TURMOIL AT KENTUCKY RETIREMENT SYSTEM HEADQUARTERS

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Kentucky Retirement System Board targets greater transparency

The shift follows recent personnel changes

By Timothy Inklebarger

The $13.9 billion Kentucky Retirement Systems, Frankfort, is headed in a new direction designed to increase transparency.

The change follows the recent termination of Robert M. Burnside, executive director, and the ousting of Randy Overstreet from his position as chairman of the board of trustees.

Incoming Chairwoman Jennifer L. Elliott, an attorney and current board member, said in a telephone interview that the system is establishing an ad-hoc legal compliance and governance committee; making available the salaries of all KRS employees; making the system’s website easier to navigate; and reviewing various policies systemwide.

“If there are problems, we need to proactively look for them and solve them, and that’s what I intend to do as chair,” she said.

Mr. Overstreet, who remains on the board, said in a telephone interview that he was always transparent during his 12 years as chairman and that Mr. Burnside was fired without cause. Mr. Overstreet said he is concerned about the future of the system.

The nine-member board, at its monthly board meeting on April 7, voted 5-4 to terminate Mr. Burnside and 5-3 to replace Mr. Overstreet as chairman.

Trustee Christopher Tobe said in a telephone interview that his votes to replace Messrs. Overstreet and Burnside were largely due to his inquiry in spring 2009 about whether the system was using placement agents and, if so, to what extent.

He said the system’s internal auditor revealed to the system’s audit committee in early 2010 that the fund was using placement agents, but the amount paid to placement agents was not disclosed until the audit was released in July. Mr. Tobe said he believes Mr. Burnside was aware of the amounts earlier than he revealed and the audit was a “delaying tactic.”

“They knew if they told me that I would make it public,” Mr. Tobe said.

The internal audit revealed that from 2004 to 2009, the system paid about $15 million in fees to placement agents. The audit also noted that roughly $6 million in fees went to Glen Sergeon, a former colleague of then-Chief Investment Officer Adam Tosh. Messrs. Tosh and Sergeon previously worked on a global emerging markets strategy at the $25.5 billion Pennsylvania State Employees’ Retirement System, Harrisburg.

Mr. Tosh left the Kentucky fund last July to become managing director, investment solutions, at Rogerscasey. The internal audit cleared Mr. Tosh and the system of any wrongdoing.

The Securities and Exchange Commission launched an “informal inquiry” into the Kentucky fund last September. A month later, Crit Luallen, state auditor, began a review of the system’s use of placement agents, as well as “various KRS policies, internal controls, and other aspects of the KRS operation,” according to a letter Ms. Luallen sent to the retirement system.

Both investigations are ongoing.

Public battle

The battle over control of the board has not stayed in the board room. Disgruntled board members have criticized Mr. Overstreet in local newspapers and elsewhere over the system’s internal audit.

In October, Ms. Elliott told the Lexington Herald-Leader that “not all board members are given the same level of access to the information we need to perform our fiduciary duties. There aren’t enough checks and balances on Randy Overstreet, who has been chairman of the board for at least 12 years.”

Mr. Overstreet said he, like other board members, was unaware that placement agents were being used and to what extent.

He also said board members should have been aware of the audit. “Some board members said they were not aware an audit was being conducted; they were aware, maybe they just weren’t paying attention,” he said. “As far as issues with the way the board was being conducted, no one ever voiced any concerns.”

Mr. Burnside could not be reached for comment.

Board members also voiced displeasure with Mr. Burnside over a recent bill in the Kentucky General Assembly that would have banned the pension fund’s use of placement agents and established term limits for sitting board members.

The Kentucky General Assembly approved a bill in 2008 by state Rep. Mike Cherry that established term limits for board members. But a subsequent opinion from the state attorney general determined the term limits did not apply to trustees who were active before the bill was passed, grandfathering in sitting board members.

Mr. Cherry said his intent was for term limits to apply to sitting board members as well and he introduced a second bill earlier this year to make the term limits apply to them.

Mr. Cherry said in a telephone interview that in February, Mr. Burnside encouraged him to drop the provision that would have applied term limits to sitting trustees.

“I agreed to wait until Auditor Luallen finished the state audit (to advance the term limits),” Mr. Cherry said. “The placement officers was my biggest issue at the time.”

Some board members supported both parts of the proposal, which did not pass.

“Mr. Burnside said after the fact that he encouraged (Mr. Cherry) to pull the term limits out of the bill,” said a source close to the board, who asked not to be identified. “At a minimum, he should have been neutral or silent.”

Mr. Burnside made it clear to Mr. Cherry that he was not speaking on behalf of the board, Mr. Overstreet said.

Mr. Overstreet said the board had “no basis” to terminate Mr. Burnside. Mr. Overstreet, who has served on the board for 14 years, said he personally has no objection to term limits.

Further strains

Relations between some board members and Mr. Burnside were further strained earlier this year when the system was ordered by state Attorney General Jack Conway to release the salaries of employees of the pension fund.

A source said board members were angered by a decision by Schuyler Olt, general counsel to the system who worked closely with Mr. Burnside, to decline to release the staff salaries to the public.

Board members were not aware of the request for salary information until Mr. Conway said in a March 31 opinion that denying the request violated the state’s Open Records Act.

The board, following the decision to remove Messrs. Burnside and Overstreet, voted on April 7 to make staff salaries public and to post them on the fund’s website.

Ms. Elliott said the board also is working to make the system more transparent.

She said she has established a temporary ad-hoc legal, compliance and governance committee. She said the committee will oversee legal and compliance issues associated with the system and make recommendations to the full board for the amendment and development of new governance policies. The committee also will evaluate reports issued to KRS by state and federal agencies and make recommendations to the board.

Ms. Elliott said she hopes to make the ad-hoc committee a permanent part of the KRS system.

“The compliance piece is important from my perspective because I think historically it has not been clear that the standing audit committee of the board has been responsible for compliance issues,” Ms. Elliott said. “Therefore, at least on a temporary basis, I think it’s important to establish a committee that has that responsibility.”

She said the legal portion of the ad-hoc committee will require the system’s legal counsel, Mr. Olt, to report to the committee.

The system also is redesigning its website to add a transparency page that will include the salary information along with investment policies, annual financial reports, audits and open-record information, Ms. Elliott said. She said the information was available previously, but was difficult for participants to find.

The board also will review the system’s various policies in an effort to improve transparency, she said.

Meanwhile, Mr. Overstreet said he believes the trustees who voted him out as chairman “just want to create problems, rather than solve problems.”

“I think anybody that’s a member of the system should be concerned about the direction this seems to be heading,” he said.

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