The Agenda Doesn't Merit the Cost - Even for Two

After a morning of web research and some mild social engineering, the Hyatt staff is much more helpful than the Kentucky Retirement Systems staff, it looks like only Trustees Randy Overstreet and W. Lewis Reynolds are soaking up the sun in Florida.

If I could have just got a straight answer from the Retirement Systems, it would have saved a great deal of time and a number of phone calls to Florida, but it was still quicker than filing an open records request.

So I guess I owe an apology to those members of the KRS board members and staff who were unable to make the trip this year. I’m sure they will have other opportunities for travel in the future.

I’ll be spending the next few days drafting an open records request for some information like who has attended these things for the last 10 years. There is an art to doing such a request, you need to be careful to just ask for what you want, you have to be careful or you get flooded with a mountain of worthless redacted paper.

Anyway, I hope Overstreet and Reynolds are having fun. Who couldn’t use a little spa time.




Oh, and by the way, one board member wrote me to say they were working and not in Florida, I won't comment on the difference in working and being in Florida, but in their words they: “.....never felt the agenda merited the expense of me traveling to Florida.”

I couldn’t agree more.

Stonewalling at KRS, what are they hiding?

I just got a call from Jennifer Jones, a member the Kentucky Retirement Systems Legal Staff, regarding my request for a list of who was attending the conference in Florida.

Ms. Jones did the standard Open Records request shuffle, “Send it to us in writing” and we’ll get back to you.

Here is their policy on confidentiality from their web site:

Section 3: Standards of Conduct Regarding Confidentiality

1. Individuals associated with KRS may be granted access to confidential information in the course of an employment, Board or contractual relationship with KRS.

2. This information may include, but is not limited to, individual member information, including but not limited to, Social Security numbers, names, addresses, phone numbers, birth dates, beneficiaries, health insurance information, Personal Identification Numbers (PIN), as well as documents, records, programs, files, scientific or technical information, or other information made available to individuals for purposes of completing their obligations to KRS.

I told Ms. Jones that I was somewhat mystified why the list of names of Trustees attending a conference needed an open records request. The answer was basically we have to have a written open records request of everything.

I told Ms. Jones I was blogging about KRS and the conference, she said, “I’ll tell Mike.” I assume that is Executive Director Mike Burnside. But she didn’t say whether she would have to walk down the hall to tell him or call him in Florida.

Oh, and in reading the policy I guess this does fall under the “but not limited to” category:

KRS Trustees in Florida

Here is an update on the Kentucky Retirement Systems Trustees that are partying in Florida.

This morning I called the KRS, I identified myself as Ralph Long a retired state employee, and asked a simple question:

“Can you tell me which Trustees and Staff members are attending the Klausner and Kaufman conference in Florida today?”

A very nice lady named Tracey Mulder, a member of the Executive Support Staff, took my question, told me that she thought just the Trustees went to the conference. I pressed her for the names of who was at the conference; she put me on hold and came back a couple of minutes later. Tracey said I would need to file an open records request for that information.

I asked if I could speak to the person that told her that I would have to file an open records request. Tracey replied that they were in a meeting and she would take my number and call me back.

Through the conversation Tracey seemed a bit uncomfortable with being asked where the Trustee’s were at and what they were doing.

This is an example of transparency in State Government, when a taxpayer, retired state employee, member of the Kentucky Retirement Systems can’t get a straight answer about what the people that control the investments of the system are doing.

Of course maybe places like the Taverna Opa need to be kept confidential:

Time to Party In the Sun

Why I have a picture of belly dancers is at the top of this post will become clear as you read.

Let me start by saying I don’t want you to have any doubt where I’m coming from on this.

I am royally pissed off and this is personal. I’m a state retiree and I’ve written a lot about the Kentucky Retirement Systems. But two items in the Herald Leader recently caught my eye.

First we have the story on how the legislature has backed off requiring the local governments and school boards to meet their obligations.

“Despite a warning that "a day of reckoning is coming," the Senate gave final passage to a bill Thursday that would give local governments more time to make payments into the state's ailing pension system.

House Bill 117 now goes to Gov. Steve Beshear, who is expected to sign it into law.

The Senate voted 29-8 on the measure though Sen. Tom Buford, R-Nicholasville, noted that a Legislative Research Commission analysis showed it would save local governments money in the short term but not in the long term.

The analysis said the bill would save local governments and schools about $40 million next year and $60 million in 2011. But it would cost them $120 million more over the next 20 years to compensate for investment earnings lost, Buford said.”

Then we have the story about how Greg Stumbo and David Williams feel it is necessary to screw future state employees rather than the government meet its’ obligations.

“With only two working days left in the 2009 General Assembly, it's too late to take up the issue in this session. But Senate President David Williams and House Speaker Greg Stumbo said the General Assembly is likely to consider the matter over the next year.

Their comments came during their weekly Friday news conference in the Capitol.

Williams, R-Burkesville, said the Beshear administration and the legislature need "to come to grips with the fact that we have a pension plan that we cannot allow people to continue to enter with the level of benefits that they have now."

"It is out of touch with what is happening with the private sector. It is a pension plan that cannot be sustained as far as new employees."

Asked if he will push for reductions in benefits for new state hires, Williams said, "For new employees, we need to have a different pension plan."

Williams criticized KASE leader Jackson's opposition to a review of the state pension plan.

"Doesn't he understand the economic times we're living in?" asked Williams.

Stumbo, D-Prestonsburg, said the legislature will have to review the pension plan for new hires because of the troubled economy.

He said "the solution that we thought was corrected" in a special legislative session last year is likely to be revisited.

"We need to think about long-term strategies," Stumbo said. "It's going to take a rethinking of the funding mechanism."

Now the legislature has already screwed the existing retirees. If you think setting a flat 1.5% cost of living adjustment is the same as pegging the adjustment to the Consumer Price Index then you can’t do math and probably qualify as a member of the General Assembly.

But these three things are not enough to truly piss me off. What is currently going on in Florida has sent me over the top. I told you we would get back to the belly dancers.

I understand the working majority of the Kentucky Retirement Systems and Executive Director and probably new General Counsel of the Kentucky Retirement Systems are going to a conference in Florida. That would be Chairman of the Board Randy Overstreet, Board Members Susan Horne, Bobby Henson, Patricia Ballenger, and Lew Reynolds, along with Executive Director Mike Burnside and General Counsel Schuyler Olt.

The conference is staged by Robert Klausner.

Here is info on the 2009 conference but you really want to watch the video of the 2008 conference (click the Client Conference link above the agenda), be sure to watch the whole thing, the best part starts at about three minutes into the video, (remember the belly dancers).

I’ve talked about Klausner before and his involvement in some questionable dealings with pension funds.

You have to kind of admire a guy that can triple dip from a pot of money.

First Klausner makes hundreds of thousands of dollars from the KRS, he then makes money off of referral fees on class action (see Forbes) and finally, (and this is the best) he makes more money by charging hundreds of thousands to money managers (the talking heads in the video) to speak at the conference, where else are the speakers going to get access to a potential investors with billions of dollars to invest, like our own KRS Trustees.

So here are some things that Greg Stumbo, David Williams, Jonathan Miller, Steve Beshear, and all of the media should be looking at.

Why are four or five Trustees and perhaps staff, many with spouses and girlfriends, spending 3 and 4 days at the Hyatt on the state dime?

Here are some thoughts.

Most of the content of conferences happens in one or two days and the most efficient way is to fly up in the morning stay one night and fly back the next evening. (Not 3 or 4 days)

Conference content should be shared so at the maximum 1 trustee and 1 staff should attend to maximize benefit.

5 Trustees discussing pension issues together is an open meetings issue.

1 Trustee will have only 2 weeks left on the board after attending the conference which provides little or no value to the system. (Parting Gift) Patty Ballenger

A trustee brought up at the August 2008 board meeting that the New York Times had written negatively about this specific conference over conflict of interest issues and that Forbes had written negatively about Klausner. This same trustee brought up in the February 2009 meeting that the host of the conference was accused of bad legal advice by one of the indicted trustees in San Diego.

And finally this one is for the folks at the Herald Leader;

I really wish you would spend some of the energy you spent on the Lexington Airport Scandal looking at these guys. Call their offices, call their homes, call their cell phones, (you can’t tell me the Governor doesn’t have the cell numbers) just pay attention and follow the money.

And one final picture from Taverna Opa for the ambiance of the conference.

More Light Please

OK, time for a little light on the cockroaches again.

I’m not going to recite the litany of screw ups that is the Kentucky Retirement Systems (KRS), you can read them if you want in the old posts of this blog.

But now there is an opportunity that a little light may come to the investment committee of the KRS. House Bill 380 has passed out of the House by a vote of 95 to 0 and is now in the Senate. The bill will essentially add a couple of people with investment knowledge to the investment committee. What a concept.

This is a good thing.

More people, more eyes, maybe someone will actually take a look at what is going on.

However, I wonder if this bill will make it out of the Senate.

You see, I understand that Sen. David Williams was involved in getting Louisville political hack Schuyler Olt a $120,000 a year job at KRS.

Since on the last things the management of KRS wants is someone who actually understands investments looking at the investments, I wonder if the payback will be the killing HB 380.

Let’s hope Williams is too busy bashing Jim Bunning to care.

Weasel Words and Retirement

The General Assembly has passed the retirement bill. The bill was loaded with weasel words that allow the legislature to back out of any commitment.

Sen. Tom Buford, R-Nicholasville, was the lone lawmaker to oppose the bill. He warned that the legislation is a mediocre first step that doesn't do enough to keep the retirement system from draining the state government's coffers in the future.

”If our goal is to achieve mediocrity in the pension plan, we have succeeded,“ Buford said.

The net result of the bill was to screw the workers and retirees a little bit while the Legislature doesn’t bite the bullet and do the right thing.

There are three approaches to this problem.

One the approach the legislature took. Reduce benefits to workers and retirees, but not enough that they actually scream. Promise to do better in the future and claim victory.

”Regardless of the speeches about this being an important first step, this is the ball game,“ he (Jody Richards) said. ”This puts us on a sound foundation for several years.“

Richards, once again, exhibits an inability to do math. If a worker is hired this year, after this bill goes into effect, and given the changes just made, the system will still not be on sound financial footing when the worker retires.

A second approach would be the David William's totally shaft the worker proposal.

One of the more controversial proposals not addressed by the legislation is a plan (Senate President David) Williams has backed that would create a so-called defined contribution option, similar to 401(k) plans that let workers manage their own retirement investment accounts.

Here is the bottom line on 401(k) investments from the Kentucky Deferred Compensation Authority, the existing state 401(k) agency.

Investing may involve market risk including the potential loss of principal.

In other words, with Williams plan you have a chance of reaching retirement age and not have a retirement fund.

The third approach would be for the General Assembly to pass comprehensive tax reform and generate enough revenue to meet the obligations to state employees.

But the odds of the General Assembly summoning up the collective backbone to do such a thing is doubtful. These folks couldn’t pass a cigarette tax increase when it was not only the right thing to do but was supported by most of the voters.

Julian Carroll on The Retirement Bill

The following is a copy of an email sent to me by a friend in Frankfort. My friend received the email from former Governor and Senator Julian Carroll.

Carroll has always been on top of money issues in Frankfort and his analysis of the retirement bill is pretty dead on.

Dear Friend,

I recently reported to you the negotiated House and Senate Leadership Pension Bill, together with charts showing the details of the agreed plan. Governor Beshear had previously charged the Leadership with negotiating such an agreed plan as a condition for calling the Legislature into a Special five-day Session in order to enact into law the proposed plan.

Just as a matter of explanation to some who are not familiar with the process, House Bill 1, the pension bill, was introduced Monday, June 23 on the first day of the Special Session and immediately referred to a House Committee for action. The Committee considered the Bill and reported it back to the House for a first reading.

The Bill received its second reading today and House Bill 1 will be considered for a vote on Wednesday, June 25, on that same day, the bill will be received in the Senate, referred to a Senate Committee, and reported out of Committee to have its first reading as required by the Constitution. The Senate will give the Bill its second reading on Thursday, and call the Bill for final passage on Friday. The Bill will then be enrolled and sent to the Governor, and the Session will adjourn Friday.

The Bill contains an Emergency Clause, which provides for it to become effective on enrollment and signing by the Governor. House Bill 1 will become law upon the signature of the Governor, presumably on Friday June 27, 2008.

I have received numerous questions about the pension bill. I hope that the bullets below will help clarify any questions that you may have.

For existing employees, beginning July 1, current and future KERS, CERS and SPRS retirees will receive a set 1.5 percent Cost Of Living Adjustment (COLA).

For current employees, hazardous KERS, CERS and SPRS retirees, who return to work on or after September 1, 2008 in SPRS in a hazardous duty position in KERS or CERS, will be required to observe a one-month break in employment.

All other KERS, CERS and SPRS retirees who return to work on or after September 1, 2008 in KERS, CERS or SPRS, will be required to observe a three-month break in employment.

Provided the break is observed, the employee can return to work, draw his pension, but will not contribute to the systems or earn a second pension. However in order to further fund the system, the employer will be required to pay contributions to the systems and the health insurance premium of the retiree not to exceed the cost of a single premium.

The Bill will presumably become law on Friday, June 27, 2008 , so the provisions for new hire's after September 1, 2008 as previously reported, will be in affect.

The argument, which has been made for increasing the break in reemployment to three-months is the savings that will be realized both for balancing the new budget starting July 1 and funding the unfunded balance for the retirement system.

I hope this information, along with what I have previously sent, will answer most of your questions.

Please feel free to contact me if I can be of assistance to you.

Julian M. Carroll
State Senator

Reduction in Retirement Benefits

I’m not going to take on the entire retirement reform bill at one time. If I did your eyes would glaze over, I know mine do, before we got half way through the legalese.


So let’s just start with the changes to the Cost of Living Adjustment for existing retirees.

The bill quits using the Consumer Price Index to compute the Cost of Living Adjustment and sets the annual raise to 1.5 % per year.

The Legislature has the ability to do away with COLA’s for existing retirees anytime they want “The General Assembly reserves the right to suspend or reduce the benefits conferred in this subsection if in its judgment the welfare of the Commonwealth so demands.”

Here is the zinger"

The Consumer Price Index has never dropped to 1.5% during the last 20 years. Below are the percentages for the last 20 years. The General Assembly will happily screw the state employees by annually reducing their purchasing power.

Below is the CPI for the last 20 years.

