Program Review and Investigations Committee

 

Minutes

 

 

<MeetMDY1> September 13, 2012

 

Call to Order and Roll Call

The<MeetNo2> Program Review and Investigations Committee met on<Day> Thursday,<MeetMDY2> September 13, 2012, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Senator Jimmy Higdon, Chair, called the meeting to order, and the secretary called the roll.

 

Present were:

 

Members:<Members> Senator Jimmy Higdon, Co-Chair; Representative Fitz Steele, Co-Chair; Senators Tom Buford, Vernie McGaha, Joey Pendleton, Dan "Malano" Seum, and Brandon Smith; Representatives Dwight D. Butler, Leslie Combs, Jim DeCesare, Ruth Ann Palumbo, Rick Rand, and Arnold Simpson.

 

Legislative Guests: Representatives Jim Gooch and Derrick Graham.

 

Guests: Eric Friedlander, Deputy Secretary, Cabinet for Health and Family Services. T.J. Carlson, Chief Investment Officer; Jennifer Jones, Interim General Counsel; Kentucky Retirement Systems. Robert Barnes, Deputy Executive Secretary of Operations and General Counsel; Kevin Carrico, Director, Investment Management; P.J. Kelly, Investment Consultant; Kentucky Teachersí Retirement System. John Steffen, Executive Director, Executive Branch Ethics Commission.

 

LRC Staff: Greg Hager, Committee Staff Administrator; Chris Hall; Colleen Kennedy; Katie Kirkland; Van Knowles; Lora Littleton; Jean Ann Myatt; William Spears; Joel Thomas; Leonard Evans, Graduate Fellow; Jenna Skop, Graduate Fellow; Stella Mountain, Committee Assistant; Program Review and Investigations Committee Staff; Rick Graycarek, LRC Staff Economists Office.

 

Senator Higdon asked for a moment of silence in memory of the granddaughter of Representative Mills.

 

Approve Minutes for August 14, 2012

Upon motion made by Representative Simpson and seconded by Representative DeCesare, the minutes of the August 14, 2012 meeting were approved by voice vote, without objection.

 

Follow-up on Impact Plus

Mr. Friedlander said that the provider that he has testified about in previous committee meetings is back in the system as a Michelle P and Impact Plus provider. The cabinet continues to look at Impact Plus and how improvements can be made in the context of managed care.

 

Senator Higdon asked if the cabinet is looking at the grievance process. Mr. Friedlander said that the cabinet is looking at all processes and how they can be improved.

 

Senator McGaha said that he has heard complaints from providers about managed care organizations denying services. Mr. Friedlander said that he has also heard complaints about provision of Impact Plus services. This is a complex issue, and the cabinet is working to ensure that children remain eligible.

 

Mr. Friedlander complimented the Program Review staff who are working on the committeeís study of personal care homes.

 

Staff Report: Governance, Funding, and Investments of the Kentucky Retirement Systems and the Kentucky Teachersí Retirement System

Katie Kirkland, Colleen Kennedy, and Rick Graycarek presented the report. Ms. Kirkland said that the Kentucky Retirement Systems (KRS) is a state agency that provides retirement and insurance benefits to primarily state and local government retired members and their beneficiaries. There are nearly 325,000 total members in KRSís three systems. Generally, state government workers participate in the Kentucky Employees Retirement System (KERS, 124,119 members), city and county workers participate in the County Employees Retirement Systems (CERS, 198,308 members), and state police officers participate in the State Police Retirement System (SPRS, 2,172 members). Over the past 10 years, the number of active members of KRS has been relatively stable. The number of persons receiving benefit payments, however, has been increasing. The ratio of active members to retired members and their beneficiaries has declined from 2.5 to 1 in FY 2001 to 1.7 to 1 in FY 2011. In FY 2012, 73 percent of individuals received less than $25,000 in benefits from KRS. Of the 84,826 total benefit recipients, 141 individuals received $100,000 or more in benefits.

 

The Kentucky Teachersí Retirement System (KTRS) is a state agency that provides pension benefits to members retired from local school districts and other KTRS employers such as the Kentucky Department of Education. The system provides medical, disability, and life insurance benefits for eligible members. As of June 30, 2011, there were nearly 127,000 active members, inactive members, and retired members and beneficiaries receiving benefits from KTRS. In 2003, the ratio was 2 active members per retired member and beneficiary, but it fell to 1.7 by FY 2011. For FY 2012, nearly one-third of benefit recipients received less than $25,000. Nearly 55 percent of recipients received $25,001 to $50,000; 135 individuals received benefits of more than $100,000.

