In the 2017 session, the Kentucky General Assembly passed legislation to shine sunlight on what had long been the black box of investment manager contracts and fees for the state’s troubled public pension systems.

While that legislation has increased transparency in some respects by requiring the quarterly posting of all management and performance fees and the posting of contracts for dozens of investment managers, it has still fallen short of what some believe was intended in Senate Bill 2.

Of particular concern is that most of the contracts for the investment managers of the Kentucky Retirement Systems (KRS) and the Teachers’ Retirement System (TRS) have not been posted to the pension plans’ respective websites, and many of those that have been posted are heavily redacted.

For example, the most recent investment manager contract posted on the KRS website is for IFM Investors, an international company specializing in private equity. However, only three of its 68 pages have no redactions, 54 pages are at least mostly redacted and 21 pages are fully redacted.

Nearly half of the lines in the contract’s 3-page table of contents have been blacked out.

While KRS and TRS have over 30 investment manager contracts available to view on their websites, most with redactions, both have nearly 100 contracts that have yet to be posted.

At the August meeting of the state legislature’s Public Pension Oversight Board, Rep. James Kay, D-Versailles, railed against these investment managers for not complying with SB 2.

“There are over one hundred contracts that are not disclosed on the website,” Kay said. “… There are many, many contracts that are overly redacted. It looks like somebody just took a black Sharpie through a lot of them.”

A typical page from the IFM Investors contract posted on the KRS website

Rich Robben, who has been the interim chief investment officer for KRS going on nearly two years, told Insider Louisville that in the case of redactions like that of IFM’s contract, the investment manager has made the redactions. He added that the managers based such redactions on exemptions from disclosure under the Kentucky Open Records Act related to “trade secrets, proprietary information and things that will put them at a competitive advantage.”

He added that KRS did not consult with or opine on these redactions with the investment managers, as “our legal counsel felt that if we provided any specific guidance on the redactions, it could open us up as an organization to future litigation claims from the manager.”

“For fear of future litigation, we as an agency really don’t want to opine on the appropriateness of the redactions,” Robben said. “But, there is a mechanism in place for someone to challenge that, and an arbitrator who will decide that. We just can’t be the ones to challenge it.”

In Kentucky’s system, that arbiter is the Office of the Attorney General, which could deliver a legal opinion on any formal appeal to its office claiming that an investment manager contract’s redactions violated the state’s open records laws.

As for the over 90 investment manager contracts that are not posted on the KRS website, Robben said these were executed before the passage of SB 2 and “contain language that specifically prohibits us from disclosing the contracts in their entirety, and we have been told that if we do that, they will bring suit against us.”

“I want nothing more than to be as transparent as possible with everyone,” Robben said. However, noting that such international investment firms have deep pockets and good lawyers, he wryly added that “I would just prefer to keep the few assets we have.”

KRS, which provides benefits for over 370,000 current and retired state employees, contains the Kentucky Employee Retirement System for non-hazardous workers — what is generally regarded as the worst-funded public pension plan in the country, with an asset-to-liability funding ratio of just 13.6 percent. As a whole, KRS has $16 billion in asset with an unfunded liability of $27 billion.

TRS is in significantly better financial shape than KRS but shares much of the same reasoning for why most of its investment manager contracts are either withheld from the public or heavily redacted.

On the TRS website listing its contracts, there is one page devoted to “confidential and proprietary contracts,” which lists nearly 100 manager contracts for funds that are exempt from disclosure under the Kentucky Open Records Act because those firms say this would disclose their confidential information and provide an unfair commercial advantage to their competitors.

In an email to Insider, Beau Barnes, the deputy executive secretary of TRS, said the pension plan asked all of its investment managers whether all or portions of their contracts could be released on its website, but with the exception of those 31 currently posted, “managers reasserted the confidential and proprietary nature of the entirety of their contracts and requested that they not be released.”

The explanation on the TRS website goes further, adding that “public release of this information would be detrimental to the fiduciary duty for TRS,” as it seeks to maximize returns and “in some cases, negotiate fees more favorable than what other pension systems pay, also disadvantaging the members.” It goes on to state that the law doesn’t require TRS to disclose information that “would compromise the retirement system’s ability to competitively invest in real estate or other asset classes.”

Chris Tobe, a former KRS whistleblower and author of “Kentucky Fried Pensions,” does not buy the explanations of either pension system and told Insider that the redacted and withheld contracts are a direct violation of the laws enacted by SB 2.

Some of the unredacted contract terms for investment managers used by Kentucky have been posted online at for over a year, which declined the request of KRS’ general counsel to pull them from its website, Tobe noted. He added that these firms are not hiding trade secrets but excessive management fees, risky investments and violations of state fiduciary laws.

Tobe shared complaints that he has sent to the office of Attorney General Andy Beshear and state Auditor Mike Harmon over the past year relating to these redacted contracts and other alleged violations of SB 2 provisions. He has not received a formal reply yet.

KRS has dramatically reduced its number of alternative and hedge fund investments over the past two years, which have long been a target for criticism related to high management and performance fees and poor returns — including a massive lawsuit filed last year by pensioners against several of the largest private equity firms in the country.

According to a June report to the KRS board of trustees’ investment committee, the overall hedge fund investments of KRS have fallen from a high of $1.6 billion in January 2016 to $965 million this spring. That total is expected to fall even further to under $400 million by the middle of 2020.

Over the summer, two hedge fund managers indicated that they would decline to work with KRS due to the new requirements enacted by SB 2. Davidson Kempner requested that KRS take back its $69 million investment because it didn’t want to abide by a code of ethics and professional conduct mandated under SB 2 and was worried about the aforementioned lawsuit, while New States Capital Partners Fund declined to accept a $25 million investment by KRS due to the new requirements.

According to KRS’ latest quarterly posting — a requirement of SB 2 — KRS paid out nearly $70 million in management fees and over $51 million in performance fees to investment managers in the 2018 fiscal year ending June 30.

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Joe Sonka
Joe Sonka is a staff writer at Insider Louisville focusing on government, politics, education and public safety. He is a former news editor and staff writer at LEO Weekly and has also freelanced for The Nation and ThinkProgress. He has won first place awards from the Louisville Metro chapter of the Society of Professional Journalists in the categories of Health Reporting, Enterprise Reporting, Government/Politics, Minority/Women’s Affairs Reporting, Continuing Coverage and Best Blog. Email him at [email protected]