1987 3.60%
1988 4.10%
1989 4.80%
1990 5.40%
1991 4.20%
1992 3.00%
1993 3.00%
1994 2.60%
1995 2.80%
1996 3.00%
1997 2.30%
1998 1.60%
1999 2.20%
2000 3.40%

2001 2.80%
2002 1.60%
2003 2.30%
2004 2.70%
2005 3.40%

2006 3.20%
2007 2.80%

Idiots or Liars?

Retirement investments suck; at least that’s the opinion of the Legislative Research Commission (LRC).

Seven months after this blog broke the story that Kentucky Retirement Systems (KRS) and the Kentucky Teachers Retirement Systems (KTRS) combined over the last 3 years underperformed by $2 billion, the LRC came out with a report saying they underperformed by $2.9 billion. Slightly different time periods but the result is the same.

The excuses by the Executive Directors of both systems prove that they are either blatant liars or totally incompetent.

From Mark Hebert’s Blog:

The CEO's of both pension systems told lawmakers that they've been hamstrung by cash flow problems and a past ban on foreign investments.

From the Associated Press story:

Gary Harbin, executive secretary of the Kentucky Teacher's Retirement System, said the system has been limited by regulations that prevented international investments. That has since changed, and the retirement system is performing better, Harbin said.

There have never been any regulations preventing KRS or KTRS from investing internationally. This was confirmed in the 1998 review by Kentucky State Auditor that recommended both KRS and KTRS invest internationally.

This hallucination of a regulation was totally self-inflicted by their own incompetence.

From page 21 of “AN EXAMINATION OF INVESTMENTS AND INVESTMENT PRACTICES OF THE KENTUCKY RETIREMENT SYSTEMS AND THE KENTUCKY TEACHERS’ RETIREMENT SYSTEM”:

KRS and KTRS should further diversify their investment portfolios by including international holdings.

Cash flow issues have no influence whatsoever on pension investment return. This is unheard of as an excuse in other states,

So it’s your choice, are the Executive Directors of the Pension Funds idiots or liars?

Kentucky Retirement - Another Reason to Clean House

I’ve not been posting lately because we have been traveling in Ireland. I hear you crying for me now, maybe you should given what the policies of the Bush administration has done to the exchange rate. But this is not a rant about international economic policy.

This one is a little closer to home.

From the minutes of the Kentucky Retirement Systems Board:

Mr. Overstreet presented the memorandum “Amendments to the Statement of Bylaws and Committee Organization and Election of Officers.”

Mr. Overstreet stated that over the last year the Board has been faced with circumstances of different reporters contacting trustees. Mr. Overstreet stated that it has been a communicated policy to the Board for a number of years to refer media inquiries to the Executive Director so that questions from the media are answered with one voice. The Bylaws as amended provide that the Board, or individual members of the Board, shall refer all news media inquiries to the Executive Director and to not discuss matters that affect the Systems or the Board generally with the news media. The role of the Executive Director is also redefined. Mr. Overstreet opined that those matters are better addressed by the Executive Director who has the information and knowledge to answer those questions.

Mr. Crall advised that it somewhat implies that the Executive Director is the one to respond on behalf of KRS to entities because the Bylaws do not specifically allow for the board members to do that. Mr. Crall advised that there are times when he is asked to do that and would use appropriate discretion in doing so. Mr. Crall stated that there are also times when he would need to respond to questions as the Governor’s representative.

It was moved by Mr. Lang, seconded by Ms. Ballenger, and carried by the Board to adopt the amended Statement of Bylaws and Committee Organization as presented.

In my absence the mainstream media have picked up on this act by the KRS board. The Governor is talking special session to deal with current mess and has appointed a working group to figure out what to do.

Given the composition of the work group, no state employees or retirees, I have a feeling which group is going to end up on the short end of any recommendations.

The proposed changes are pretty cosmetic and don’t deal with the real problems of chronic underfunding by the legislature and the ballooning cost of medical care.

Proposed changes:

Raising retirement ages for future hires;
Lowering the cost of living adjustment to 1.5 percent;
Requiring new employees to contribute 1 percent of their salary to the health insurance fund;
Reforming the practice of double-dipping, in which government retirees return to government jobs while still collecting a state pension.

But I digress; let’s get back to the KRS board and the smelly sock that is stuffed in their collective mouth. The KRS Board is the governing body of the Kentucky Retirement Systems. These people are not doing their job. If Steve Beshear needed a reason to clean house this is it.

Whatever happened to transparency in Government? Does the Executive Director think his board is too stupid to talk to the media? Is it possible that if more than one of them answered a question the answers would be different?

The only reason for an action like this is to keep the story straight. If only one person is stonewalling or telling a lie then it’s easier to keep the story straight.

If the Governor really wants to instill ethics in state government then cleaning out this sad excuse for a Governing Board at the Kentucky Retirement Systems would be a great way to start. I would like to see people appointed who cared more about doing the job they were supposed to do than the next tax payer paid junket they were taking.

Winding Down

Some thoughts on the current legislative session as it winds down.

I don’t know if Governor Steve Beshear was thinking of the good old days when the Governor told the legislature what to do and they did it, or if he was trying to be too much of a nice guy and believing that they would all work together for the benefit of the Commonwealth when he was trying to get his agenda through the legislature.

Maybe a little of both, but this administration has been pretty inept at getting anything done during this legislative session.

Beshear has been consumed with pushing gambling down the throats of the citizens of this state. Let’s be honest there has been no great out cry for “Give Us Casinos” from the citizens of this state. The whole issue is being driven by a small number of horse farmers and casino owners trying to make a buck.

Any meaningful legislation like House Bill 70 to restore voting rights to felons that have served their time has taken a back seat to gambling. Beshear says he supports this legislation, I believe he does, but both restoring voting rights and legalizing gambling require a constitutional amendment.

Steve Beshear is not about to confuse the voters with two amendments on the same ballot, and casinos take precedence.

But the lack of meaningful legislation can’t be laid solely at the feet of Steve Beshear.

I have to think the Democratic House Leadership just doesn’t like Steve Beshear. They appear to have made a concerted effort to screw the Governor. Jody Richards and the House Democratic Caucus have one primary goal, to stay in office.

Why else do they stone wall on tax reform?

Why else do they refuse to raise the tobacco tax to at least the average nationwide?

Why else have they short changed the state retirement systems to fund pork barrel projects?

These guys are good at political infighting and handing out tax money, but when it comes to responsible leadership, they are sadly lacking.

Decreasing Pension Benefits

A few more thoughts on the bill decreasing pension benefits for new employees.

First up, I think the bill should be called “decreasing pension benefits for new employees and existing retirees” bill. After all if the legislature makes a decision that retirees don’t need to keep up with the cost of living then isn’t that reduction of benefits?

Second, why is this piece of legislation a separate bill and not an amendment to the bill decreasing pension benefits for new employees? Why would Greg Stumbo make this a standalone bill? Stumbo, a master of legislative process, must have a reason.

AN ACT relating to retirement. Amend KRS 61.510 and 78.510 to extend the high-three final compensation window set to expire January 1, 2009, for the remaining term of office of an elected official who is eligible to retire and receive the benefit as of January 1, 2009; amend KRS 61.595 to extend the 2.2 percent benefit factor window set to expire January 31, 2009, for the remaining term of office of an elected official who is eligible to retire and receive the benefit as of January 1, 2009.

And third, speaking of amendments to the bill decreasing pension benefits for new employees, Jim Wayne comes through again. The Public Pension Advisory Commission must be as insulated as possible from the money interests current making obscene profits from the retirement systems.

HFA (8, J. Wayne) - Require all members of the Kentucky Public Pension Financing Advisory Commission to comply with the Executive Branch Code of Ethics established in KRS Chapter 11A; prohibit any member from having any direct or indirect interest in commission findings or recommendations that puts the member's personal interest in conflict with his duties on the commission; require any investment advisor contracted by the commission to abide by the CFA Institute Code of Ethics and Standards of Professional Conduct; prohibit any investment advisor from serving simultaneously as an investment advisor to the commission and one of the state-administered retirement systems; amend KRS 11A.010 of the Executive Branch Ethics Code to include the members of the Kentucky Public Pension Financing Commission in the definition of "officer," thereby applying the code guidelines and financial disclosure requirements to the commission members.

Walking the Walk

One part of the Steve Beshear’s retirement bill opens a whole set of political questions.

Create a new section of KRS Chapter 42 to establish the Kentucky Public Pension Financing Advisory Commission in the Finance and Administration Cabinet to review investments and financing of the state-administered retirement systems and to provide a report to the General Assembly

The complete text of the section is below:

SECTION 6. A NEW SECTION OF KRS CHAPTER 42 IS CREATED TO READ AS FOLLOWS:

(1) There is hereby established the Kentucky Public Pension Financing Advisory Commission, which shall be composed of the following fifteen (15) members:

(a) The secretary of the Finance and Administration Cabinet;

(b) The secretary of the Personnel Cabinet;

(c) The State Treasurer;

(d) The state budget director;

(e) The state controller;

(f) The Auditor of Public Accounts;

(g) The executive director of the Kentucky Retirement Systems:

(h) The executive secretary of the Kentucky Teachers' Retirement System; and

(i) Seven (7) individuals appointed by the Governor. Of these seven (7) individuals appointed by the Governor, one (1) appointee shall hold the designation of chartered financial analyst (CFA), one (1) appointee shall hold the designation of certified public accountant (CPA), three (3) appointees shall have extensive professional investment experience or pension plan experience, one (1) appointee shall be a member of the Kentucky Teachers' Retirement System or an organization established to represent the interests of employees and retirees participating in the Kentucky Teachers' Retirement System, and one (1) appointee shall be a member of the systems administered by the Kentucky Retirement Systems or an organization established to represent the interests of employees and retirees participating in the systems administered by the Kentucky Retirement Systems.

(2) The secretary of the Finance and Administration Cabinet shall serve as chair of the Kentucky Public Pension Financing Advisory Commission. The State Treasurer shall serve as vice chair of the commission and shall serve as chair in the absence of the secretary of the Finance and Administration Cabinet.

(3) A majority of the entire membership of the Kentucky Public Pension Financing Advisory Commission shall constitute a quorum, and all actions of the commission shall be by vote of a majority of the quorum.

(4) Professional, clerical, and other staffing needs shall be provided by the Office of Financial Management in the Finance and Administration Cabinet.

(5) The Kentucky Public Pension Financing Advisory Commission shall be charged with:

(a) Conducting a comprehensive operational and governance review of the past investments of the state-administered retirement systems. This review shall be completed no later than December 1, 2009;

(b) Examining and recommending appropriate investment benchmarks and investment portfolio strategies, based on investment returns and asset allocations of comparable public pension systems;

(c) Preparing an analysis for the 2010 Regular Session of the General Assembly as to the financial impact of the pension modernization reforms enacted under this Act;

(d) Providing recommendations to the 2010 Regular Session of the General Assembly for a long-term funding strategy for pension and health care benefits, with the goal of ensuring full funding of the actuarially required contributions to the state-administered retirement systems by 2020; and

(e) Providing and filing a report summarizing the findings and recommendations of the commission as provided by paragraphs (a) to (d) of this subsection to the Governor, the Legislative Research Commission, and the boards of the state-administered retirement systems.

(6) Notwithstanding any provision of KRS Chapter 6, 16, 61, 78, or 161 to the contrary, each state-administered retirement system shall furnish any and all investment or investment-related information or data and any actuarial analysis or projections requested by the commission, at no cost to the commission.

(7) The Kentucky Public Pension Financing Advisory Commission shall be dissolved at the conclusion of the 2010 Regular Session of the General Assembly, unless the General Assembly acts to extend the duration of the commission.

(8) In order to carry out this section, the commission may contract for the services of a nationally recognized independent investment advisor with extensive experience advising public pension plans who is capable of reviewing investment benchmarks, investment portfolio strategies, investment returns, and asset allocations of the state-administered retirement systems.

(9) For purposes of this section, "state-administered retirement system" includes:

(a) The Kentucky Employees Retirement System, the County Employees Retirement System, and the State Police Retirement System administered by the Kentucky Retirement Systems and established under KRS 16.505 to 16.652, 61.510 to 61.705, and 78.510 to 78.852;

(b) The Kentucky Teachers' Retirement System established under KRS 161.220 to 161.716;

(c) The Judicial Retirement Plan established under KRS 21.345 to 21.580; and

(d) The Legislators' Retirement Plan established under KRS 6.500 to 6.577.


Now I don’t expect to see brilliance coming from the head honchos at Kentucky Retirement Systems or Kentucky Teachers Retirement Systems.

If things follow course in Frankfort most of the elected and appoint officials will never show up, they will send an assistant to sit in their chair. We've already seen that the State Auditor has been content to sit and ignore this problem so we shouldn’t really expect a lot from most of the Commission members.

But the real question mark here is what will Jonathan Miller do as Secretary of Finance and Administration with this Commission?

Gubernatorial candidate Jonathan Miller had some very definite ideas on what should be done about pension systems in Kentucky.

A year ago Miller had these things to say:

"Irv Maze and I will stand up for our teachers, police, firefighters and civil servants with real reforms. In the Miller-Maze Administration, we will fight for full disclosure of all investment commissions and of all legal fees affecting the pensions systems."

"Just as we will shine light on all aspects of state government so that Kentuckians know they are getting what they pay for, our public employees and their families need to know that their pension systems are managed well. And that includes providing leadership through the Governor's office to manage our overall budget well so that we don't have to divert resources to shore up our retirement systems at the peril of safe streets and a strong education system."

Other reforms Miller proposed for the public pension systems included:

-Posting the names of the chairs of all systems committees on the Web

-Posting times of all full board meetings on the Web at least one month prior to the meetings

-Posting times of all committee meetings on the Web sites at least one month prior to the meetings

-Posting on the Web all minutes of the full boards, as well as committees, within one week of the meetings

-Including State Treasurer and Secretary of State on both the KRS and KTRS boards

-Including the Secretary of Finance on the boards as a voting member and as a member of investment and audit committees

-Making the Personnel Secretary a voting member of the boards and chair of the personnel committees -Opening voting rules for employee representatives and including term limits

-Banning exclusions of board members from any committees

-Full disclosure of investment commissions paid by name of firm and firm's location

-Full disclosure of all legal fees including proceeds from class action suits and attorney of record on class action suits.

“I also call on the Governor to follow the advice of the advocacy groups to provide a real, independent review of the state's pension funds, and to take the tough, immediate action that is necessary. I also call on our legislative leaders, including those running for statewide office this year, to tackle the pension problems in this year's session, instead of pushing them off to future generations."

So if this bill becomes law in its’ current form we will get to see if Miller can walk the walk as the Secretary of Finance or if his statements were just talking the talk by a candidate.

