The second meeting of the Interim Joint Committee on State Government was held on Wednesday, August 26, 2009, at 1:00 PM, in Room 154 of the Capitol Annex. Senator Damon Thayer, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Damon Thayer, Co-Chair; Representative Mike Cherry, Co-Chair; Senators Walter Blevins, Jr., Ernie Harris, Mike Reynolds, and Elizabeth Tori; Representatives Eddie Ballard, Dwight Butler, John "Bam" Carney, Larry Clark, Leslie Combs, James Comer, Jr., Tim Couch, Will Coursey, Joseph Fischer, Danny Ford, Derrick Graham, Mike Harmon, Charlie Hoffman, Jimmie Lee, Mary Lou Marzian, Brad Montell, Lonnie Napier, Sannie Overly, Darryl Owens, Tanya Pullin, Tom Riner, Carl Rollins II, Steven Rudy, Sal Santoro, Kent Stevens, John Tilley, Jim Wayne, Alecia Webb-Edgington, Ron Weston, and Brent Yonts. (Representative Bob Damron also sat in with the Committee.)
Guests: Mike Burnside, Adam Tosh, and Randy Overstreet - Kentucky Retirement Systems; Gary Harbin, Kentucky Teachers’ Retirement System.
LRC Staff: Judy Fritz, Kevin Devlin, Brad Gross, Alisha Miller, Greg Woosley, Bill VanArsdall, and Peggy Sciantarelli.
The minutes of the July 29 meeting were approved without objection, upon motion by Representative Rudy.
Representative Comer recognized a guest in the audience from his district, Greensburg Mayor George “Lisle” Cheatham.
The Co-Chairs announced plans for the Committee to meet in Princeton, Kentucky, sometime during October. Representative Cherry said the meeting would include a debriefing from local and state officials regarding the emergency response to the January ice storm.
First on the agenda was a status update on Kentucky Retirement Systems (KRS) investments, finances, recent real estate transactions, and plan governance. Mike Burnside, Executive Director, and Adam Tosh, Chief Investment Officer, gave the report. The main topics of their PowerPoint presentation were Investments, Actuarial Projections, and the Holly Hill Church Transaction.
Mr. Tosh discussed investment allocation and performance as of June 30, 2009. In summary, he said that it has been an extremely turbulent year for the economy, in which interest rates fell hundreds of basis points, stock markets plummeted around the globe, and assets declined in value across the board. A benefit of KRS investments is that they have been broadly diversified. Both U. S. and international markets have rallied.
Mr. Tosh said that the Pension Fund was slightly overweight with respect to U. S. and non-U. S. equity markets but was slightly underweight in Treasury Inflation Protected Securities (TIPS). Alternative allocations were underweight, but it takes several years to build up an alternative allocation. Cash was slightly over the benchmark, partly because KRS took a more defensive position with its cash holdings over the time period. The KRS Pension Fund had a market value of $9.81 billion as of June 30, 2009 and a -17.21 percent rate of return. The rate of return for the performance benchmark was -14.88 percent. Mr. Tosh said he is rather pleased with the results, given the economic freefall that the U. S. and global markets were experiencing at the time. He said the numbers for June 30 have not been released yet, but preliminary indications are that KRS fund performance should rank in the top third of all state pension plans. He noted that for the same time period California’s funds were down 23 percent and 25 percent. Harvard and Yale endowments had similar negative returns. Over the fiscal year, KRS pension fund performance tracked close to the benchmark in both U. S. and international equities. There was greater deviance from the benchmark in Core Fixed Income. Exposure to subprime securities, however, was rather muted and not more than 9/10 percent of Fixed Income. KRS has taken steps to evaluate the Fixed Income managers and restructure fixed income. While the managers’ performance was average, the performance was still poor, and KRS is actively seeking to retain managers that have had better performance. Mr. Tosh said that the greatest divergence was in Alternative Asset performance, which could be partially because privately held corporations are slower in reporting than publicly held companies.
Representative Cherry asked for more information about the benchmarks. Mr. Tosh said that the KRS benchmarks are accepted as industry-wide standards. They are publicly available, are not proprietary in any way, and are broad and open. Some of the benchmarks used are the S&P 500, the MSCI world index funds, and the Barclays Aggregate. KRS uses three organizations as consultants: Harvey Coons is the general consultant; SIS is an alternative consultant; and ORG is the consultant for real estate investments. These consultants also handle accounts for other public pension plans, endowments, and corporations. KRS makes recommendations to the Investment Committee, based on the consultants’ analyses and recommendations and those of KRS staff. Mr. Tosh said he expects that other states are using similar or identical benchmarks.
