A new state representative from Louisville has filed a bill designed to add transparency and oversight over public pension systems’ financial activities, including the possibility of felony criminal penalties for trustees and contracted investment managers who violate their ethical and fiduciary duties.
Democratic Rep. Lisa Willner filed House Bill 126 on Tuesday — the first day of the 2019 legislative session of the Kentucky General Assembly — which she calls “a good governance, transparency and accountability bill.”
The provisions of the bill would apply to the investment manager contracts for the state’s two largest public pension systems — Kentucky Retirement Systems (KRS) and Teachers’ Retirement System (TRS) — requiring them both to follow the state’s Model Procurement Code when contracting for services to manage and invest their billions of dollars worth of assets.
While state government agencies are required to follow the competitive bidding rules under this code when contracting services, Willner noted that state law carves out special exemptions for these pension plans, whose boards of trustees adopt their own investment manager procurement policies in consultation with the Finance and Administration Cabinet.
Despite a 2017 law designed to add some degree of transparency to this process — requiring pension systems to publicly post such contracts and the fees paid to investment managers — Willner told Insider Louisville that these contracts are still “shrouded in mystery,” as most contracts remain unposted and many that have been are heavily redacted.
“(HB 126) would basically make pension oversight consistent with the rest of the law, as far as financial oversight,” said Willner. “So the fact that this exemption is carved out for Wall Street firms and private hedge funds… I don’t know that it’s very well-known or very well understood, but it’s a huge problem.”
Willner’s bill would also grant the state attorney general the jurisdiction to investigate and prosecute any violations of the ethical and fiduciary duties of both the pension systems’ trustees and the contracted investment managers. If either commits a knowing violation of such rules under Kentucky statutes — including having a conflict of interest or obtaining a personal financial benefit from pension investments — the bill now indicates that they would be committing a Class D felony with possible jail time.
Similar legislation was filed in the 2018 legislative session, but it did not receive either a hearing or vote in committee. House Bill 551 had nearly identical language and was sponsored by former Rep. Jim Wayne — whose seat Willner now occupies — and House Minority Leader Rocky Adkins.
Former Rep. James Kay, D-Versailles, also attempted in the 2018 session to attach an amendment to Senate Bill 151 — the contentious public pension bill that passed but was recently struck down by the Kentucky Supreme Court — that would have added these same transparency and oversight provisions. However, the Senate declined to suspend the rules to hear it on a 43-43 vote.
Willner said that she spoke with one Republican member of the House majority leadership about the bill, who told her that “he’ll be sure that the bill gets a good look in the majority caucus.”
The spokesmen for KRS and TRS did not return a request for comment on the bill.
As Insider reported last year, KRS and TRS officials state that many investments manager contracts are not publicly posted or heavily redacted because of the risk of potential litigation from Wall Street firms, who value secrecy on the management and performance fees that they charge and assert that this disclosure would amount to putting the companies at a competitive disadvantage.
Last year, two firms returned nearly $100 million worth of KRS investments because of a new requirement to adhere to the CFA Institute code of ethics, in addition to concerns over a massive lawsuit filed by pensioners against several of the largest private equity firms in the country, which accused them of breaching their fiduciary duties and depleting KRS assets with risky hedge fund investments while charging excessive fees.