The lead sponsor of bill passed in last year’s session of the Kentucky General Assembly designed to add transparency to investment manager contracts for the state’s public pension systems says that while the new law has initiated positive change, it will likely require new legislation to enforce the full and unredacted copies of such contracts to be publicly disclosed.
Senate Bill 2 passed in 2017 required the Kentucky Retirement Systems (KRS) and Teachers’ Retirement System (TRS) to post all of their contracts with investment managers and quarterly post the management and performance fees paid to them, in addition to requiring such managers to abide by a uniform code of ethics.
While both public pension systems now post detailed records of such fees, Insider Louisville reported last month that a large majority of investment manager contracts are not posted online, and many of those that are posted are heavily redacted — which some legislators and observers view as a violation of the spirit and letter of the legislation.
Leadership of both pension systems say that such redactions are allowed due to broad language in the bill allowing exemptions to the Kentucky Open Records Act related to companies’ proprietary information, and may spur litigation from these large private equity firms if they were posted in full.
Sen. Joe Bowen, R-Owensboro — the lead sponsor of SB 2 and outgoing co-chair of the Public Pension Oversight Board (PPOB) — told Insider that while this legislation added a new level of transparency to pension systems’ use of investment managers, there would have to be further legislative or executive action to make them provide full and unredacted contracts to the public.
“As a Public Pension Oversight Board, we can only bring them in, question them on it and encourage them to do those things and be in compliance (with SB 2), so on and so forth … and we’ve done that,” said Bowen, noting that his bill had “broad language” and “they’re stretching that as far as they can.”
While stating the avenue that his board should pursue is “to continue to make an issue of it at the PPOB meetings, to call their hand, so to speak,” he conceded that such shaming doesn’t necessarily mean that systems will begin posting full contracts.
“I didn’t really write an enforcement arm to this,” said Bowen, adding that “short of some type of additional legislation, I don’t have any enforcement capacity.”
Bowen noted that while the public is shielded from viewing most investment manager contracts, his legislation did include a provision that allowed the state Auditor of Public Accounts, the Finance and Administration Cabinet and the Contract Review Committee to request and review unredacted copies.
Additionally, he pointed to new information related to manager performance and fees that is now posted quarterly and was formerly a black box, noting that this new vehicle is “plowing so much new ground.”
“While some may fault me as sponsor of that bill to not have more strict language in it, or more defining language … OK, I’ll take the blame for that,” said Bowen. “But let me tell you, we didn’t have any language previous to Senate Bill 2. We had nothing. We simply got spoon fed whatever they wanted to spoon feed us. And now we’ve crossed that threshold and now we’re getting the information we feel like we need.”
As for adding even more transparency to investment manager contracts, Bowen said he would encourage people “to make as much noise on these issues as possible,” and “if there’s an outcry from the public, it will be addressed. And I’m good the with that, I’m totally fine with that.”
Rep. James Kay, D-Versailles, filed an amendment to a pension bill in this year’s session that intended to address several of these issues, requiring the full and unredacted posting of each investment manager contract and their fees down to the fund-of-fund level, but it went nowhere.
Bowen said that while Kay’s suggestion might have been good, he filed it too late in the session and did not come to him first, which imperiled its chances.
“Had he come and had a sit down with me and said, ‘Hey, why don’t we include this in the bill, I think it would be a good idea,’ I might have been receptive to that.” said Bowen. “But it was too late in the day. We needed to get the bill passed and I wasn’t going to jeopardize what I thought was a really important bill by some late change.”
As for whether a stand-alone bill with Kay’s provisions may be filed in next year’s session and have a chance of passing, Bowen noted that both he and Kay won’t there, as he did not to run for a third term this year and Kay chose to run as judge-executive of Woodford County.
“There could be (a bill), but he’s leaving the process and so am I,” said Bowen. “It’s going to have to come from someone new, because we’re riding off into the sunset.”
As of Friday, no General Assembly legislator had yet pre-filed a bill for the 2019 session with provisions similar to Kay’s amendment.
Rep. Jerry Miller, the remaining co-chair of the PPOB and chair of the State Government Committee, told Insider that he has filed a few narrow bills relating to pensions and retirement systems, but “we’re mostly just waiting to see what the Supreme Court does.”
The Kentucky Supreme Court is still deliberating on the lawsuit challenging Bowen’s public pension bill filed in this year’s session, which dramatically altered the benefits of newly hired teachers and drew widespread protests. That law is currently vacated due to a ruling in Franklin Circuit Court that it was passed in an unconstitutional manner, and if upheld, Republicans would have to pass it yet again.
If the Supreme Court upholds the previous ruling striking it down, Miller said, “My recommendation would be that we just go back with the same bill, change some dates and whatever else is appropriate to bring it up to snuff, and then go through the process as originally written in the constitution to pass it.”
While no one has filed a bill similar to Kay’s amendment, Miller said that he expects a bill to be filed that relates to the same section of SB 2, which requires all investment managers to adhere to the CFA Institute code of ethics. This summer, one hedge fund manager requested that KRS take back its $69 million investment because it didn’t want to abide with the CFA code and was worried about a large lawsuit recently filed against other hedge fund managers, while another declined to accept a $25 million KRS investment due to the same requirements.
Miller said that those managers already rely on SEC regulations and codes of ethics and don’t want to associate with CFA, so legislation may be filed to tweak that portion of the law — at which time the matter of contract redactions may also come up.
“As long as they are complying with federal requirements, maybe we ought to just backtrack to that,” said Miller. “That’s one thing under discussion right now. But since it does affect those contracts, it would be an appropriate time to touch that section as well.”
In the past month, TRS announced that its funding ratio has improved to a 57.7 percent assets-to-liabilities funding ratio, while the nonhazardous Kentucky Employees Retirement System plan within KRS remains the worst funded in the country, with its funding ratio declining slightly to 12.9 percent.