Representative Montell asked whether it might be preferable to invest in the indexes without using managers and having to pay management fees if KRS is not going to outperform the indexes. Mr. Tosh said there are points in time when indexation can add value, while there are other points in time when active management can add value. He said KRS is diversifying exposure, but it is the combination of all the different factors that hopefully will outperform over time. He said that if the market decline was a long-term trend, indexation might be better; but given the opportunity that is available in the market—especially after the recent volatility—there is a great opportunity for investors to be able to find real bargains. Another aspect is that with indexing only, performance will ride up and down with the market. KRS believes that, over time, active managers have demonstrated the ability to add value, to provide defensive protection when markets fall, and to outperform when markets are rising. Representative Montell said he agrees with Mr. Tosh but would like to see the managers outperform the indexes. Mr. Tosh said that KRS is trying to ensure that it has managers with a higher probability of achieving outperformance.
Representative Wayne said he understands that total investment losses for FY 2009 were about $2 billion and that the underperformance to the benchmark was about one quarter of a billion dollars. He also said he understands that one of the investment managers for the past two and one-half years performed $40 million below the benchmark. He said he is concerned that KRS performance in the market is not what it needs to be and that something is wrong within the System. He asked whether there is an investigation going on internally to determine why the investment managers are doing so poorly—and whether there may be a need for the legislature to get more involved. Mr. Tosh said he does not know of an investigation but that he and his staff are continuing to look at how the managers are performing and reacting to the market.
Mr. Burnside said that just in the last month the Investment Committee has taken action to replace its underperforming managers—especially in the Fixed Income portfolio. He also stated that the current underperforming money managers had been recommended because they had very good performance ratings at the time. He said that KRS is looking at ways to improve performance of the portfolio and is also doing another asset/liability modeling study with the general consultant that was hired about a year ago. Representative Wayne said that is comforting but that considering the seriousness of the issue and the negative press reports in recent weeks, it will be important to know who is being replaced, as well as the history and resumes of the new managers. Mr. Tosh said that information is publicly available. He explained that recently KRS has terminated managers Baird and Pyramis and replaced them with SIMCO. He said that firing Baird was a relative value decision. Although Baird did not lose money for the System, KRS felt that there are other managers who can perform better. Representative Wayne complimented Mr. Tosh for the efforts of his office and urged him to regularly keep the legislature informed. Mr. Tosh said that he and Mr. Burnside would be more than willing to work along those lines.
Mr. Tosh discussed the Insurance Fund. He explained that it is structured differently than the Pension Fund. He said that insurance obligations have a longer duration and, because of the nature of health care inflation, the portfolio is higher risk, with the potential for greater return. There are no Core Fixed Income holdings within the insurance fund allocations. It does hold Treasury Inflation Protected Securities, which are a type of fixed income instrument. Because it is heavily weighted to equities, it is easy to track the performance of the portfolio relative to the benchmarks. He went on to say that KRS is trying to build up the Fund’s alternative assets. An overweight to cash has been employed to act as a cushion, since there are no fixed income securities to protect against market turmoil. Negative returns in the Insurance Fund are considerably greater than in the Pension Fund because it has such a high concentration in the stock market. The total fund return for FY 2009 was -23.18 percent, which tracks relatively well to the benchmark.
Representative Webb-Edgington asked how the Pension and Insurance Funds ranked when compared to other states. Mr. Tosh referred to charts entitled, “Return Comparison as of 03/31/09.” He said that June data is not yet available for the Pension Fund, but indications are that KRS will compare well for the end of June. The Pension Fund performance’s percentile rank as of March 31 was 24.00, which placed it in the upper quartile of public pension plans. He said that, unfortunately, there are no accurate comparisons for state insurance funds only, since other states do not prefund their insurance fund. Regrettably, they have to be measured against public pension plans, which is not the best measure, since they are the antithesis of each other. Returns on the insurance side do not look very good because it is highly concentrated in equities, and the diversification and cash flow movements are not there.