Tinker's Dam

"Tinker's-dam - a wall of dough raised around a place which a plumber desires to flood with a coat of solder. The material can be but once used; being consequently thrown away as worthless."

In today’s Herald-Leader Larry Dale Keeling points a major flaw in Steve Beshear’s proposed pension reform plan.

What's missing, though, is money.

Don't take that as a criticism of Beshear's opposition to giving the plans a one-time infusion of cash by issuing pension bonds. In the current economy, the risk of bonding may well exceed the reward.

The missing money in question is the difference between the state contribution to the systems proposed in Beshear's budget and the actuarially recommended amount that would keep the unfunded liability from increasing during the next biennium.

Although the rising cost of health care is the major force that has driven this crisis of unfunded liability, governors and lawmakers have exacerbated the problem by underfunding the systems to the tune of $1.5 billion in recent years.

This governor and the current group of legislators are preparing to do it again.

Once again our so called leaders in Frankfort demonstrate their ability to see as far as the next election. This like other issues could be dealt with if the Governor and General Assembly had the vision and intestinal fortitude to actually address the nineteenth century tax laws the Commonwealth currently operates under.

Like Ernie Fletcher’s tinkering with tax reform, Steve Beshear is tinkering with pension reform.

Retirement Reform Light?

A few thoughts on the Herald-Leader story about Steve Beshear’s plan for state retirement systems. I’ll have more after we actually see the bill.

From the Herald-Leader:

FRANKFORT -- The state would save several hundreds of millions of dollars a year for its financially strapped retirement systems under a plan Gov. Steve Beshear and lawmakers are to unveil Thursday.

The plan primarily would affect future hires. It would raise the years of service before state workers could retire but not for teachers, place restrictions on "double dipping" in which state workers retire and then return to a job in government and eventually draw two pensions, and create a special panel to review any proposed changes in the pension systems.

House budget chairman Harry Moberly Jr., D-Richmond, said the primary area in which the plan deals with current employees is the cost-of-living adjustment on the pension system for state workers.

Their annual cost-of-living adjustment for current and future retirees would be 1.5 percent. Any adjustment higher than that would have to be approved and pre-funded by the state legislature. The COLA now is tied to the rate of inflation. In recent years, retirees have been getting about a 3 percent increase each year.

The COLA change "is going to be necessary," Moberly said in an interview Wednesday. "Overall, I think the governor has put forth a reasonable plan."

Some thoughts on what was in the story:

Double Dipping

This will not include any current employees. If it did Beshear would have to send home half of the people he has appointed to jobs in state government.

Teachers

These sacred cows can’t be touched by Beshear. After all the Jefferson County Teachers Association is one of the water carriers for legalizing Casinos.

Future Employees

The new employees will bear the brunt of the funding burden; it’s easier to screw the guys with no voice in the process.

Retiree’s COLA

Tough luck if your pension doesn’t keep up with inflation. You should be used to it, the same thing happened to your raises when you were working for state government.

What wasn’t in the story was the mention of health care. Why this 800 pound gorilla sitting in the corner of the room was ignored is puzzling. At first blush this looks like band-aid fixes at best.

God forbid that Beshear, Moberly and the rest of the so called leaders of both parties in Frankfort have the guts to actually propose changing the tax laws to a fair system that would meet the obligations of state government.

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.

Cockroaches and Bright Lights

I've been asked who I want to head the Kentucky Retirement Systems (KRS)?

I’m not campaigning for any individual.

I want an Executive Director that would bring transparency, integrity and professional competence to the job. There are only a handful of people in Kentucky with the credentials. Most did not apply because of the bad reputation of KRS. One was talked into applying but did not even make a first interview, because they had been critical of KRS in the past and were eliminated because the board feared they may uncover some of the problems and make them look bad.

KRS reputation nationally and with a lot of folks in Kentucky, is that all hiring decisions are based on cutting political deals and nothing to do with qualifications.

Asking a KRS board to bring in a reformer as Executive Director has about as much chance of succeeding as the General Assembly enacting ethics legislation that would control the behavior of the General Assembly.

The Board of Kentucky Retirement Systems needs to be cleaned up before you will ever get an effective Executive Director.

The two people that can clean up the retirement systems are Gov. Steve Beshear appointing knowledgeable people to the board, who will ask hard questions and Auditor Crit Luallen with an in-depth professional audit of KRS.

There is nothing like shining a bright light in the corner to make cockroaches run.

Shallow Pool

Looking at the new Executive Director of the Kentucky Retirement Systems (KRS) a few more thoughts come to mind.

From the Frankfort State Journal:

Mike Burnside, the new executive director of the Kentucky Retirement Systems, plans to hit the ground running when he starts work on Jan. 3.

"I think there's going to be a steep learning curve," he told The State Journal.

Well I’ll give him this at least he's honest about being totally unqualified.

However, honesty seems to be absent in the KRS Board Chairman’s statement.

Randy Overstreet, chairman of the KRS board of trustees, said Burnside has the right experience to lead KRS. "His knowledge of the legislative process and established relationships with the legislature will be invaluable," Overstreet said. However, Burnside is an unknown quantity with local lawmakers. Rep. Derrick Graham, D-Frankfort; Rep. Carl Rollins, D-Midway; and Sen. Julian Carroll, D-Frankfort, all said they were unable to comment on the decision to hire him. None of them could ever recall meeting or talking to Burnside.

Since the decision to hire Burnside was unanimous, (over 3 other apparently more qualified candidates), this feels like a done deal. Mark Hebert asks the valid a valid question on his blog.

It's probably a fair question to ask Burnside if his votes, or lack of votes, had anything to do with his pursuit of the Kentucky Retirement System's top job, which is expected to pay more than $200,000.

All signs point to Bill Hanes not giving up power. The relatively low $157,000 compared to Hanes $235,000, puts Burnside in the same basic salary range as Chief Operating Officer Thielan, Chief Investment Officer Tosh, Chief Benefits Officer (and close personal friend) Geri Miller, and legal counsel Eric Wampler. All four of these owe their positions and allegiance to Hanes.

Hanes will most likely officially work for Robert Klausner or some other vendor for a six figure salary and KRS will pay significantly more to that vendor in fees. With Burnside one of five top officers, it will give the appearance of new leadership, while Hanes still calls the shots behind the scenes.

KRS justified paying Hudepohl this way from their press release.

Hudepohl recommended a well-qualified pool of four candidates from the national market and we are fortunate to have hired such an experienced ‘Kentuckian’ to lead the KRS organization,” Overstreet said. Overstreet said the Board is very pleased with Hudepohl’s management of the search. “The search for a new executive director was extensive and far-reaching, receiving applications from 17 states.”

If everyone else was less qualified than Burnside then the talent level in this pool was pretty shallow.

Bombs Away

I hope this is wrong but a reliable source has informed me that the new Executive Director of the Kentucky Retirement Systems will be Mike Burnside.

His bio at the time of his appointment as Secretary of the Finance Cabinet by Ernie Fletcher is below.

Mike Burnside

Mike Burnside was appointed Secretary of the Finance and Administration Cabinet by Governor Ernie Fletcher on August 1, 2007. He had previously served as Deputy Secretary of the Cabinet since December 16, 2006.

A native of Lancaster, Kentucky, Mike is a 1974 graduate of the United States Air Force Academy where he majored in general sciences and holds a master’s degree in management from Troy State University in Montgomery, Alabama. He is a veteran of 20 years of active duty in the U.S. Air Force, spending the majority of his career as a pilot and instructor in fighter, bomber and training aircraft. He is also a graduate of numerous professional military schools including Air War College; Air Command and Staff College; Army Command and General Staff College; and Armed Forces Staff College. He retired from active duty in 1994 after reaching the rank of Colonel.

Mike joined state government in June 1996 as the Executive Director of Administrative Services within the former Revenue Cabinet. He has also served as the Executive Director of the Customer Resource Center and Executive Director of Material and Procurement Services within the Finance and Administration Cabinet. Most recently he served as Undersecretary of Fiscal and Administrative Affairs for the Cabinet for Health and Family Services.

Mike and his wife, Patti, live in Georgetown and have two sons, Steve and Scott (Jamie) and one granddaughter.

Burnside was chosen after an extensive search by recruitment consultant Hudepohl & Associates.

The company received approximately 70 resumes, although not all applicants were qualified.

Here is the advertisement Hudepohl used for a new Executive Director


Kentucky

EXECUTIVE DIRECTOR
Kentucky Retirement Systems

The Kentucky Retirement Systems (KRS), a $16 billion state administered retirement system, located in Frankfort, KY, is seeking an Executive Director (Director) to replace the currently retiring Director.

The Director reports to the Board of Trustees, is responsible for the strategic planning and leadership of the agency with an annual operating budget of $24 million and a team of over 240 associates. Working through five direct reports, the Director oversees all functional areas of the system. While the Director is responsible for management and oversight of KRS, the Chief Investment Officer and Internal Auditor report to the Investment and Audit Committees of the Board, respectively.

The key Director objectives are:

• Enhancing and establishing relationships with key policy makers with oversight of public pension funds
• Facilitating and leading solutions to the under funded liability facing Kentucky retirement systems

Continued improvement of investment returns

Oversight and leadership of the Strategic Technology Advancement for the Retirement of Tomorrow (START) project, a new state of the art pension administration solution

Identifying opportunities (e.g., wellness programs) to manage/contain health care costs

Minimum qualifications include a Bachelor's degree (Master's preferred), ten years of progressive relevant experience in a large complex organization and broad based knowledge of the pension fund industry. The Board is seeking candidates that have "generalist" pension fund experience - member services, investments, benefits administration, legislative affairs, health care, information technology, and human resources. Strong experience in legislative affairs is desired. The Director must be non-partisan, transparent, and an advocate in the best interest of the System. Compensation is designed to attract the best-qualified applicants from the national market, and includes a base salary commensurate with experience and qualifications. Additionally, KRS offers excellent benefits including flexible work schedules, health and life insurance, ample vacation and sick leave, holiday pay, retirement and optional deferred compensation plan. Relocation assistance will be provided.
For further information or to apply, please contact Gary Hudepohl, ghudepohl@hudepohl.com or Bonnie Scafaro, bscafaro@hudepohl.com 614 - 854-7300 / 614 - 854-7301 (fax)

Col. Burnside may be a bomber pilot but as Secretary of Finance his knowledge of pensions and investments was a total dud. Did anyone look at his resume and the qualifications for the position at the same time?

And as far as duds go, the best person Hudepohl can find in a nationwide search for a $230,000 year job is an out of work retired military bureaucrat?

What a waste of money. If Hudepohl has any professional integrity they will give the money they got for this sham back to the state.

Update 12-20-2007,5:00 pm - A second source confirmed Burnside arrive at KRS today.

Crall Creep

At the end of the Fletcher administration here’s what I see and hear about the Kentucky Retirement Systems.

Brian Crall has filled the pension vacuum in this Fletcher lame duck period. Finance Secretary John Ferris and Budget Director Cowgill abandoned Fletchers Blue Ribbon Pension commission and Crall took over. Crall by his position as Personnel Secretary also has served nearly three years on the board of Kentucky Retirement Systems (KRS).

Just like his buddy Cowgill did at Council on Postsecondary Education, and John Draud at the Education Cabinet, Crall appears to be trying to burrow his way into the ($230,000 – plus annual salary) job as Executive Director at KRS before the administration ends.

A deal might be on the table that will block any negative information on investment returns (see prior posting Retirement Investments Suck). A white washed Blue Ribbon Commission’s final report could be exchanged for an Executive Director position. It would be in Crall’s personal interest, if named Executive Director, to help cover up all of the prior shenanigans as pointed out on this blog.

A Nov. 16th article in the State-Journal on the KRS board meeting gives a hint to their strategy to install Crall. After sitting vacant for over 8 months, just last week soon to be former Governor Ernie Fletcher appointed a Lou Reynolds of Oldham County to the KRS board to give another vote to put in Crall.

In the article the KRS staff seems to be trying to intimidate the board.

“General Counsel Eric Wampler reported that six trustees of the San Diego pension fund are facing criminal charges after being accused of misconduct.”

This suggests to the board that they have the ultimate fiduciary duty for any misdeeds of the staff. For its’ own personal interests the Board would want an executive director who will try to cover up. Who better than a fellow board member Brian Crall as an Executive Director who shares their interests in not letting embarrassing information out?

We have heard rumors the Finance Cabinet in an attempt to document the investment shortfalls has spent over $40,000 to hire nationally known public investment consultant, Callan. We have also heard rumors that both KRS and Kentucky Teachers Retirement System have both refused to give Callan information in the hope that Crall can kill the entire investigation.

According to the State-Journal the KRS board spent nearly $60,000 to hire a headhunter (Hudepohl) who has collected over 70 resumes in a National Search. It looks like Crall’s resume despite having no pension or investment experience will somehow rise to the top of the pile.


However, there are rumors that several principled members of the Blue Ribbon Pension Commission will publicly resign and go public to the press. Maybe finally our local media and Auditor of Public Accounts will give this issue the attention it deserves.

Two other notes on KRS:

I hear Bill Hanes, current KRS Executive Director, has flown to Pennsylvania to interview for the retirement job there. Hanes believes that he will be getting that job. One has to wonder if there is any coincidence that Adam Tosh is from there and had ties to the Pennsylvania state government.

I also understand that Bill Hanes was very upset that I published his salary.

Mr. Hanes, the salary of public employees should be public; most are public, except when you work for the Kentucky Retirement Systems.

Remedial Math for Legislators

We need to require remedial math for all members of the Kentucky General Assembly.

From the Herald-Leader:

Speaker Jody Richards said yesterday that he will create a "work group" to study allowing casinos in Kentucky -- a signal that lawmakers are bracing for an extensive debate on the issue in 2008.

So here’s my dilemma.

From a fiscal statement prepared for the 2002 General Assembly. The legalizing of Gambling in Kentucky would produce Net General Fund Revenues of $194.1 million.

From a report prepared by Gabriel Roeder Smith & Company to the Governor’s Blue Ribbon Commission dealing with fully funding the actuarially required contributions:

“To move (and keep) all plans at a 7.75% discount rate (fully funded), the KRS (Kentucky Retirement System) increase would be $315 million and the KTRS (Kentucky Teachers Retirement System) increase would be $213 million, for a total of $528 million.”

Ok, I know that an estimate from 2002 on gambling income and a 2007 estimate on retirement contributions suffer some variation due to time lag. But, I don’t think that gambling is going to suddenly produce another $330 million.

