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?