Mr. Tosh said that, while it appears the recession may be coming to an end, neither the U. S. nor the global economy are out of the woods. He said KRS is working diligently to position the portfolio so that it can fare in multiple types of economic environments. With the diversification that is being built into the plan, the hiring of other managers, and efforts to find the best strategies, KRS hopes for a greater likelihood of achieving its objectives.
Mr. Burnside discussed actuarial projections. He said that the estimated actuarially required contribution (ARC) rates presented today have not been officially adopted by the Board for next year because they have not had the benefit of a full actuarial valuation for the year which ended June 30. They are provided as a projection and include FY 2009 investment returns and updated actuarial assumptions that the Board adopted on August 20. They also include the impact of the Employee Group Waiver Plan. The projections may change, once final actuarial valuation is complete.
Mr. Burnside said that last year’s Public Pension Working Group noticed that there may be some demographic differences in actual plan performance over the last three years that differed slightly from the actuarial assumptions. He said the actuarial experience study provided to the Board last week documented slight differences in projected pre-retirement mortality rates; withdrawal rates—which were up; disability retirements—which were lower; and salary increases. Applying the changes adopted by the Board last week to 2008 data produces a slight improvement in funding ratios and employer rates. Though not enough to offset the investment returns, it was felt to be important to incorporate those changes into the System in order to provide as valid data as possible.
Mr. Burnside said that through the Employee Group Waiver Plan, KRS has a direct contract with CMS (Centers for Medicare and Medicaid Services) that allows the Medicare drug subsidy to apply directly toward offsetting the health insurance unfunded liability. He said this means that in October, after the actuarial valuation, KRS should see a reduction of approximately $1.5 billion in that unfunded liability as a result of the subsidy.
Mr. Burnside discussed estimated ARCs for KERS (Kentucky Employees Retirement System) and SPRS (State Police Retirement System). He said the presentation does not include numbers for CERS (County Employees Retirement System) because the legislature does not develop the budget for that system. Looking at KERS Nonhazardous, he said that the projected total ARC for the Pension Fund—20.09 percent of payroll for FY 2011 and 22.29 percent for FY 2012—would be smoothed over a five-year period. The projected ARC for the Insurance Fund is calculated in the same manner, with the exception that the discount rate—the assumed investment rate for insurance—is not as high as it is for the Pension Fund, which has an assumed 7.75 percent rate of return. He said that even though the Pension Fund lost over 17 percent last year, the assumption is 7.75 percent because investments are viewed for a 30-year horizon. The actuary uses the assumed inflation rate of 3.5 percent and adds to that the real rate of return, which is assumed to be 4.25 percent. He said that the insurance rate, because of GASB (Governmental Accounting Standards Board) rules, cannot be figured at the full 7.75 percent. Under the House Bill 1 phase-in (enacted in the 2008 Special Session), the combined projected total ARC would be 16.04 percent for FY 2011 and 18.60 percent for FY 2012. The rate is currently 11.5 percent. Mr. Burnside said that the estimated rates have not been vetted through the KRS Board but that the actuary should be proposing rates close to these to the Board in November after completion of the actuarial valuation.
Looking at KERS Hazardous, Mr. Burnside stated that under the House Bill 1 phase-in, employers are currently paying 24.69 percent; next year they are supposed to pay 76 percent of the ARC, which would increase the rate to 25.43 percent. The following year it would increase to 27.71 percent, or 79 percent of the ARC.
Mr. Burnside said that in SPRS employers are currently paying 33.1 percent of payroll. To meet the schedule of House Bill 1, using current actuarial projections, that rate would increase to 51.7 percent for FY 2011 in order to meet retirement obligations. He said these estimates reflect pretty dramatic increases and were done without the benefit of an actuarial analysis for FY 2009. He stated again that the rates have not been adopted by the Board and are for planning purposes only.
Representative Owens, noting that the ARCs will not be fully funded under the provisions of House Bill 1, questioned whether the system could become a “train wreck” at some point. In response, Mr. Burnside said he has asked the actuary to update a letter he did about three years ago for the Blue Ribbon Commission. The actuary has been asked to estimate what the funding ratios would be and when the fund would be depleted, based on two separate calculations—(1) assuming the system is funded according to House Bill 1; and (2) if the calculations in House Bill 1 are not met and funding is continued at the current rate of 11.5 percent with no increase. Representative Owens asked whether the significant decrease in investment return could shorten that window and whether the projections would include the recent investment losses. Mr. Burnside said that the actuary’s projection will include the full valuation of the fund as of June 30, 2009. Representative Owens asked whether the Committee can have a copy of that information as soon as it is available. Mr. Burnside said he would furnish it to the Committee but that it will probably be late October before the full valuation results are ready. Senator Thayer asked Mr. Burnside to forward the information to committee staff.