While the legislature spends time in an extensive debate on gambling they will be doing their best to ignore the major problem facing the budget in the upcoming session.

And let’s not forget that after the extensive debate, a change to the Kentucky Constitution can only be done with the support of three-fifths of both legislative chambers and approval of a majority of Kentucky voters.

Let me put this as simply as possible for the math challenged in the legislature.

A $528 million existing shortfall is more important than a possible $194 increase in revenue.

The Piggy Bank is Almost Empty

Since the main stream media finds this topic a little difficult let’s again talk about the Kentucky Retirement Systems.

In my last post on retirement systems I talked about the less than average performance of investments. The investments by the retirement systems are the key to maintaining financially sound retirement funds.

But the less than mediocre investment strategy has been compounded by past governors and legislatures underfunding the systems.

So let’s talk about the Kentucky Retirement Systems.

Unless there are major changes made the retirement fund for Non-Hazardous employees (most state employees) will be exhausted sometime between 2019 and 2021. The insurance fund for these former employees will be bust in 2013 or 2014.

So how much money would it take for Legislature to catch up to what it should have contributed?

KRS needs $315 million additional dollars per year to be fully funded. Now I don’t pretend to understand how actuaries do what they do. But I do understand that past legislatures and governors have robbed Peter to pay Paul and the bill is coming due. The longer they wait to do something the worse it gets.

The state doesn’t have a spare $315 million every year. If we did the bozo’s in the legislature would be building parks and naming them after themselves.

So why should the average tax payer care if those feeders at the government trough get screwed when they retire?

Simple, there is a contractual obligation by the Commonwealth of Kentucky to pay the retirees.

If the retirement fund doesn’t do it then the money comes from the General Fund. That means taxes go up. Now the legislature passing a tax hike to pay retired state workers is about as likely as the proverbial snow ball in hell.

Investments are the key, the state is not going to fund its’ way or tax its’ way out of this problem.

So the question now for our new governor is whether he trusts the clowns that got us in this mess or does he make some meaningful changes to the way the retirement systems function and manage their investments?

Retirement Systems Investments Suck

Kentucky Retirement Systems (KRS) and Kentucky Teachers Retirement System (KTRS) have a performance shortfall over $550 million in Fiscal Year 2007. That translates to a $2,000,000,000.00 (that’s billion with a capital “B”) over 3 years.

As a reader of this blog you may not be surprised by a large investment shortfall from the Kentucky Retirements Systems of $285 million in FY 2007, but you may be surprised that the Kentucky Teachers performance shortfall in FY 2007 of $280 million was almost as bad.

Over the 3 year period Kentucky Teachers hit $1.4 billion in investment shortfall and KRS had “only” a $565 million loss. These numbers are calculated from a report presented to the Governor’s Blue Ribbon Pension Commission yesterday.

While KTRS may not be as ethically challenged as KRS they seem to be caught in an 80’s time warp as far as their investment strategy. They are so conservative; they’re scared of their own shadow.

KTRS has not changed consultants in over 17 years and their consultant Becker Burke is seen as out of date and has few large institutional clients.

KRS sticks with low performing managers for years as well. For 15 years they have stuck with Weaver Barksdale which has been fired by every major client except Pennsylvania, where KRS CIO (Tosh) used to work. What a coincidence.

Retirement systems nationwide that have out performed KRS and KTRS have larger allocations to alternative assets. KTRS is so chicken they have not even tried. KRS meager attempts to invest in alternatives have ended in disaster.

In April 2006 they forced out CIO John Krimmel and COO Gordon Mullis on an ill fated mistake with an alternative asset. Worse they hired as their Chief Investment Officer Adam Tosh who while at MDL was involved in the worst alternative investment disaster in history with an Ohio public plan.

This horrible performance has not hampered salaries at KRS. Bill Hanes had his board give him a raise to $239,000 a year since he could not double-dip on his pension.

One final point:

During the entire meeting, on multiple occasions, different members of the Governor’s Commission went to great lengths to make the statement that they “Didn’t want to assign blame for past mistakes.”

Maybe someone should be held accountable.

Texas Doubt-Em

Remember my doubts on the mysterious disappearance of Chief Investment Officer John Krimmel in April of last year.

Now Texas Public Pension officials appear to be doubting the truth in Kentucky’s official financial statements regarding the resignation of Krimmel.

This latest revelation was spurred on by The national Trade publication Pensions & Investments (P&I) published “Kentucky fund audit cites flaws” in June 2007.

Kentucky Retirement Systems was criticized in a state audit report for inadequate internal controls. The audit, released by Crit Luallen, Kentucky’s auditor of public accounts, said the $16 billion fund needs to take steps to prevent executive officers from overreaching their authority…., “During the fiscal year ended June 30, 2006, two officers of Kentucky Retirement Systems’ executive management, the CIO (John Krimmel) and Chief Operations Officer (Gordon Mullis), circumvented internal control policies and procedures related to an alternative investment made by the (systems’) insurance fund,” the audit said. The two officers had failed to perform adequate due diligence and exceeded their investment authority, and had commingled pension and insurance assets in violation of … the Internal Revenue Code,” the audit said. Messrs. Krimmel and Mullis both resigned last year. (pg.143 of audit)

This story in P&I resulted in a nasty letter from KRS Ex. Director Bill Hanes published in P&I in July.

The articles state, “Kentucky Retirement Systems, Frankfort, was criticized in a state audit report for inadequate internal controls.” This statement is completely false and inaccurate. ……….. It was the conclusion of both (auditors) that the internal controls were adequate; however, the internal controls were overridden by two former members of executive management. I agree that the state auditor’s report was critical of John Krimmel (former chief investment officer), and Gordon Mullis, former chief operations officer, but not with Kentucky Retirement Systems as a whole. As noted in Statement on Standards for Attestation Engagements AT501.14, as published by the American Institute of Certified Public Accountants, “controls can be circumvented by the collusion of two or more people or management override of internal control.”

Hanes clearly shifted the blame 100% back to Krimmel & Mullis, and that they colluded together to commit this act.

Meanwhile back in Texas, John Krimmel is acting as the leading advisor on alternative investments to the State Pension plans.

Robert Elder one of the leading public pension writers noticed the P&I story and started asking questions in his August 5th article.

Reissman (Texas Chief Investment Officer) said Callan Associates told her of the allegations in June 2006, around the time it hired Krimmel. Callan executives "felt they were baseless, and we've been asking them to keep us posted on what happens there," she said. Reissman said she has confidence in Krimmel because she has known him for 10 years. Another point in his favor, she said, is that he is serving a two-year term on the advisory group for the federally created Public Company Accounting Oversight Board.

The story was picked up by the AP and got 17 major media hits in Texas 4 largest newspapers 13 TV stations

Krimmel was on the hot seat early this week at the Texas ERS meeting, and he reluctantly gave the Texas Retirement board his story at their open meeting and basically blamed Mullis.

Krimmel, who had not spoken publicly about the allegations, told the board he had a very limited role in the Kentucky systems’ purchase of land. He said the systems’ former chief operating officer did most of the work on the land deal. Krimmel said his role was essentially limited to overseeing a loan his part of the Kentucky pension operation made to a related-party real estate affiliate so it could buy the land.………

The Kentucky auditor of public accounts later found that Krimmel and Mullis “circumvented internal controls” to buy the land. Krimmel said it was not his job to do any due diligence on the purchase, only to make sure the related party could repay a loan to the pension. He acknowledged his staff improperly commingled funds to finance the deal, but said that error was quickly corrected at no loss to the pension fund.

If Krimmel was framed as many people think, why would he not want to defend his reputation by standing up and publicly saying what he has said privately that he was framed by KRS?

One theory on why he has clammed up is a bit disturbing, remember KRS spends millions on lawyers, one being Ice Miller of Indianapolis.

Ice Miller is known to have prepared a severance agreement for the Chief Investment Officer of the Indiana State Plan, in which she received $212,000 with the caveat that she not be allowed to talk publicly or to the press about any of the corruption or ethical problems with the plan.

Is it possible that Ice Miller did the same with Krimmel in Kentucky?

Courier-Journal and the KRS Pension Commission

A couple of weeks I posted about the unraveling of Ernie Fletchers Blue Ribbon Pension Commission, the Courier-Journal has made this the lead story in their Kentucky-Metro Section.

Recommendations by a blue-ribbon commission studying the state's pension crisis may be delayed because of controversy over an attorney being paid $550 an hour to help find solutions, officials say……

Chairman John Farris has resigned as finance and administration secretary, and commission member Brad Cowgill is leaving as state budget director to become interim president of the Council on Postsecondary Education.

The hurdles have some members questioning whether the commission can be successful.

I do think the C-J did kind of miss the point with the lead. The Kentucky Retirement System routinely spends $522,000 a year on legal fees.

Is Fletcher’s Blue Ribbon Pension Committee Unraveling?

Incompetence and heavy turnover in the Cabinet Secretary ranks may doom the Pension Committee before it even barely gets started.

A major force and chair John Ferris quit as Finance Secretary last week leaving a gaping hole and a leadership vacuum. The Vice Chair Brian Crall, Secretary of the Personnel Cabinet has shown his ineffectiveness on the KRS board.

The other driving force Brad Cowgill is rumored to be leaving as state Budget Director to fill the hole over in education. Ferris and Cowgill’s absence effectively kills the committee. They have already started canceling meetings.

The Fletcher administration’s has a record of incompetence with pensions at Kentucky Retirement Systems (KRS). They have been so inept they cannot even get their own people appointed to the KRS board. There are still 2 Patton appointees they have not bothered to replace.

The botched hiring job at Education has made the headlines. But the botched KRS Chief Investment Officer (CIO) hire and current Executive Director search are just as important or more. In many states like Texas where the CIO can make as much as $700,000 a year these are the highest paid jobs.

Fletcher’s 2 personnel secretaries Erwin Roberts and Crall have presided over a number of botched personnel decisions. Roberts presided over the CIO and Chief Operating Officer (COO) resignations due to the land buying scandal and never uttered a word.

Crall with a single Google search could have found out that hired CIO Adam Tosh last place of employment was under investigation for mismanaging a hedge fund for Ohio.

“Mimi Forbes, an MDL spokeswoman, confirmed Mr. Tosh resigned in December 2005. Ms. Forbes said he left because of family reasons and not because of a lawsuit filed in June 2005 against MDL by the Ohio attorney general's office on behalf of the $14 billion Ohio Bureau of Workers Compensation.”

Tosh’s old boss Mark Lay was indicted on a number of federal and state charges, and it would not be a surprise if Tosh was indicted as well since he was the director of risk management for MDL.

KRS has decided to hire a headhunter to fill the Executive Director position since they have such a bad national reputation that despite national ads.

They had only 2 inside applicants - Bob Leggett the former KRS CIO from 4 years ago who is just took a job in Louisiana and current COO - Bill Thielen.

Two Birds, One Stone

From the Herald-Leader:

“Overhaul in the works for state retirees
LEGISLATORS SAY THEY HAVE A PLAN FOR HIGH COSTS OF PENSION SYSTEMS”

This bill has two purposes:

First, reduce benefits to new employees. In reality the only thing they can do with the legislation is just deny retirement and retiree health benefits to new employees. All this does is lower compensation for new state hires. You either have to raise base salary or you get a lower quality employee, there is no magic to this.

Second the Republicans know that Jody Richards and the Executive Director Hanes of the Kentucky Retirement Systems have been married at the hip for 20 years. Hanes doesn't want any changes to the system. Hanes wife works for Democratic Caucus. And the Democratic Caucus raises money from money managers contracted by KRS which the Ethics Commission says they do not have to disclose).

This forces Jody to either make changes that will anger state workers and retiree's or look like a road block to solving the problem.

Basically we are probably talking changing the system from a defined benefit plan to a defined contribution plan.

Great legislation, screw the employees and a candidate for Governor at the same time.

You have to love David Williams, never let doing the right thing stand in the way of politics.

Too Little, Too Late

In contrast to Wayne’s legislation mentioned in the previous post, we have the sad attempt to buy the loyalty of teachers, state employees, retired teachers and state workers.

Do the retirement systems need the $50 million? Hell yes. But the hypocritical thing here is that these two guys have been complicit in the under funding of both systems for years. They have used the retirement systems like an ATM machine to fund pork barrel projects and maintain their own power.

HB 419 (BR 1388) - H. Moberly Jr, J. Richards AN ACT relating to the funding of public employee retirement systems, making an appropriation therefor, and declaring an emergency.

Amend 2006 Kentucky Acts Chapter 252, the state/executive branch budget bill, to appropriate an additional $25,000,000 for the Teachers' Retirement System Medical Insurance Fund; create the Retirement Contribution Supplement Pool in the Personnel Cabinet; appropriate $25,000,000 for this pool to implement new employer retirement contribution rates for the Kentucky Employees Retirement Systems and the State Police Retirement System from April 1, 2007, through June 30, 2007; require any general fund moneys directed to be appropriated by Part VII, General Fund Surplus Expenditure Plan, to the Kentucky Retirement Systems to be appropriated to the Kentucky Systems Insurance Fund; delete the Kentucky Retirement Systems and the Kentucky Teachers' Retirement System's medical insurance fund from the General Fund Surplus Expenditure plan; declare an emergency

If they really cared about this problem they would have done something about it years ago. This is like putting a band-aid on a severed artery.

A First Step at Fixing KRS

I have been posting for a while now about the lack of legislative oversight regarding the Kentucky Retirement Systems.

Jim Wayne, in my opinion one of the bright lights of the legislature, has taken the first step in fixing the problem. His proposed legislation would provide a means of ending the on going self appointing nature of the board.

HB 535 (BR 1769) - J. Wayne
AN ACT relating to retirement. Amend KRS 61.645 to require the Kentucky Retirement Systems Board of Trustees to nominate all constitutionally eligible members of KERS, CERS, or SPRS who request to be nominated for placement on the trustee election ballot of their respective retirement system.

It looks like Wayne took part of one of Jonathan Miller’s ideas on how to clean up the KRS. Now if someone will just amend the bill to include the others, we will have a good start on cleaning up the system.

Reforms for the public pension systems will include:

• Posting the names of the chairs of all systems committees on the Web
• Posting times of all full board meetings on the Web at least one month prior to the meetings
• Posting times of all committee meetings on the Web sites at least one month prior to the meetings
• Posting on the Web all minutes of the full boards, as well as committees, within one week of the meetings
• Including State Treasurer and Secretary of State on both the KRS and KTRS boards
• Including the Secretary of Finance on the boards as a voting member and as a member of investment and audit committees
• Making the Personnel Secretary a voting member of the boards and chair of the personnel committees
• Opening voting rules for employee representatives (emphasis added) and including term limits
• Banning exclusions of board members from any committees
• Full disclosure of investment commissions paid by name of firm and firm's location
• Full disclosure of all legal fees including proceeds from class action suits and attorney of record on class action suits

WTVQ Picks Up the Tosh Story

Let me give a note of thanks to Heather MacWilliams, at WTVQ-36, for following up on my post about Adam Tosh.

