly higher than similarly sized public pension funds elsewhere in the nation and have certainly contributed to the pension shortfalls. A former KRS trustee has suggested these hidden fees may have totaled several hundred million dollars over the past five years.
This lack of transparency and accountability at KRS in recent years seriously undermines the integrity of the system and calls into question its management. A comprehensive, independent, external review of the operations of KRS that compares its results to systems in other states and makes recommendations for action is the only way taxpayers and policymakers can have confidence that the system is being managed properly.
The Kentucky Auditor of Public Accounts and his opponent this fall have both said they are willing to conduct a performance audit of KRS and legislators on both sides of the aisle have expressed verbal support. However, the independent pension and actuarial experts needed will require funding to conduct such a review. The Kentucky Chamber has appealed to the Public Pension Oversight Board and leaders of the General Assembly to provide the financial support needed for the audit from the legislative budget. But, there has been no action to date.
The news about a downgrade of Kentucky’s credit rating, a revelation about hidden fees and, as we learned earlier this year, an estimate that one of the KRS pension funds has a 56 percent chance of being forced to sell off all investments, has been discouraging for public employees and taxpayers alike.
Clearly there are other issues affecting the retirement systems that deserve our attention – not the least of which is proper funding of the retirement systems by the governor and legislature. Meanwhile, what other unpleasant surprises await taxpayers and public retirees concerning the performance of KRS?
Instead of sitting idly by as disappointing findings are reported drip by painful drip, the state must move ahead with an extensive performance audit. This will provide a comprehensive roadmap to put the management of the retirement system on the right track. This is critical, not only to ensure accountability for taxpayers and address a major financial challenge for the state, but also to honor the promises made to the 348,000 active and retired state and local employees who rely on KRS for security in their retirement.
The Kentucky Chamber of Commerce called on state Auditor Adam Edelen to conduct a performance audit of the Kentucky Retirement System to ensure the financial stability of the system in December.
Edelen has expressed interest in the audit but needs funding from the legislature, which he plans to ask for during the 2016 session of the General Assembly.
To make sure the audit is funded, business leaders and the public are encouraged to call 1-800-372-7181 and urge their legislators to approve the necessary resources to bring in an independent expert to bring transparency to the system.