Representative Cherry said he would consider it a “train wreck” only if the state were to stop paying retirement benefits, which he does not expect to ever happen. He said that as long as funding continues to progress as outlined in House Bill 1, he believes the system will be okay. He said that, hopefully, this will be helped through improved investment performance. Representative Owens stressed the importance of determining actuarially where the system is headed and what needs to be done. Mr. Burnside said he had just returned from a national conference with other retirement administrators, where it was generally conceded that retirement systems can no longer rely on investments to solve funding problems. To keep a system viable will require a combination of strong investments, control of expenditures, control of health care, and employers meeting required contribution rates.
The next topic discussed was the Holly Hill church transaction. Mr. Burnside briefed the Committee on the timeline and details of KRS’s purchase of the church property from Dr. Caroline Taylor in February 2006 for $752,502.47. Dr. Taylor had paid $450,000 for the property in December 2005. Senator Thayer advised the Committee that he had requested this report and said it is important to note that Mr. Burnside did not become KRS Executive Director until January 2008.
Mr. Burnside said that the Investment Committee of the Board of Trustees had discussed the possibility of purchasing the property on three different occasions between November 2005 and January 2006. He said the Committee did not vote to approve or disapprove the purchase, and meeting minutes reflect that no action was taken on what was discussed in closed session. He explained that KRS officials made a $500,000 offer on the property in December 2005 but that it was subsequently sold to Dr. Taylor, who already had a contract on the property. KRS then offered her $525,000, which she rejected. KRS and a nearby apartment complex opposed the zoning change sought by Dr. Taylor, and she later sold the property to KRS in February 2006. The purchase was through Perimeter Park West, Inc. (PPW), a 501(c)(25) corporation held by KRS for the purpose of holding title to and maintaining the KRS office campus and also to protect the KRS trust fund in the event of a lawsuit. Mr. Burnside said that $700,000 of the purchase price was transferred from the Insurance Trust, and the remainder came from the PPW operating account, which is funded through the pension trust.
Mr. Burnside said that the KRS Board of Trustees launched an investigation of the acquisition in March 2006. They contacted their internal auditor and contracted with Ice Miller, the KRS outside fiduciary and tax counsel. They also contacted the Auditor of Public Accounts’ (APA) office in June 2006, which subsequently asked Mountjoy and Bressler, the external auditing firm for KRS at the time, to do a full audit of the transaction as part of the annual financial statement. APA also contacted the office of Stoll Keenon Ogden in Frankfort, which was responsible for investigating the advisability of litigation or filing of a fiduciary insurance claim. The Kentucky State Police was also contacted. The investigation continued for more than a year, and it was discussed in numerous board and committee meetings in both closed and open session. The first report that KRS received was from Ice Miller, in May 2006; it was supplemented by a second report in August 2006. Stoll Keenon Ogden also presented its report in August, and Mountjoy and Bressler completed its report on behalf of the APA in December 2006. The KRS internal auditor presented his report to the audit committee in April 2007.
Mr. Burnside said that Mountjoy and Bressler found that KRS staff who were involved in the purchase circumvented existing internal control policies and procedures. They also said that KRS staff failed to perform adequate due diligence prior to the purchase. As evidence, they noted that there was no property appraisal, no mechanical inspection, no environmental study, and no formal signed sales contract. The only closing document lists the expenses and how they were assigned. Mountjoy and Bressler said that there was a co-mingling of funds between the insurance and pension trusts, in violation of the Internal Revenue Code and the plan document. They also opined that the purchase was an isolated incident and not indicative of normal business operations at KRS.
The 12 recommendations of the KRS internal auditor are listed as follows, along with Mr. Burnside’s comments:
The PPW operating account should require two authorizing signatures for internal control – The two checks written for the purchase were written with only one signature. This recommendation has been fully implemented.