WTVQ got the following response from Bill Hanes about the Tosh hiring.

("Any reason you guys left out on the press release that you sent out to the media, you left out the whole part about MDL?)

"We don't believe it's relevant," says KRS Executive Director William Hanes. “His relevance to us is his experience and knowledge that he gained by working for a public pension system quite frankly. He worked for treasury and that was somewhat related but his work at MDL was just a carry on for what he did for the public systems and quite frankly we're more interested in what his work experience was with the public retirement system," Hanes continued.

Hanes says to his knowledge Tosh had no involvement with the hedge fund in question.
"We've had ample discussion with Adam in the process. Board members were concerned about that issue and we explored it and found that he was not involved... I don't believe he was involved. He's an excellent candidate and we're happy to have him as our Chief Investment Officer," says Hanes.

Hanes says Tosh was hired from a pool of 39 candidates and did a complete background check on him prior to his employment."

"The search committee recommends to me the individual that's most qualified and quite frankly I think we've got a very qualified person."

Neither Tosh nor MDL returned messages seeking comment.

Looks like Hanes is doing the usual smoke and mirrors act with this hire. Hanes' answer that he doesn't have any direct knowledge of Tosh's involvement and that he really doesn't think that Tosh working for a company that lost public money in hedge fund applies to Tosh's current job is completely consistant with the way KRS is being run.

I can't wait for Heather to get Jody Richards' comments about his involvement in the Tosh hiring.

A Better Breed of Politician

I would like to thing that the Commonwealth Kentucky has a better breed of politician than other governments.

For instance, there are the politicians involved with the San Diego pension system, that is under funded by $2 billion dollars, or the Baltimore City Retirement System that is heading the wrong way. Then there is Illinois Teachers Plan sinking almost a billion bucks in the hedge funds.

Of course let us not forget the Ohio public pension and workers' compensation funds public pension and workers' compensation funds investing $215 million in a Bermuda hedge fund.

For a general guide to what’s wrong with pension funds take a look at Speech by Edward Siedle at Florida Atlantic University, School of Accounting, “Issues in IT and Compliance”.

But let’s take a look at the Kentucky Retirement Systems (KRS) and the legislature.

First, KRS with $16 billion in assets generates nearly $50 million a year in fees paid to money managers, brokers, lawyers & consultants.

Second, the House Democratic Caucus only reports donations from Registered Lobbyists. The Democratic Caucus is a PAC whose sole purpose is to insure the re-election of member of the Kentucky House of Representatives.

Third, in 1993 KRS procured an ethics opinion which gave them a legal license to for money managers and attorneys to give to the House Democratic Caucus.

…..you wish to know whether persons and companies who hold personal service contracts with the Kentucky Retirement Systems to advise the Systems' Board of Trustees are considered executive agency lobbyists. These individuals or companies may be hearing officers, investment advisors, actuaries, outside legal counsel, real estate managers, medical examiners, and others. Secondly, you ask whether entities who contact the Retirement Systems in order to be considered for providing investment or other services are considered executive agency lobbyists. ……..

The Commission believes that individuals and companies who hold personal service contracts with the state and are advising the Retirement Systems under the terms of their contract are not engaged in executive agency lobbying activity and thus, are not executive agency lobbyists.

Now I guess we could assume that the $50 million in fees goes to companies that never give to the House Democratic Caucus, but we really don’t know. It is equally possible that there is a major funding source for the House Democratic Caucus from lobbyists that is totally and legally hidden from view.

We've already established that the Legislature has abdicated oversight of the Kentucky Retirement Systems, so maybe it really doesn't matter how much money these non-lobbyists give to the Democratic Caucus.

But the bottom line is we just don’t know what is going on. The issue here again is transparency in government.

Like I said at the beginning, maybe Kentucky politicians are a better breed than those in other locations, but on the other hand we could just be watching natural selection in progress.

The stupid ones are getting culled from the herd, while those in Kentucky are still ahead of the regulatory lions.

A Quality Hire?

You can always tell a management team by their quality hires. This one falls into the category of it’s not what you know, but who you know.

The newly hired Kentucky Retirement Systems (KRS) Chief Investment Officer is Adam Tosh.

Tosh’s previous employer was MDL a firm being sued by the Ohio Attorney General for "fraudulent inducement, negligent nondisclosure, and constructive fraud”.

MDL managed blow $216 million dollars of Ohio Worker Compensation Funds in a Bermuda based hedge fund.

According to the current S&P money manager directory, Tosh is Sr. Investment Strategist, responsible for investment risk management at MDL and has worked at MDL since 2004.

Most of MDL’s major clients fired them after the Ohio case, so Tosh has been out of work for nearly a year. Prior to joining MDL in 2004 Tosh worked for the State of Pennsylvania.

MDL was founded by Mark Lay. Starting as a minority manager with county and city governments in Pennsylvania MDL later expanded to large public pensions in Illinois & Ohio.

Tosh’s father in law, Virgil F. Puskarich was Executive Director, Local Government Commission of the Pennsylvania General Assembly for over 20 years. Lay & MDL gave generously to Pennsylvania politicos especially in the General Assembly.

Puskarich was a national officer and 30 year active member of the National Conference of State Legislatures and became friends with Speaker of the House and Candidate for Governor Jody Richards.

KRS Executive Director Hanes has a 20 year plus relationship with Richards dating back to Warren County and his wife Diana Hanes has worked for Richards and the House Caucus for 15 years.

Tosh apparently was unemployable until his father-in-law’s buddy in Kentucky came through for him.

Material Boys

Materiality - The concept that recognizes that small or insignificant deviations from generally accepted accounting principals can be treated in the easiest manner.

Or as it relates to Kentucky state government - close enough for government work.

From the Herald-Leader:

“According to Bill Hanes, executive director of the Kentucky Retirement Systems, the current budget falls $365 million short of an adequate investment in state workers' pension plans.

Some $6 billion to $7 billion of the Kentucky Employees Retirement System's $11 billion in unfunded liability can be attributed to health insurance, according to Hanes.

A recent actuarial study concluded that if current trends continue, the KERS health insurance trust fund will be in default in 2013, and the pension trust fund will be in default as early as 2021. At that point, the pension and health benefits would be put on a pay-as-you-go basis at an annual cost of about $2 billion to taxpayers.

At KTRS, health insurance benefits for retired teachers are already on a pay-as-you-go basis and account for $4.2 billion of the system's nearly $9.7 billion in unfunded liability.

Health insurance is also the driving factor in the $6.8 billion unfunded liability of the County Employees Retirement System, which serves and is funded by local governments and their employees.”

The $365 million Hanes is talking about is sort of the minimum payment on the credit card. From an accounting stand point it doesn't even reach the level of materiality.

And the projected surplus Ernie Fletcher is talking about is a smoke and mirrors kind of answer.

Why should taxpayers care?

Because folks, that annual 2 billion dollars is going to come directly out of your pockets if this mess isn’t fixed. Let’s see Ernie tax tinkerize that.

Lawyers, KRS and Money

When looking at the staffing for the Kentucky Retirement Systems there was an increase in the number of lawyers on the payroll. Now it must take a bunch of legal help to run KRS.

In addition to the lawyers on the payroll KRS spent, according to the 2006 Comprehensive Annual Report (CAFR) Schedule of Professional Consultant Fees, a total of $522,000.00 for legal services. The cost of legal fees is up over $100,000.00 from the previous year's $397,000.00.

I guess the more you spend for lawyers the less you have to spend on Auditors. The CAFR showed the cost of Audit Services dropped from $41,000.00 to $23,000.00.

So who are the law firms making over a half million dollars from retired state employees and taxpayers?

According to the CAFR, the legal consultants listed are Klausner & Kaufman, PA and Stoll, Kennon & Park, LLP which is now Stoll Kennon & Ogden.

Klausner & Kaufman

The picture painted of Klausner & Kaufman is not pretty.

According to Forbes, Klausner receives a varying cut of lawyer fees for work on cases he refers to class action firms, on top of a retainer for routine work. One client the Jacksonville Police and Fire Fund trustees seemed largely unaware of Klausner's arrangement.

Klausner also played a role in the controversy surrounding the San Diego pension system. From the San Diego Reader:

'Someday this mess will end up in the media," wrote an irate Terri Webster in an e-mail on August 13, 1999. Oh, how prescient her words were. Webster, then assistant city auditor, was writing to deputy city manager Bruce Herring…..

She particularly challenged the hiring of Robert D. Klausner, the Florida lawyer who was not licensed in California. "You would think question #1 in selecting candidates for the board to interview would be, 'Are you licensed to practice in the state?'" wrote Webster to Herring. She questioned Klausner's past advice: "He's the guy from Florida that mostly supported the questionable issues without citing much case law. He gave the advice on independence, Brown Act, conflicts of interest, etc. He's been employed with the board for over two years. Reassuring, isn't it? The board should contact his other California clients to save them $$$ for bum advice."

Klausner’s “client conferences” also get mentioned in this article by Gretchen Morgenson and Mary Williams Walsh, of the New York Times

Pension consultants aren't the only ones holding conferences where money managers can hobnob with pension officials. Robert D. Klausner, a lawyer at Klausner & Kaufman in Plantation, Fla., whose firm provides legal counsel to many pension funds in Florida and elsewhere in the south, runs similar meetings.

Klausner & Kaufman's sixth annual client conference was in March at the Hyatt Regency in Fort Lauderdale, Fla. Among the eight companies that paid to sponsor the 2003 conference were Merrill Lynch and Davis Hamilton Jackson & Associates, a money manager based in Houston that Merrill often recommends to its pension clients.

Stoll Kennon & Ogden

The managing partner of Stoll, Kennon & Ogden is former State Representative Bill Lear. You would think that with Lear’s reputation for land dealings and economic development KRS management would have used some of those fees to consult him on their real estate dealings:

“In the area of economic development, Mr. Lear has extensive state, national and international experience and is one of Kentucky's foremost attorneys.”

Other law firms

The law firm of Ice Miller is listed as a Fiduciary Consultant and the firm of Lussler, Gregor, Vienna and Associates isn’t listed at all.

That’s a lot of high powered legal talent. As a comparison all Professional Services Contracts (legal, audit, etc.) at Kentucky Teachers Retirement System cost a total of $229,833.

So today’s questions are:

Why do you pay over half a million dollars in legal fees when you have a stable of lawyers in house?

Does the $522,000.00 for legal services cover all the lawyer’s fees or just those to Klausner and Stoll Kennon?

Why does the Kentucky Retirement System need a Washington DC lobbying firm?

Is part of the $2 million dollars in salaries and per diem spent on junkets to Florida for “client conferences”?

Why is Ice Miller listed as a Fiduciary Consultant in the CAFR and not legal consultant? Is there are real difference in the service they provide or is this just a way to hide more legal fees?

And once more,

Where are the watch dogs on this agency?

Stacking The Deck

In a previous post I talked about the way elections at Kentucky Retirement Systems are setup to allow the Board of Trustees to ensure their own reelection. Here are some more issues concerning the Board of Trustees of Kentucky Retirement Systems.

The issues regarding how someone gets on the Board do not end with the Kentucky Revised Statues. For instance a candidate for the Board of Trustees can raise an unlimited amount of money from any source to run for this Board.

There is this advisory opinion from the Registry of Election Finance:

December 29, 2004

Mr. Edwin A. Davis Trustee,
Kentucky Retirement Systems
12004 Doe Ridge Place
Louisville, Kentucky 40229

Dear Mr. Davis:
This is in reference to your November 29, 2004 letter requesting an advisory opinion concerning whether, as a candidate for reelection to the post of Trustee for the Kentucky Retirement Systems, you are subject to campaign finance regulation as defined under KRS Chapter 121. You explain that you have received donations to help defray the expenses for your reelection to the Kentucky Retirement Systems, but you want an advisory opinion regarding your legal duties, if any, under KRS Chapter 121.

Elections for the board of trustees of the Kentucky Retirement Systems are governed by KRS 61.645(4), which provides that “trustees selected by the membership of each of the various retirement systems shall be elected by ballot … distributed to eligible voters by mail…” KRS Chapter 121, which governs the campaign finance requirements for candidates for nomination or election to Kentucky public office, pursuant to KRS 121.015(2), defines “election” as “any primary, regular, or special election to fill vacancies regardless of whether a candidate or slate of candidates is opposed or unopposed in an election.” (Emphasis added.)

The election for the board of trustees of the Kentucky Retirement System is not a “primary, regular or special election” within the meaning of KRS 121.015(2). Therefore, the requirements of KRS Chapter 121 do not apply to candidates or nominees for the office of trustee to the board of trustees of the Kentucky Retirement Systems.

This advisory opinion represents the Registry's consideration of the circumstances presented in your letter. If you have any further questions, please do not hesitate to contact the Registry's staff.

Sincerely,

Rosemary F. Center
General Counsel

So this means that if an investment company or law firm wanted to spend thousands of dollars on the campaigns of Board members they could potentially stack the Board that controls $14 billion dollars in investments.

The opinion was restated here:

December 29, 2004

Mr. William A. Thielen
General Counsel
Kentucky League of Cities
101 East Vine Street,
Suite 600
Lexington, Kentucky 40507-3700

Dear Mr. Thielen:

This is in reference to your December 7, 2004 letter requesting an advisory opinion concerning whether, as a candidate for election to the post of Trustee for the Kentucky Retirement Systems, you are subject to campaign finance regulation as defined under KRS Chapter 121. You explain that you currently serve as General Counsel to the Kentucky League of Cities, a nonstock, nonprofit corporation, which intends to use its resources to promote your candidacy. Therefore, you ask the following questions:

1. Am I subject to the campaign finance reporting requirements that apply to candidates for public office?

The answer to your question is no. As expressed in the Registry’s Advisory Opinion 2004-008, issued simultaneously to this opinion, elections for the board of trustees of the Kentucky Retirement Systems are governed by KRS 61.645(4), which provides that “trustees selected by the membership of each of the various retirement systems shall be elected by ballot … distributed to eligible voters by mail…” KRS Chapter 121, which governs the campaign finance requirements for candidates for nomination or election to Kentucky public office, pursuant to KRS 121.015(2), defines “election” as “any primary, regular, or special election to fill vacancies regardless of whether a candidate or slate of candidates is opposed or unopposed in an election.” (Emphasis added.)

