FRANKFORT — A workers' compensation agency paid about $510,000 to a private financial adviser rather than using state-employed advisers, as the law requires, state Auditor Crit Luallen said Friday.
The Kentucky Workers' Compensation Funding Commission, which manages more than $350 million in assets, has paid Morgan Stanley Smith Barney in Louisville to help it make investment decisions since 1999. The agency paid Morgan Stanley $40,000 to $50,000 a year, the auditor said.
State law requires the funding commission to use the Kentucky Finance and Administration Cabinet's Office of Fiscal Management for investment advice, Luallen said.
"The taxpayers' interest is, should those fees have been paid?" Luallen asked.
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Auditors found no evidence of relationships or other conflicts of interest between the funding commission and Morgan Stanley, Luallen said.
Judy Long, board chairwoman of the funding commission, declined to comment on the audit Friday. In its written response, the board accepted Luallen's findings, and in a meeting Thursday, it agreed to begin using the Office of Fiscal Management as its financial adviser.
The funding commission collects more than $70 million a year from assessments on employers' workers' compensation premiums. It manages the funds necessary to retire liabilities on claims from before the state's 1996 workers' compensation reform.
It's overseen by a seven-member board, four of them appointed by the governor, as well as Finance and Administration Secretary Jonathan Miller, Economic Development Secretary Larry Hayes and acting Labor Secretary Mark Brown.
One of the appointed board members, Jeff McIntosh, said he asked Luallen for the audit and remains dissatisfied with the board's response. Nobody inside the agency has explained why it ignored the law and nobody on the board seems curious, despite poor investment returns under Morgan Stanley, McIntosh said.
The funding commission's investments lost about $81 million during fiscal 2008 and 2009, McIntosh said. Growing liabilities in the funds require higher assessments on employers, he said.
"This cost us more than a half-million dollars in fees, and those are just the real dollars we can count," McIntosh said. "How about the however many dollars we lost in the stock market with Morgan Stanley? I don't think they did a particularly good job for us."
Frank Thompson, senior vice president at Morgan Stanley's Louisville office, said he handled the agency's investments and defended his performance. The recession caused stock market losses everywhere, but the funding commission lost less than its peer group on average, Thompson said.
"We did everything we were supposed to do," Thompson said. "We did an outstanding job for the funding commission."
The funding commission has been wise to avoid the state Office of Fiscal Management, which proposed bad investments, such as low-yield U.S. Treasury notes, Thompson said.
"We strongly recommended not using OFM," Thompson said. "That is a serious, serious mistake."