Business operations of PPW should be under the oversight of the Chief of Operations – The Director of Fixed Income, who reports to the Chief Investment Officer, signed the check from the PPW check. This audit recommendation would ensure that all operations go through the Chief of Operations and also avoid the appearance of any conflict of interest. This recommendation has been fully implemented.
Checks issued from PPW should require a formal check request document and all supporting documentation. – The checks for the purchase were issued on the basis of an e-mail from the Chief Investment Officer to the Director of Fixed Income. Later, other documents were brought forward that included a justification of expenditures. This recommendation has been fully implemented.
The General Counsel should provide training to PPW agents on the bylaws, conflicts of interest, and their fiduciary obligations. – This recommendation has been fully implemented. Additionally, the Board of Trustees in its April 2009 meeting voted to add a member to the PPW Board of Directors and to require the PPW board to hold quarterly meetings and report to the full Board on a regular basis.
PPW should reevaluate its contractual relationship with the Crumbaugh Companies. – Mr. Burnside said he believes Mr. Bill Crumbaugh has done an excellent job in managing the property for KRS. He said the purpose of the recommendation is to avoid the appearance of a conflict of interest, since Mr. Crumbaugh’s son owns Summit Realty, which represented KRS in the negotiations with Dr. Taylor. An RFP has been issued for competitive bidding on property management services at KRS, and Mr. Crumbaugh will be allowed to bid.
The PPW Board of Directors should require that evidential matter exist for all assets acquired, be they personal or real property. – In the closing document there is a $25,000 entry for personal property, but no description of that personal property has been found to date. This recommendation has been fully implemented.
Once the resolution of the Holly Hill property is achieved, $52,502.47 should be reimbursed to the PPW operating account. – This recommendation is being implemented.
All employees, particularly those in the Division of Investments, should comply with KRS’ Statement of Investment Policy. - This recommendation has been fully implemented. KRS now has an active education program to ensure that everyone is aware of the investment policies.
Formal documentation of check/expenditure requests should be formulated to strengthen internal controls. - This recommendation has been fully implemented.
KRS is prohibited from co-mingling funds between the pension and insurance trusts. - This recommendation has been fully implemented. All pertinent staff are aware of this prohibition, and as a matter of policy, KRS issues Letters of Direction to money managers to remind them that there is to be no co-mingling of funds in investments.
All Letters of Direction (instructions to custodial banks) should be reviewed, approved and signed by the CIO (Chief Investment Officer), the Executive Director, and/or the Chief Operations Officer. - This recommendation has been fully implemented.
The CIO should have dual reporting responsibilities to the Investment Committee and to the Executive Director. – Previously the CIO reported only to the Investment Committee. This recommendation has been fully implemented.
Mr. Burnside said that after he became Executive Director on January 3, 2008, the Finance and Administration Cabinet (FAC) internal auditor contacted KRS to initiate an audit of the Holly Hill transaction. He said KRS cooperated in the audit, and the Cabinet submitted a draft report to him in mid-May 2009. The KRS Board met May 21, 2009, but the draft report was not discussed, even though the board meeting included a lot of discussion of Holly Hill. The report was not final, and staff had not had a chance to review it. KRS spent the next month reviewing the report and submitted comments to the Cabinet in June. FAC issued the final report July 6, 2009.
Mr. Burnside that about that time he began talking to FAC officials Glenn Mitchell and Jim Abbott to ask them to help find a tenant for KRS Building-B, which that had been vacated by the Department of Revenue. He also worked with FAC and Kentucky State Police (KSP) regarding selling the property. KRS hired a real estate consultant, ORG, which did a full property appraisal, mechanical inspection, and environmental study. ORG hired a Louisville commercial real estate company, C. B. Richard Ellis, to market the property on a nationwide scale. Ultimately, the decision was to sell to KSP, which wanted to buy both Building B and the adjacent church property in a combined deed. Total sale price for the two properties was $3.2 million.
The four recommendations in the FAC internal auditor’s report are listed as follows, along with Mr. Burnside’s comments. He said that the recommendations reinforce many of KRS’ own findings.
KRS should use the Holly Hill proceeds to reimburse the KRS Insurance Fund for an amount no less than $135,000 and to follow the recommendation of the KRS internal auditor to reimburse PPW for $52,502.47. – This recommendation has been fully implemented. Mr. Burnside explained that the $135,000 amount comes from an appraisal done in 2006 after purchase of the property. The appraisal valued the property at $135,000, unimproved. If improved, the value could have been as much as $290,000, but KRS wrote down the value at $135,000. In accord with suggestions from KRS’ current audit committee and Ice Miller, KRS has taken steps to reimburse the Insurance Fund for the entire $700,000.
