Editorials

Pension board: beef up qualifications, accountability

State Auditor Crit Luallen's report released this week about the Kentucky Retirement Systems revealed a very loose ship.

The finding that grabbed headlines and prompted the audit was the way-too-close relationship between the richly paid former chief investment officer and a placement agent whose earnings on KRS investments he handled could reach at least $1.3 million. That information has been sent to the Securities and Exchange Commission for investigation.

But the report also is rife with signs that no one seemed to be watching the people who are supposed to watch over the $13 billion set aside for the retirement of 330,000 Kentuckians. Examples:

■ Before February, there were no guidelines for the information presented to the investment committee of the board of trustees. So, how could they compare investments?

■ There are no guidelines for approving special audits, meaning internal auditors can initiate them without the audit committee's knowledge or approval.

■ Managers, rather than the board or its audit committee, are allowed to make critical decisions about investigating alleged fraud.

■ Not all of the executive staff is required to complete written conflict-of-interest and confidentiality statements, and there is no specified penalty for violating these policies.

■ KRS doesn't budget for or adequately track investment-related administrative expenses like travel, education and conferences.

■ The board was unaware of the salaries paid to individual staff until recently, and health-care administrative expenses are not included in the budget provided the board or the legislature.

■ Contrary to the board's own rules, between July 1, 2007 and Dec. 30, 2010, the minutes weren't transcribed, presented, or amended by the next regular meetings for nine of 28 full board meetings and seven of 22 investment committee meetings.

■ Staff or board members are not required to reimburse personal expenses charged to agency ProCards within a certain time; there aren't guidelines about how much money can be spent on entertainment; and staff aren't required to submit invoices or receipts to support charges.

The report contains 92 recommendations for tightening up management and accountability.

KRS' problems are not all of its own making. Governors and legislatures have failed to ante up the state's required share to the system, contributing to a huge anticipated shortfall. Still, trustees — some appointed by the governor, others elected by organizations that represent retired employees — must take a more active role in overseeing this system. To its credit, a reconstituted board is already hard at work.

Regarding the qualifications of trustees, the audit suggests all potential trustees should present a detailed resume, a cover letter explaining qualifications, authorization for a background check, an account of any felony convictions and a formal application.

That's good for starters, but the governor and those who vote must accept responsibility, too. They've got to choose trustees who are willing and able to do the hard work required. The selection shouldn't be a popularity contest to get a resumé enhancement or a plum in exchange for a political gift.

The mess at KRS is like too many we've seen recently. Board members, faced with complex and often technical material, cede too much authority to professional staff. Questionable spending, huge salaries and perks and sloppy accountability follow. Reforms are good and essential. But only a qualified, vigilant and engaged board of trustees can assure they will be meaningful.

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