KRS Land Deal - Another Look

One encouraging sign that Governor Steve Beshear is finally living up to some of his promises on ethics in State Government is the reopening of this investigation of Kentucky Retirement Systems (KRS). I understand that auditors in the Finance Cabinet are looking into the bad land deal made by KRS.

As posted in “Texas Doubt Em” even other states have cried foul on the KRS land deal. Then there is the $2.9 million 30% jump in salaries reported in the 2006 financial.

There appears to be discrepancies between the 2006 & 2007 Comprehensive Annual Financial Reports (CAFR) which would directly contradict a form KRS filed with the Internal Revenue Service.

This begs for an investigation.

The recently released, November, 2007 CAFR appears to be trying to sweep under the carpet a number of issues from the 2006 land deal.

The 2007 report barely mentions the 2006 land deal except to say the $700,000 purchase was written down to $136,000 and that the “Management Overide of Internal Controls, was addressed adequately by management.”

The fiduciary insurance claim for the property loss was fully outlined in the 2006 CAFR, but no resolution of the claim is even mentioned in the 2007 CAFR. It is like it never existed. There should at least be a note saying why the claim was rejected in the 2007 CAFR.

The IRS issue from pg. 71 of the 2006 CAFR disappears as well:

“In addition, there was a commingling of funds between the Pension and Insurance Funds to financé the acquisition of the Alternative Investment. This is in violation of the Plan Document and the Internal Revenue Code.”

Again this serious IRS issue is not even worth a mention in the 2007 CAFR or audit.

The actual entity that made the bad land purchase is KRS Perimeter West Inc. KRS Perimeter West Inc. is not even a government entity but a non-profit safe from any state scrutiny. Like all non-profits it files a tax return called a 990.

On the 990, longtime KRS System board members Susan Horne & Bobby Henson are listed as board members of KRS Perimeter West, Inc. and KRS attorney William Thielen is listed as the contact and no one else.

This non-profit off balance sheet subsidiary of KRS in 2006 paid out $85,000 in Janitorial services, $50,000 in management fees, paid out repairs and maintenance $144,000 all to one firm, Summit Realty owned by Bill Crumbaugh. For the year ending 2006, the IRS-990 does not mention the receiving of a $700,000 loan from the KRS Health plan, and there is no mention of even purchasing the Church property for 2006.

This whole land deal is very confusing and contradictory.

From the November 6, 2006 Herald-Leader story and 2006 CAFR let’s take a look at the facts:

The property was for sale since 2000 and KRS had many opportunities to buy it over 5 years.

In December 2005 veterinarian Caroline G. Taylor buys the building from Holly Hill Church of Christ on 2 acres for $450,000.

Two months later in February 2006 the KRS Health Plan loans the non-profit KRS Perimeter West, Inc $700,000.

KRS Perimeter West hires the Summit Realty group to help them buy the property from the Veterinarian for $700,000 in February.

On May 1, 2006, KRS appraisal said it was worth $135,000 and books a loss entirely for the KRS Health Plan of $565,000.

So this means the KRS Health Plan government entity gave a gift of $565,000 to the non-profit a violation of IRS rules.

Let’s get back to the $2.9 million 30% jump in salaries. KRS management must have felt that this did not look good so they just restated them.

On the 2007 financial statements they just restated the 2006 salaries from $13.04 million down to $11.15 million. This is nearly $2 million and there is absolutely no explanation in the CAFR by management or in the actual audit by Carpenter & Mountjoy of why 2006 salaries were restated.

Some questions that need answers:

Why does the KRS real estate consultant who botched the Church deal continue to collect around $275,000 a year in fees from the non-profit?

Given KRS obsession with local real estate why was this never discussed with the board or by the Executive Director from 2000-2005?

Why was there no board approval from both the KRS system board and the board of KRS Perimeter West?

This property has been for sale next to the headquarters for 6 years, and these real estate fanatics did not notice?

Why didn't the appraiser or real estate agent say anything nor do anything about this transaction?

This contradictions between the 2006 and 2007 financial reports and the IRS filings is very disturbing and worthy of a state investigation.

Let's hope the Finance Cabinet will be able to pick up the ball where the State Auditor and Attorney General have dropped it.