KRS should clearly disclose the decision to self-correct the co-mingling of assets related to Holly Hill and the subsequent loan write-down in the notes to the KRS and PPW financial statements. – To fully comply with this recommendation, language to this effect has been approved for the 2009 Comprehensive Annual Financial Report.
KRS should formalize its real property purchasing process. – Real estate policy has been incorporated into the Investment Policy manual. The policy restricts KRS holdings in real estate to no more than five percent of the total value of the fund. It also discourages the direct purchase of real property, so that KRS would not be sole owner of any property other than the buildings it now occupies.
KRS and PPW should implement and/or continue the implementation of all internal controls recommended herein and in the KRS internal audit report. – This recommendation has been fully implemented, and the Board of Trustees has taken action to increase the scope and responsibilities of the PPW Board.
Mr. Burnside summarized by saying that since the Holly Hill transaction of February 2006, all KRS executive management and senior staff positions have changed through resignations, transfers or retirements. Six of the nine Board of Trustees members have changed. The current Board has changed the scope and membership of the PPW Board. The church property and adjacent KRS office building has been sold to KSP, and KRS is in the process of reimbursing all of the accounts. KRS has implemented recommended safeguards and fully complied with audit recommendations. He said, too, that after the sale was publicized he asked State Auditor Luallen to review the FAC internal audit report and offered to fully cooperate with her office if they had any questions.
Representative Ford asked who ultimately made the decision to purchase the church property and whether they had authorization. Mr. Burnside said it was “KRS staff,” according to the audit report, and that they were acting as agents of PPW. He said it is his opinion that they thought they had authority to make the purchase.
Answering other questions from Representative Ford, Mr. Burnside said that PPW board members are trustees of KRS. He also said that KRS’ sale of its properties closed on June 10, 2009.
Representative Ford said he is concerned that there was not a formal sales contract for the Holly Hill purchase. He pointed out that real estate transactions are required to be in writing in Kentucky. He asked whether anyone had investigated the real estate company that handled the transaction. He also said he would be interested to know the cost of the various audits relating to the transaction. Mr. Burnside said he did not have that information with him but that he would get back with Representative Ford about those two questions.
Representative Ford asked about final appraisals of the two KRS properties. Mr. Burnside said they were appraised separately and that KRS assigned approximately 10 percent of the $3.2 million selling price to the value of the church. Representative Ford said he appreciates the way KRS has brought information to the Committee. He said it bothers him somewhat though that KRS is discouraging the purchase of real estate, since he believes it is a great investment over time. Mr. Burnside clarified that KRS is still including real estate in part of its portfolio but just not as a direct purchase of property.
Representative Wayne said he is concerned about many things that were presented today. He questioned the decision to withhold the FAC preliminary audit from the KRS Board until staff had time to review it. He also asked whether Mr. Crumbaugh’s role in the transaction should have been referred to the Executive Branch Ethics Commission for review and whether he should be permitted to bid on the RFP. He suggested that actions like these could create mistrust and damage Mr. Burnside’s image with the public and the legislature. He said he does not want that to happen because he does not think Mr. Burnside deserves that kind of image. He expressed concern that KRS may be losing a public relations “war.” He said he is concerned about the lack of internal checks and balances at KRS preceding the Holly Hill transaction and the subsequent need for the FAC internal auditor and the State Auditor to become involved. Mr. Burnside responded that Mr. Crumbaugh is not subject to oversight by the Executive Branch Ethics Commission and that PPW is a nonprofit shareholder. Representative Wayne countered that contractors are included in the Executive Branch Ethics Code and that PPW is a subsidiary of the state. Mr. Burnside said he was not aware that Mr. Crumbaugh would be covered by the ethics code and that he would certainly look into that. He also said he feels that Mr. Crumbaugh should be exonerated. He said his contract as property manager is still in force—that KRS did not cancel it because of the FAC audit. Representative Wayne said he believes KRS, to preserve its reputation, should look into whether Mr. Crumbaugh’s involvement created an ethical breach. Mr. Burnside said that they would do so.