The election for the board of trustees of the Kentucky Retirement System is not a “primary, regular or special election” within the meaning of KRS 121.015(2). Therefore, the requirements of KRS Chapter 121 do not apply to candidates or nominees for the office of Trustee to the Kentucky Retirement Systems Board of Trustees.

2. Is the Kentucky League of Cities prohibited by Section 150 of the Kentucky Constitution, KRS 121.025 and KRS 121.035 from utilizing its resources (website postings, electronic and regular mailings, broadcast facsimiles, etc.) to promote my candidacy for the Kentucky Retirement System Board of Trustees.

Section 150 of the Kentucky Constitution provides, in pertinent part, as follows:

[I]f any corporation shall, directly or indirectly, offer promise or give, or shall authorize, directly or indirectly, any person to offer, promise or give any money or any thing of value to influence the result of any election in this State, or the vote of any voter authorized to vote therein, or who shall afterward reimburse or compensate, in any manner whatever, any person who shall have offered, promised or given any money or other thing of value to influence the result of any election or the vote of any such voter, such corporation, if organized under the laws of this Commonwealth, shall, on conviction thereof, forfeit its charter and all rights, privileges and immunities …
(Emphasis added.)

The General Assembly codified Section 150 at KRS 121.025 and KRS 121.035. As explained above, Section 150 of the Kentucky Constitution, KRS 121.025 and KRS 121.035 do not apply to an election to the Kentucky Retirement System Board of Trustees.

This advisory opinion represents the Registry's consideration of the circumstances presented in your letter. If you have any further questions, please do not hesitate to contact the Registry's staff.

Sincerely,

Rosemary F. Center
General Counsel

We should notice that Thielen apparently not only wanted to spend money to run for the Board he also wanted to know if his current employer, the Kentucky League of Cities, could help his campaign.

This is the same William Thielen that took Gordon Mullis’s position at KRS and is currently the Chief Operating Officer for the KRS.

And it would appears that the Board is not simply satisfied with the way elections are already stacked in their favor, they want more. The following questions were presented to the Ethics Commission:

1. Whether it is required that Board members seeking re-election to the Board in a particular election recuse themselves from all discussions of nominations for the election,
2. Whether they may just decline to nominate or vote for themselves in the nomination process, or
3. Whether they may participate fully in the discussions and nomination process, including nominating and voting for themselves

The Ethics Commission answered these questions with this:

The Commission believes that a conflict of interest will exist if a member of the Board is involved in any discussions/decisions regarding the nomination of applicants to be included on the ballot for election to a position on the Board. Clearly, a Board member’s involvement in his own nomination is an attempt to use his influence in a matter that involves a substantial conflict between his personal interest and his duties in the public interest. Involvement in matters of other applicants, as well, would present that same conflict between personal interest and duties in the public interest.

They didn't get what they wanted here, but these people obviously have no shame.

The complete Ethics Commission opinion is here.

So the question here is "Where is the legislative oversight of this agency?"

Asleep At The Wheel

One more question about checks and balances at Kentucky Retirement Systems (KRS).

The problems at KRS have been going on a long time and more than one administration and a number of legislators are responsible for letting this agency get out of control.

But how does Ernie Fletcher’s Personnel Cabinet Secretary Brian Crall not notice $2 million dollars disappearing into the salary bucket.

Was he asleep at all of the Board meetings?

Did he even attend the meetings, or did he send one of the kiddie corps as a stand in?

Fletcher ran on cleaning up the “waste, fraud and abuse” in Frankfort. Well the first thing you have to do to clean up something is to notice the problem.

I guess Crall was so involved in looking the other way while Fletcher and company were trying to subvert the merit system that personnel issues at KRS seemed like business as usual.

How Much Does It Cost To Run A Retirement System

Kentucky Teacher’s Retirement System is a comparable sized retirement plan to the Kentucky Retirement Systems.

According to their 2006 annual report the actuarial value of the Teacher’s Retirement Plan was $14,857,641,238.00. Compare that amount to the actuarial value of the Kentucky Retirement Systems of $14,964,331,749 stated in their 2006 annual report.

The two systems are comparable in total actuarial value.

Salaries at Teacher’s Retirement were reported in the 2006 annual report as $4,890,745.00 and the total administrative expenses were $6,839,859.00.

Salaries at Kentucky Retirement Systems were reported in their 2006 annual report to be $13,041,000.00 and the total administrative expenses were $25,819,000.00.

As a point of comparison the budget for FY 2006 for the Auditor of Public Accounts was $9,652,700 and the FY2006 budget for the Attorney General was $25,014,900.

So here are today’s questions:

Why is there such a difference in the amount of money it takes to run Kentucky Retirement Systems and the Kentucky Teachers Retirement System?

Is it that much more complex to manage the Kentucky Retirement Systems? Both have memberships spanning the state.

Are the administrators at Teacher’s Retirement just better at their job?

Why are the administrative costs of KRS nearly $19,000,000.00 more than those for Teacher’s Retirement?

Who Got the Two Million Dollars?

You know sometimes numbers just don’t add up. Take for instance the increase in salaries at Kentucky Retirement Systems (KRS). Stay with me a minute and walk though some of the data.

The current number of employees at KRS, according their current staff directory, is 245.
The number of employees at KRS on January 7, 2006, according to the staff directory at that time, was 243.

The changes include the loss of John Krimmel and Gordon Mullis and the gains of a couple of directors and five attorneys.

So for argument sake lets say the changes in staff cost KRS $100.000.00 more in salaries. Let’s also assume that the two new positions cost additional $75,000.00 per employee for another $150,000.00

We are up to $250,000.00.

We can also assume that every employee got a raise last year. Let’s be generous and say the all got a 7% raise from the previous year. The previous salary and per diem was $10,139,000.00, so a 7% raise for all the employees would cost $709,730.00.

This takes the total to $959,730.00.

But the total increase for salaries and per diem was $13,041,000.00

So the question is who got the approximately $2 million dollars?

Did the Board get some real nice, I mean really nice, trips to play golf?

Did the Executive Director and maybe other key staff get a hefty bonus?

Or did KRS pay off Krimmel and Mullis, with golden parachutes on the way out the door and a non-disclosure agreement not to talk about what was happening at KRS?

This sort of thing has already happened across the river in Indiana.

So which public servants, and I use the term loosely, got the $2 million dollars?

KRS Staff Get $2.9 Million Salary Increase

Buried on page 64 of the 160 page of the Kentucky Retirement System’s 2006 Comprehensive Annual Financial Report (CAFR) is this little gem.

Salaries and Per Diem went from $10,139,000.00 to $13,041.000.00. That’s about a 30% increase folks. At the same time total operation expenses increased $7,186,000.00, so nearly 3 million of the 7 million in operating expenses was salaries.

So let’s do a little basic math:

The total increase in salaries was: $2,902.000.00
The total number of employees was: 245

Assuming that everyone got the same raise, and we all know the lowest paid clerk got the same raise as Executive Director Bill Hanes, then every employee at Kentucky Retirement Systems got an $11,844.90 raise last year.

Now I don’t know what the average raise was in state government for the same time period, but I would guess that it was a lot less than $11,844.90 and same goes for the checks of retired state employees.

And while we are talking about salary increases I’d really like to know what the 2004 legislature meant by “bonus payment”?

This is from the actuarial cost analysis of House Bill 519 in the 2004 Session of the General Assembly

“Section 7: KRS 61.510(13) is amended to clarify the treatment of bonus payments under the definition of “Creditable compensation.”

Does this mean that Bill Hanes and crew get bonus payments, and if so, for what? Doing their job?

But I guess you can get away with kind of fuzzy accounting when you run your own personnel system and everyone, particularly the legislature, abdicates any responsibility for maintaining checks and balances.

Questions for Kentucky Retirement Systems

Let’s return to the topic of the Kentucky Retirement Systems (KRS). The impetus for looking at KRS was the egregious property investment and the subsequent departure of John Krimmel and Gordon “Don” Mullis.

Let me be clear here, I don’t think either Krimmel or Mullis did anything wrong, nor do I think they suddenly got stupid, but I do think there is more to how investments are being made by KRS than is being shared with the members and taxpayers that support the system.

Here are the questions that need to be asked, preferably by someone with subpoena power, and answered by KRS officials. The questioning should be done individually and not in a group.

Questions to Chair of Investment Committee

Now, I am not sure who the chair of the Investment Committee is since it is a secret on the KRS website. However, the organizational chart in the CAFR (Annual Financial Report) clearly states that the Chief Investment Officer bypasses the William P. Hanes, Executive Director on investment issues and reports directly to the Investment committee, so here are the questions.

How often were investment committee meetings held? Can we see minutes?

Did Krimmel ever meet alone with the committee or were Hanes and/or General Counsel Eric Wampler always present?

How many one on one phone calls and/or meeting did you have with Krimmel as the chair of the investment committee?

Were their any disagreements with Executive Director Hanes? If so could you elaborate?

If not, why not, were you not his direct supervisor?

Did you feel that in practice Executive Director Hanes acted as Krimmel’s supervisor?

You have been without a CIO for 6 months. Who is making the investment decisions, The Chair of the Investment Committee, consultants, the Executive Director, or the Investment staff?

If buying local real estate is part of your investment strategy, did Krimmel or anyone contact their investment consultant for advice?

Questions for Todd Coleman, CPA Internal auditor

Coleman is supposed to report directly to the audit committee, not the Executive Director.

How often were audit committee meetings held? Who is the chair of the Audit Committee? Can we see minutes?

Did you ever meet alone with the committee or was always Hanes and/or Wampler present?

How many one on one phone calls and or meetings did you have with the chair of the audit committee?

If any did he discuss any disagreements with Executive Director Hanes and could you elaborate? If not, why not, were you not reporting to your direct supervisors?

Did you feel that in practice that Executive Director Hanes acts as your supervisor?

With the land transaction, did you make an independent report (without input from Wampler or Hanes) to the board? Why or why not? Can we see the report?

Why do you think this happened? Was it willful misconduct or a lack of controls?

In 2004 then Chief Operations officer Lauren Stewart and Director of Accounting Glenn Valley left KRS after reported questionable cash management practices.

Did you produce an independent report on this to the board, if so can we see it?

Why was this not reported, or referred for criminal prosecution?

Was a claim filed for Fiduciary insurance?

Questions for the Executive Director

The 98 report by auditor showed underperformance in direct real estate by over $61million in the early to mid-90’s, but it showed an investment decision to get away from direct real estate and invest in REIT’s.

What caused a reversal to make direct local real estate investments in 2006? Did the investment committee approve direct real estate investments of any kind?

KRS and KY Teachers (KTRS) are roughly the same size in assets at over $14 billion.

Can you explain why KRS at $9.026 million pays nearly twice the fees to investment managers as KTRS at $4.6 million?

Can you explain why KRS has a payroll of $10.139 million in Frankfort again over double that of KTRS at $4.872 million?

Can you explain why KRS pays nearly $8 million in brokerage commissions while KTRS pays less than $4 million?

A 1994 audit report talked of staff and trustees being flown around in private jets.

Can you comment the use of private jets to fly staff and trustees and other issues like the use of limousines, travel to resorts etc. that have been raised on on-line blogs since this report?

In 2004 then Chief Operations officer Lauren Stewart, and Director of Accounting Glenn Valley left the KRS after reported questionable cash management practices. Why was this not reported, or referred for criminal prosecution?

Was a claim filed for Fiduciary insurance?

KRS has hired a number of out of state attorneys. Were you aware that your attorney Robert Klausner has been portrayed negatively for his role with public plans in Forbes (9/20/04) ?
Can you provide a full detailed breakdown by firm of the commissions paid by KRS?

Can you provide a full detailed breakdown of any proceeds you have received from class action suits and detailed accounting of all attorneys fees directed on your behalf?

In early press reports you said the losses on the land sale would not affect retirement assets? Could you explain this?

If this was not an investment issue, but an administrative one, why was the Chief Investment Officer even involved?

Why did a major administrative land purchase not involve the Executive Director and/or the full Board of Trustees?

Does this not suggest a major control issue, or more of a criminal issue?

Your counsel gave the following reasons for the breach of fiduciary duty “involve the failure to ascertain the value of the (Holly Hill) property, to evaluate its potential for current and future investment return, to exercise due diligence in the purchase of the property and the expenditure of funds, to adequately negotiate concerning price, fees and expenses, and exceeding the authority provided by the investment committee of the board of trustees."

This seems to suggest that this was an investment for the system, can you explain?

How long has your wife worked for the House Democratic Caucus?

Are you aware of any donations to the House Democratic Caucus or any other public official in Kentucky, from any vendor who has received investment fees, commissions, or legal fees from class action suits?

KRS Participating Agencies

Who belongs to the Kentucky Retirement Systems?

The short answer is state, county and state police employees. But that is not the complete answer. Actually no one except the retirement systems staff knows.

From the Listing of Participating Agencies:

PUBLICATION NO. 3, REVISED MARCH 2004

Note: Over time several agencies have merged or no longer participate in the retirement systems. If you have a question regarding a particular agency not provided in this listing please contact the retirement office.

So we really don’t know if the information on this page is accurate or not but for argument sake let’s assume the information is accurate.

So who is on the list aside from the usual suspects? Here are a few.

Ky. Council of Area Development Districts

“The Kentucky Council of Area Development Districts (KCADD) is an organization representing all ADD Board members throughout the state. The Kentucky Association of District Directors (KADD) is an organization of the fifteen ADD Executive Directors. In 1995, KCADD and KADD hired a full-time Information Director and opened an office in Frankfort to coordinate network information flow in the state capital.”

Kentucky Association for Community Action

“The Kentucky Association for Community Action, Inc., is a 501(C)3, not-for-profit corporation domiciled in and registered with the Commonwealth of Kentucky.”

Kentuckiana Regional Planning and Development Agency

The Kentuckiana Regional Planning & Development Agency (KIPDA) is an association of local governments in a nine-county region of southern Indiana and north central Kentucky.

Appalachian Research & Defense Fund

The Appalachian Citizens Law Center is a non-profit law firm in Prestonsburg, Kentucky. We provide free legal services to persons and citizens' groups who have legal issues related to coal mining, logging, drilling, and other resource-related practices in Central Appalachia

Kentucky Educational Development Corporation

Kentucky Educational Development Corporation (KEDC) was established in 1969 as a nonprofit corporation exempt under Section 501(c)(3) of the Internal Revenue Code of 1954.