In regard to withholding the draft FAC audit from the Board, Mr. Burnside said that as soon as KRS received the final audit report, it was referred to the Board’s audit committee. He said the Committee reviewed the report thoroughly at its August meeting and did express some concern about the Crumbaugh issue. They then transmitted the audit report and their findings to the full Board on August 20. Representative Wayne said that may be correct procedure but that KRS should be working in full partnership with the Board, in which case, he thinks the preliminary report should have been brought to the Board immediately. Mr. Burnside said that the Board Chair and Vice-Chair are present at today’s meeting and that they could vouch for his integrity. Representative Wayne said he is not questioning Mr. Burnside’s integrity but rather trying to promote it. He said he feels there has been some mishandling of issues that do not do justice to Mr. Burnside.
Representative Owens asked whether KSP has done an investigation. He said he is asking because it occurred to him that there may have been some criminal violations. Mr. Burnside said that KSP did conduct an investigation but that he does not know its status. He called on Randy Overstreet, Chair of the KRS Board of Trustees, to speak on that issue. Mr. Overstreet said he has communicated with KSP on various occasions and that they have not done anything actively on the investigation for some time. He said they indicated to him that they have reached a dead end, from their perspective. Mr. Overstreet said that KRS intends to seek closure on the KSP investigation.
Representative Rollins said he believes there is the appearance of a conflict of interest with respect to Mr. Crumbaugh. He asked whether the realtor received a commission, and Mr. Burnside said that the realtor received a $28,000 commission. Representative Rollins asked Mr. Burnside to request a copy of the written contract from the realtor and, if he does not have one, to report that fact to the Real Estate Commission.
Senator Blevins asked how much of the U. S. investments is invested in Kentucky. Mr. Tosh said they do not routinely track Kentucky-only investments and that he would have to look into it and get back with Senator Blevins. He stated that, first and foremost, KRS tries to find the best managers in order to maximize return for the System. They make every effort to try to invest in Kentucky and to use organizations from Kentucky to invest on KRS’ behalf. Senator Blevins said it seems logical to him that KRS should try to maximize investing in Kentucky because it will create jobs, increase the tax base, and thus pay bigger dividends. Mr. Tosh said KRS and he, personally, are very supportive of investing in Kentucky but that his first responsibility is to system participants. Senator Thayer said he understands Senator Blevin’s sentiment but pointed out that, by law, KRS is responsible for protecting the fiduciary interest of the plan participants and that it is not KRS’ job to create economic opportunity and jobs in Kentucky. Senator Thayer asked Mr. Tosh to forward the information about Kentucky investments to committee staff. He directed staff to make the information available to the Committee, along with a copy of the statute dealing with KRS’ fiduciary responsibility.
Representative Lee asked whether there is anyone who may have knowledge of the $25,000 personal property that was included in the Holly Hill purchase price Mr. Burnside said he does not know of anyone. He said there are varying accounts of it being for personal property or services but no solid information about it.
Senator Thayer pointed out that Mr. Burnside retired as a colonel after a 20 year career in the Air Force prior to entering state government. He said he believes Mr. Burnside has been treated a bit harshly by members of the Committee, and he apologized. He said he personally asked Mr. Burnside to testify and that Mr. Burnside has been honest and forthright in his testimony—more so than were representatives of the Kentucky League of Cities and the Kentucky Association of Counties at today’s meeting of the Local Government Committee. Further, he is trying to clean up problems that occurred before he came to KRS. Senator Thayer said he knows that Mr. Burnside is a man of the utmost integrity. He said he appreciates his 20 years of service to this country. He also appreciates his leadership and service as KRS Executive Director, as well as the service of KRS staff and the KRS Board, as they try to protect Kentucky retirees in this very difficult economy. Senator Thayer thanked Mr. Burnside and Mr. Tosh for appearing today.
Senator Thayer announced that due to the length of today’s meeting, the scheduled report from Gary Harbin, Executive Secretary of the Kentucky Teachers Retirement System, would be postponed until the September meeting.
The final item on the agenda was a subcommittee report for the August 25 meeting of the Task Force on Elections, Constitutional Amendments, and Intergovernmental Affairs. Senator Thayer, Co-chair of the Task Force gave the report, and it was accepted by voice vote, upon motion by Representative Carney.
Business concluded, and the meeting was adjourned at 3:10 p.m.