So it would appear that Kentucky Retirement Systems has members that are 501(c)(3) non-profits that are at least partially funded by tax payer dollars.

Should the Kentucky Retirement Systems assume the responsibility for the retirement accounts for these non-profit corporations?

If it is proper to fund non-profit corporation retirements with tax dollars should more of the thousands of 501(c)(3)’s in Kentucky be allowed or required to participate?

The bottom line here is that the Kentucky Retirement Systems is more than just the agency handling state employee retirement. The KRS is a government agency with minimal external oversight that has connections to multiple levels of government in Kentucky including quasi-governmental corporations managing billions of dollars.

As fiefdoms go this is pretty sweet.

Career Opportunity

From Pensions and Investments Online a career opportunity:

Chief Investment Officer (CIO)Kentucky Retirement SystemsPosition Announcement

Kentucky Retirement Systems

Chief Investment Officer (CIO)

Kentucky Retirement Systems (KRS), a $15 billion state administered retirement system located in Frankfort, Kentucky, is seeking qualified applicants for the position of Chief Investment Officer (CIO).

The CIO is responsible for overall multi-asset class portfolio management including internally managed assets. The position requires a master's degree in business or related field and more than 7 years of multiple asset class investment experience with a pension plan or related financial institution that has assets of at least $5 billion. CFA certification desired. Annual salary range at time of placement is from $108,264 to $162,384. Position duties include, but are not limited to, the following:

? Developing and establishing investment policies and procedures.
? Reviewing policies, procedures, and management controls to ensure that activities are properly managed and cost effective.
? Ascertain the extent of compliance with internal controls, fiduciary standards, policies, procedures, laws and regulations.
? Monitoring and assessing service providers.
? Assessing the performance and risk exposure of the investment program.

To apply, please submit a completed application and resume by December 1, 2006 to the following address:

Kentucky Retirement Systems, c/o Beverly Fouts
Perimeter Park West
1260 Louisville Road
Frankfort, KY, 40601-6124

Applications and additional position information are available at www.kyret.com (under Employment Opportunities) or by contacting the Human Resources Division 800-928-4646 ext.8595.

KRS is an Affirmative Action/Equal Employment Opportunity Employer.

As a point of comparison from the Kentucky State Government Salary Database:

Indicted Governor Ernie Fletcher $97,100

Fletcher’s Chief of Staff Stan Cave $109,250

Fletcher’s General Council Jim Deckard $108,920

Governor’s Executive Cabinet Secretary and Lt. Governor Candidate Robbie Rudolph $108,370

Attorney General Greg Stumbo $82,550

So if you are willing to pay the CIO $162,384 what are you willing to pay his boss the Executive Director?

This is why every successful fiefdom needs its’ own personnel system.

Building A Fiefdom

There are three primary ways to build a fiefdom in the Kentucky government bureaucracy.

Expertise, know a lot about something and control the flow of information,

Money, have the power to manipulate a lot of money. We’re not talking chump change like a few million dollars, we’re talking Billions of dollars, that’s with a capital “B”.

People, the number of troops you command and the extent to which you control their hiring, firing and promotions.

So how are Executive Director William P. Hanes and his right hand man General Counsel J. Eric Wampler doing at building a fiefdom at the Kentucky Retirement Systems (KRS)?

First, they meet the expertise requirement. An essentially self appointing Board of Trustees appears to rubber stamp whatever the administration puts before them, thus removing an essential check and balance. The internal functioning of KRS is modeled on the old communist party structure, organizational units do not communicate across organizational lines. All communication is vertical in nature, so Hanes controls the flow of information.

Second, this little fiefdom meets the horde of gold test. The total assets of the Kentucky Retirement Systems according to the 2005 annual report were $17,413,500,000.00. That’s almost 17.5 Billion dollars over a year ago.

Third, controlling staff, this is where the team of Hanes and Wampler has displayed true brilliance in arena of bureaucratic in-fighting.

From the 2003 KRS annual report:

“As a result of legislation passed during the 2003 General Assembly, KRS began implementing its own personnel system in December 2002. A Human Resources Director was hired to lead the human resources and payroll functions. This position is currently focusing on recruitment, retention and compliance to applicable federal and state statutes. We have already begun to see positive experiences in several operational areas, and we believe the new personnel system will continue to allow Kentucky Retirement Systems to provide even better service to our members.”

The law is KRS 65.145 (9) (c)

Effective December 1, 2002, all employees of the Kentucky Retirement Systems shall be transferred to a personnel system adopted by the board.

The reason this is a big deal is that another check and balance has been removed from the system.

To put this in perspective you have to understand that all of the Constitutional Offices of Kentucky government must function under the State Personnel system. This includes the Attorney General and the Auditor of Public Accounts.

Compare this piece of manipulation to the ham handed attempt indicted Governor Ernie Fletcher tried with the merit system. Fletcher should have asked Hanes for advice on how to get around the state personnel system.

Below is a list of sponsors for the Retirement Systems, omnibus update bill. This bill was actually passed by the 2002 General Assembly.

HB 309/AA (BR 1247) - J. Barrows, W. Allen, J. Adams, Ro. Adams, R. Adkins, J. Arnold Jr, A. Arnold, C. Belcher, L. Belcher, J. Bruce, B. Buckingham, Dw. Butler, J. Callahan, M. Cherry, J. Coleman, J. Comer, B. Crall, J. Crenshaw, R. Crimm, R. Damron, J. Draud, T. Feeley, C. Geveden, G. Graham, J. Gray, K. Hall, C. Hoffman, J. Jenkins, T. McKee, F. Nesler, S. Nunn, T. Pullin, J. Reinhardt, A. Simpson, R. Thomas, J. Thompson, Jo. Turner, J. Vincent, M. Weaver, R. Webb, S. Westrom, R. Wilkey, B. Yonts

AN ACT relating to retirement……

amend KRS 61.645 to allow the systems to create and operate its own personnel system without limitation of or by other statutes and to promulgate regulations to structure, to contract without limitation for medical or technical services, to acquire goods, allow for creation of an appeals committee, change the systems' operating officer from the general manager to an executive director and allow the executive director to function and be compensated without limitation of KRS 18A, 45A, and 64.640 and to appoint employees deemed necessary without limitation of KRS Chapter 18A;………..

So here are the hard questions for today.

What the hell were these people thinking in passing this section of the bill?

The group of sponsors includes some pretty savvy politicians and policy wonks. This little paragraph wasn’t just something that slipped by.

What was the quid pro quo for the legislature to allow “the systems to create and operate its own personnel system without limitation of or by other statutes”?

We did it for good government just doesn’t pass the smell test.

How To Get On The KRS Board

And now for a look at the elected members of the Kentucky Retirement Systems Board of Trustees:

So how do you get elected to the Board of Trustees?

According to Kentucky Revised Statutes 61.645 there are two ways to be nominated to the Board.

(4) (a) The trustees selected by the membership of each of the various retirement systems shall be elected by ballot. For each trustee to be elected, the board may nominate, not less than six (6) months before a term of office of a trustee is due to expire, three (3) constitutionally eligible individuals;

(b) Individuals may be nominated by the retirement system members which are to elect the trustee by presenting to the executive director, not less than four (4) months before a term of office of a trustee is due to expire, a petition, bearing the name, Social Security number, and signature of no less than one-tenth (1/10) of the number voting in the last election by the retirement system members;

In reality only the first method is used the difficulty with the second is getting the number of signatures needed to be nominated. First you have to find out the names and addresses of the retirees and get in contact with them, and then they have to be willing to sign the petition and put their social security number on the petition.

For example if you wanted to run for a CERS position you would need a minimum of 1,378 names, and you had better have a lot more than that because some of them will be challenged,

From the KRS member news:

Nominations by the Membership

Individuals may also be placed on the election ballot by submitting a petition from the CERS membership. Per Kentucky Revised Statutes 61.645, the petition must contain the name, social security number, and signature of no less than 1/10 of the number of members voting in the last election. Based upon 2001 election results, the petition would require a minimum of 1,378 names, social security numbers, and signatures from the current CERS membership. Petitions to be included on the CERS election ballot must be submitted no later than November 30, 2004.

So basically the system is rigged. It is nearly impossible to get on the Board unless the Board or the Governor wants you on the Board. Remember how elections were done when you elected a class president in high school, this is pretty much the same thing.

The five elected members are:

Randy J. Overstreet, Chairman, Elected by State Police Retirement Systems (SPRS)

Bobby D. Henson and Susan Smith Horne Elected by Kentucky Employees Retirement Systems (KERS)

Vince Lang and Patricia Ballenger Elected by County Employees Retirement Systems (CERS)


Randy J. Overstreet

Overstreet is a retired Captain with the Kentucky State Police and the former Commander of Post 4, Elizabethtown. He is serving his third four-year term as State Police Retirement System Member of the Board of Trustees.

Bobby D. Henson

Henson is a retired KERS member and currently serving his second term as a member of the KRS Board of Trustees. He retired from the position of Executive Director, Office of Policy and Budget, Kentucky Transportation Cabinet.

Susan Smith Horne

Horne is a retired KERS member, currently serving her second term as a member of the KRS Board of Trustees and is employed as an attorney in private practice. She was an Assistant Fayette County Attorney

Patricia Ballenger

Ballenger is a retired CERS member and currently operates her own public accounting firm.

Vince Lang

Lang is a retired CERS member and currently serves as Executive Director of the Kentucky County Judge/Executive Association.

The elected members of the Board appear to have the paper qualifications to be the watch dogs needed but the look like a closed club with three of the five serving multiple terms.

The one possible real watch dog in this group is Vince Lang. Lang with his position with County Judge/Executive Association should have the knowledge and connections to make a difference, but he would be a lone voice.

Basically the Board is not a pack of watch dogs; it’s mostly a group of toothless lap dogs, all bark and no bite.

There is no dog in this fight for the tax payers and retirees when it comes to watching the administration of billions, that right billions with a “B”, of public dollars.

Brian Crall

More on the Kentucky Retirement Systems (KRS) Board of Trustees:

Since I am concentrating on the Kentucky Retirement Systems I am not going to comment on what the Deputy Secretary of the Executive Cabinet and Secretary of the Personnel Cabinet knew or should have known about the indicted Governor Ernie Fletcher’s abuse of the merit system.

Brian J. Crall the Secretary of the Personnel Cabinet and is an ex officio member of the Board. In essence he is Fletcher's fourth appointee to the KRS Board. Crall has also been a member of the Board of Directors of MainSource Financial Group since May 25, 2005.

Prior to being Secretary of the Personnel Cabinet Crall was Deputy Secretary of the Executive Cabinet, Office of the Governor. He held this position from April 2004 until June 2006.

Mr. Crall also served as CEO of the Owensboro Family YMCA from November 1986 until June 2000, CEO of Progress Printing Company from July 2000 until April 2004, and was the 13th District State Representative in the state of Kentucky from January 1995 until April 2004.

As a state Representative, Crall supported legislation to close down the KRS Defined Benefit plan, at least to new employees, and replace it with a Defined Contribution plan. Most of Crall’s other legislative efforts generally followed the Right Wing Republican agenda.

Same Sex Marriage

HB 13 (BR 143) - S. Baugh, L. Brandstetter, K. Bratcher, J. Bruce, S. Cave, P. Clark, R. Cox, B. Crall, R. Crimm, R. Damron, D. Ford, K. Hogancamp, T. Kerr, A. Maricle, L. Napier, B. Polston, J. Reinhardt, J. Stewart, K. Stine, M. Treesh, C. Walton

AN ACT relating to marriage. Create a new section of KRS Chapter 402 to render a same sex marriage, which occurs in a foreign jurisdiction, void and unenforceable in Kentucky; amend KRS 402.020 to prohibit same sex marriage in Kentucky; amend KRS 402.040 to make invalid a same sex marriage involving a resident of Kentucky who marries in another state; amend KRS 402.030, 402.210, and 402.260 to conform.

Abortion
AN ACT relating to crimes and punishments. Amend KRS 507.010 to include an unborn child in utero in the definition of human being and person; exclude doctors performing abortions as defined in KRS 311.720.

HB 293 (BR 961) - T. Kerr, Ro. Adams, S. Baugh, L. Brandstetter, K. Bratcher, S. Cave, P. Clark, B. Crall, R. Crimm, D. Ford, B. Heleringer, K. Hogancamp, J. Hoover, P. Marcotte, R. Murgatroyd, J. Reinhardt, A. Simpson, K. Stine, M. Treesh, J. Vincent, C. Walton

AN ACT relating to wrongful death actions. Amend KRS 411.130 to allow for prosecution of wrongful death action for an unborn child in utero without regard to stage of gestation; amend KRS 411.135 to conform; create new section of KRS Chapter 411 to exempt physicians and pregnant women from prosecution under certain circumstances.

HB 408 (BR 1518) - K. Hogancamp, Ro. Adams, H. Anderson, A. Arnold, S. Baugh, L. Brandstetter, K. Bratcher, J. Bruce, Dw. Butler, J. Callahan, S. Cave, P. Clark, B. Colter, R. Cox, B. Crall, R. Crimm, R. Damron, D. Ford, J. Gooch, J. Haydon, B. Heleringer, J. Hoover, T. Kerr, P. Marcotte, A. Maricle, C. Miller, R. Murgatroyd, L. Napier, T. Pope, M. Rader, C. Ratliff, J. Reinhardt, A. Simpson, D. Sims, J. Stewart, K. Stine, R. Thomas, M. Treesh, J. Vincent, C. Walton, J. Wayne, M. Weaver, R. Wilkey, J. Zimmerman

AN ACT relating to abortion. Amend KRS 311.720 to establish the definitions of "partial-birth abortion" and "vaginally delivers a living fetus before killing the fetus"; create a new section of KRS 311.710 to 311.820 to criminalize partial-birth abortion; amend KRS 311.595 to permit the suspension or revocation of a license to practice medicine held by a physician who performs a partial-birth abortion; amend KRS 311.990 to establish a crime of a Class D felony for a physician who performs a partial-birth abortion; establish the defense that the partial-birth abortion was necessary to save the life of the mother; prohibit the prosecution of the woman upon whom the partial-birth abortion is performed; require that any person, other than a physician, who performs a partial-birth abortion, shall not be prosecuted under the Act but shall be prosecuted under the provisions of law which prohibit any person, other than a physician, from performing an abortion.

Private School Vouchers

HB 533/FN (BR 1537) - B. Heleringer, W. Allen, H. Anderson, J. Arnold Jr., A. Arnold, S. Baugh, L. Brandstetter, M. Brown, J. Bruce, T. Burch, De. Butler, Dw. Butler, S. Cave, P. Clark, R. Cox, B. Crall, R. Crimm, D. Ford, W. Gee, J. Haydon, K. Hogancamp, J. Hoover, D. Horlander, J. Jenkins, S. Johns, T. Kerr, M. Long, P. Marcotte, A. Maricle, V. Miniard Jr, R. Murgatroyd, L. Napier, S. Nunn, B. Polston, M. Rader, J. Reinhardt, W. Scott, J. Stewart, K. Stine, C. Walton, J. Wayne, M. Weaver, P. Worthington

AN ACT relating to individual income tax. Create a new section of KRS Chapter 141 to provide for taxpayers with adjusted gross income of $75,000 or less a $500 tax credit if a dependent attends an elementary or secondary parochial or private school; effective for taxable years beginning after December 31, 1997.

Of course his most impressive effort was pretty rock solid, we all know every state needs an official state hydroflurocarbon.

AN ACT relating to the designation of the official rock of Kentucky. Create a new section of KRS Chapter 2 to designate Kentucky agate the official rock of Kentucky.

HB 123 - AMENDMENTS

HFA (1, B. Crall) - Designate coal as the official state fossil fuel; designate agate as the official state mineral, rather than coal; and designate limestone as the official state rock, rather than agate.
HFA (2, B. Crall) - Designate coal as the official state hydroflurocarbon; designate agate as the official state mineral, rather than coal; and designate limestone as the official state rock, rather than agate

Crall also wanted to reduce the retirement benefits of retired state employees that had been reemployed by the Commonwealth. He sought an Attorney General’s opinion on the legality of such an action.

Representative Crall has asked us to determine whether the General Assembly can retrospectively prohibit the practice known as "double dipping." It is our opinion that a retroactive amendment to KRS 61.637(7) (a) would "impair the obligations" of the "inviolable contract" of the Commonwealth created by KRS 61.510 to 61.705 thereby interfering with the vested rights of current members of the Kentucky Retirement Systems in violation of both the Contract Clause of the United States Constitution and its state counterpart, Section 19 of the Kentucky Constitution. Because any attempt by the General Assembly to suspend or reduce the benefits of those members whose rights have vested upon their reemployment would be unconstitutional, we conclude that the General Assembly can only prohibit "double dipping" on a prospective basis, if at all.

Crall as Personnel Secretary also supported the questionable appointment of Jeff Taylor to the Murray State Board of Regents.

Despite a legal dispute about the opening and more questions about the nominating process, Gov. Ernie Fletcher appointed Court of Appeals Judge Jeff Taylor of Owensboro to Murray State's Board of Regents late Friday afternoon.

Looking a Crall’s record he appears to be more interested in politics and his personal gain than the interest of Kentucky government retirees.

Fiduciary

From the FreeDictionary.com

fiduciary 1) n. from the Latin fiducia, meaning "trust," a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty.

Let’s talk about the Board of Trustees of the Kentucky Retirement Systems.

According to an Attorney General’s opinion written while Ben Chandler was the Attorney General, “The Board oversees the combined system in a fiduciary capacity, and administers the plan "solely in the interest of the members and beneficiaries . . . ."

The opinion concludes:

“The Legislature, as it can do, has devised a retirement plan for the public servants of this Commonwealth. In so doing, it also provided for an appropriate and responsible governing structure to best insure the responsible operation of that plan. We think it a simple matter to conclude that the persons governing those funds and managing that system are holding a "State Office." Moreover, the law plainly and unequivocally dictates that result.”

So, the members of the Board of Trustees are State Office Holders administering the retirement plan solely for the benefit of the members and beneficiaries of the Kentucky Retirement Systems.

According to the organizational chart in the 2005 Comprehensive Annual Financial Report (CAFR) the Finance Committee and the Audit Committee appear to report directly to the Board of Trustees, they do not report to the Executive Director. Some of the blocks on the chart are connected with dotted lines and some aren’t connected at all.

This may be a graphical Freudian slip that reveals how this place really runs.

Three names that appear on the chart are John Krimmel, Gordon Mullis and J. Eric Wampler, I talked about these guys before but let’s concentrate on the Board for now.

To put it in simple terms the Board of Trustees should be the sheriff’s of this here town. But who are the trustees?

The members of the Retirement System elect five (5) Board Members, three (3) are appointed by the Governor, and one (1) is the Secretary, Personnel Cabinet (who is also appointed by the Governor).

The current Board of Trustees are:

Randy J. Overstreet, Chair
Walter J. Pagan, Vice Chair
Brian J. Crall
Bobby D. Henson
Susan Smith Horne
Vince Lang
Patricia Ballenger
Larry C. Conner
Lynn T. Harpring

So today let’s look at the political appointees on the Board:

First, Walter J. Pagan, Vice Chair:

Wally Pagan, was a Covington city manager the late 1970s, who was named director of SouthBank Partners, a civic group seeking to coordinate development on the Ohio River in Northern Kentucky and Cincinnati. Pagan resigned his job as director of the Telecommunications Board of Northern Kentucky to take the SouthBank post.

His experience with the Telecommunications Board seems to have prepared him well for his stint on the Retirement Systems Board.

From an Attorney General’s Opinion:

This matter comes to the Attorney General on appeal from the Kenton/Boone Counties Cable Television Board's (hereafter “Board”) denial of Mr. Donald J. Ruberg's open records request to inspect certain records of the Board….

By letter dated February 27, 1996, Mr. Walter J. Pagan, Executive Director, Kenton/Boone Counties Cable Television Board, responded to Mr. Ruberg's request……

We conclude the Board improperly denied Mr. Ruberg's request to inspect a copy of the Interlocal Agreement that had been forwarded to the Attorney General for approval.

Of course he has also demonstrated how he builds the confidence in how he manages other people’s money.

From the Enquirer:

COVINGTON - City commissioners have approved a general fund budget of about $41 million for the fiscal year starting today, a 7.7 percent increase from last year.
Commissioner Bernie Moorman cast the only dissenting vote. He said Covington isn't getting enough results for the $65,000 it's paying Southbank Partners for economic-development work on behalf of the city.

"Wally (Pagan, president of Southbank Partners) is a wonderful guy,'' Moorman said.”Southbank is a wonderful program. But you don't pay anybody unless they do something for you.''

Moorman said he hasn't seen results from Southbank in the past year and a half.

"Newport pays Southbank Partners some $43,000, and they get the bulk of Southbank's time and talent and effort,'' Moorman said.

Pagan could not be reached for comment Wednesday. "

But of course Wally does like Republican Senator Jim Bunning.

“The State of Kentucky and our entire region are fortunate to have strong advocates in Washington, like Sen. Jim Bunning, who get behind visionary ideas like the National Submarine Science Discovery Center,” said Wally Pagan, president of Southbank Partners and leader of the Riverfront Commons development project, which includes the USS Narwhal exhibit."

Just what everyone needs, a moth balled sub, truly visionary.

Second, Lynn T. Harpring:

Lynn T. Harpring was appointed by indicted Governor Ernie Fletcher.

According to the news release at his appointment:

“Lynn Harpring is currently a financial planner with Harpring & Pope in Louisville. Harpring has served on numerous boards and civic organizations including as the Past President of Louisville Estate Planning Council, Louisville Association of Life Underwriters, Bellarmine College Board of Overseers and the Board of Directors for the Executives Club of Louisville. “

Harpring’s main qualification, other than running his business as a financial planner is contributing to Anne Northup. Over the years Harpring and his wife have contributed over $6,500 to Northup.

and the third appointee Larry C. Conner

From the Herald-Leader:

Profession: Chief operations officer for the Kentucky School for the Deaf in Danville; officer of special instructional services for the Kentucky Department of Education's Visually Impaired and Deaf/Hard of Hearing Team.

Background: Conner was formerly a high school teacher. His prior activities include serving on the Bryan Station High School site-based decision-making council and as a division director and consultant for KDE. He has a master's degree in education from Eastern Kentucky University and studied labor market planning and analysis at the University of Louisville-Urban Studies Center and the University of Mississippi/ Memphis State University. Conner is a member of the Kentucky State Retirement Board of Directors and has served on the Bluegrass Area Development District Board of Directors as well as being chair of the Lex-Tran Board. He has been married for 35 years and has three children, Nicholas, Alanna and William.

Conner appears to be a nice guy with a lot of the right credentials for this job. But he may not be as forceful as he needs to be.

This from the Reporting Times:

Lexington, Kentucky – (April 25, 2004) – Inconsistency and poor communication resulted- in fewer central office staffing cuts last spring than the Fayette County Board of Education expected, former Schools Superintendent Ken James concluded.

But James' report -- portions of which were released Friday night -- has left some school board members with questions. And since James has already resigned his post, interim Schools Superintendent Marlene Helm is now working on her own investigation.

Board members say they not only want to know what happened to the jobs they were told would be cut a year ago, they also want a full count of who works in central office and what they do……..

"I was disappointed," said school board member Larry Conner, explaining that the report lacked the specifics the board had sought.

"We did not have the detail that we expected," he said. "Perhaps it warranted further investigation by Dr. James or perhaps he just chose to do the best he could do with the time constraints he was under."

The real down side to Conner is that his term expires March 31, 2007. That means that indicted Governor Ernie Fletcher gets to appoint someone like Pagan or Harpring.

Remember these are the watch dogs on millions of dollars of tax payer and public employee’s money.

The Abuse Of Attorney Client Privilege

When you turn on a bright light cockroaches run for the nearest dark corner.

When you turn on a light (open records request) bureaucratic cockroaches in Frankfort run for their favorite dark corner, the one labeled attorney client privilege.

Did you ever wonder why so many state agencies have General Councils?

The General Council is the house lawyer to the agency management team. So here’s the drill.

Let’s say you have an issue that is embarrassing, if not illegal, and you are trying to figure out what to do. You have your General Council in the meeting, that way if anything gets out about what you are doing or not doing you can claim attorney client privilege to stonewall an open records request.

Here is an example of stonewalling an open records request.

James Dodrill filed an open records request with the Kentucky Retirement Systems. (Read the previous post for more on the Kentucky Retirement Systems.)

Dodrill’s request was partially denied and he appealed to the Attorney General for a ruling.

From the Attorney General’s ruling:

‘The question presented in this appeal is whether Kentucky Retirement Systems violated the Open Records Act in partially denying James Dodrill’s May 25, 2004, request for a copy of “all employee investigations, charges, and records of discipline imposed for the following employees or former employees of Kentucky Retirement Systems: Lauren Stewart[;] Glenn Valley[;] Cheri Curtsinger[; and] Robert Sircy.” For the reasons that follow, we affirm KRS’s partial denial of Mr. Dodrill’s request.

By letter dated May 28, 2004, KRS General Counsel J. Eric Wampler responded to Mr. Dodrill’s request. Although Mr. Wampler provided Mr. Dodrill with copies of records reflecting disciplinary measures imposed on Cheri Curtsinger and Robert Sircy, he denied Mr. Dodrill’s request for “employee investigations, charges, and records of discipline imposed on” Lauren Stewart and Glenn Valley. In so doing, Mr. Wampler relied on the attorney-client privilege, asserting that “[a]ny documentation which may exist regarding this subject matter involves protected communications between the Board of Trustee of the Kentucky Retirement Systems and their legal representatives.”

…..” In sum, Mr. Wampler maintained that KRS’s partial denial of Mr. Dodrill’s request “was supported by all relevant statutory and case law.”

In response, Mr. Dodrill advised this office (Attorney General Greg Stumbo), by letter dated July 2, 2004:

Lauren Stewart and Glenn Valley were former employees of Kentucky Retirement Systems. Mr. Stewart was Chief Operations Officer and Mr. Valley was Director of Accounting. Mr. Stewart and Mr. Valley engaged in questionable cash management practices while employed at Kentucky Retirement Systems.

As former staff attorney of Kentucky Retirement Systems, I was asked to proof read letters of reprimand prepared for Mr. Stewart and Mr. Valley. Mr. Wampler may be playing some game of semantics with your office; however, I assure you these records do exist.

The opinion goes on to say:

“The record on appeal therefore does not support Mr. Dodrill’s veiled assertion that KRS has concealed these records.”

I’m not a lawyer, but Dodrill’s assertion didn’t look veiled to me, he pretty much called Kentucky Retirement Systems management and their lawyer liars.

So three conclusions from this:

First, the Attorney Client privilege is being abused when it comes to Kentucky state government. The transparency of government is non-existent when it can be hidden by the attorney client two step.

Let’s add reform of this privilege, when it comes to the functioning of state government agencies, to our Legislative Agenda.

Second, does anyone else see a pattern with the management of multiple millions of dollars in taxpayer and state employee funds? Does the Board of Trustees of the Kentucky Retirement Systems actually show up and do anything? Who is holding the management team responsible?

Third, this agency is having a hard time passing the smell test, so where are the Attorney General, the Auditor of Public Accounts, and other regulatory entities?

Follow the Money

This is a follow-up to a post on Bluegrass Report about the shake up at Kentucky Retirement Systems. More background can be found at the Herald-Leader.

On April 10, 2006 Chief Operating Officer (COO) Gordon Mullis resigned from the Kentucky Retirement Systems. On May 10, 2006, John Krimmel, Chief Investment Officer resigned from the Kentucky Retirement Systems. The reason they resigned was because approved a deal that cost the Kentucky Government Retirees $565,000.00

They approved a loan for $700,000 to buy a piece of property worth $135,000.

According to a draft copy of the Financial Statements of the Kentucky Retirement Systems they did this without documenting the loan with a note, mortgage contract or security interest in the property.

Krimmel and Mullis circumvented internal control policies and procedures to accomplish this deal. Krimmel and Mullis also commingled funds between the Pension Fund and the Insurance Fund at Retirement Systems, a violation of the Internal Revenue Service Code, to make this deal happen.

The bottom line here is Krimmel and Mullis orchestrated a deal where retired Kentucky state employees lost over half a million dollars. They resign their jobs and moved on.

Here is the question:

Why do two guys, with years of experience, willfully and intentionally violate the rules of their agency and common business practices to make a really bad deal and possibly illegal deal?

I don’t think they were just having a bad day.

Where are the Attorney General, the Auditor of Public Accounts, the State Police, and the IRS?

Krimmel and Mullis intentionally shoved a half a million dollars out the door of the Retirement Systems and no one seems to be following up.

By the way, John Krimmel is a member of the Public Company Accounting Oversight Board (PCAOB) and is now senior vice president and consultant at Callan Associates of Atlanta.

Guess who I’m not going to for investment advice.