 

HB 146 from 2010 added requirements for the composition of the KRS investment committee and that two members are the trustees with investment experience appointed to the board by the governor. The KTRS Investment Committee has seven members: two lay trustees with ďinvestment experience,Ē three other trustees, and two investment advisors with ďinvestment experience.Ē The investment advisors are nonvoting members of the committee but still act as fiduciaries to KTRS. Investment experience is defined in KTRSís governance manual but it is not defined in statute or administrative regulation. In comparison, for KRS, investment experience is defined in statute.

 

For KRS, investment constraints are primarily imposed by the board of trustees. For KTRS, statute limits the amount of assets internal and external managers can invest, and administrative regulations limit the types and amounts of investments KTRS can make.

 

HB 1 from the 2008 Special Session required the KRS and KTRS boards of trustees to establish formal trustee education programs for all board trustees, including an orientation program and annual required training. The systems were also required to incorporate the trustee education program by reference in administrative regulation. According to KRS officials, as of May 23, 2012, all trustees were up to date on their training except the newest trustee whose term began in April 2012. KTRS reported that as of May 30, 2012, all trustees were current on their training requirements. HB 1 also required the boards of KRS and KTRS to post specified information on their systemís websites and make it available to the public.

 

HB 300 from the 2012 Regular Session added a requirement for each board to post a searchable database of the systemís expenditures and a listing of each individual employed by the system along with the employeeís salary or wages. The systems have the option to provide the information through an executive branch website.

 

Staffís review of KRSís website on June 18 determined that each required document was accessible. Staffís review of KTRSís website on July 11, 2012, determined that some information was unavailable: the quarterly investment performance update for the period ending March 31, 2012 was missing a benchmark for cash. As of July 2012, information was not available for KTRS on expenditures and employeesí salaries. KTRS reported that it had sent the required information on salaries to the Finance and Administration Cabinet in May 2012, and that it had been providing expenditure information to the Cabinet but that it recently learned that only summary information was being posted to the website. KTRS reported that it contacted the cabinet about the need to post detailed expenditure information.

 

Recommendation 1.1 is that KTRS should ensure that information is posted online as required by KRS 161.250(4).

 

Ms. Kennedy gave an overview of the inviolable contract question. In general, the modern judicial interpretation of state pension obligations has been that they are contracts between plan members and the state government. As contracts, pension obligations are often considered to be constitutionally protected by the US Constitutionís Contracts Clause and state equivalents. Support is sometimes also found in state statutes and case law.

 

Constitutional Contract Clauses prohibit a state from passing a law that diminishes or impairs existing public or private contracts. The US Constitution says ďno State shall...pass any...Law impairing the Obligation of Contracts....Ē Many state constitutions, including Kentuckyís, have language that mirrors the Federal Constitutionís. Some states have language in their state constitutions that specifically declares public employee pensions to be an inviolable contract, New York, for example. Kentuckyís Constitution does not have such a clause.

 

Inviolability of existing public pension plans has also been found to varying degrees in state statutes and state case law. In Kentucky, the statutes creating KTRS and each system in KRS state that it is ďan inviolable contract of the Commonwealth.Ē A number of court cases around the country have interpreted such statutes to mean that a change in retirement benefits for new employees is not covered by an inviolable contract. In some states, case law has supported the inviolability of public pension contracts. For example, the Kentucky Supreme Court said in a 1995 case that KERS members ďhave the right to the pension benefits they were promised as a result of their employment, at the level promised by the Commonwealth.Ē

 

Recent policy changes and several lower court legal cases in other states are testing the inviolability of public employee pension contracts. For example, in Illinois public pension retirees are now required to contribute to their health insurance coverage. Rhode Island recently made sweeping changes to its public employee pension system. The report summarizes recent cases in Arizona, Colorado, Florida, Minnesota, and Rhode Island regarding whether public employee pension benefits are considered inviolable contracts between plan members and government. These cases are illustrative; they are not binding on the Commonwealth.

 

Mr. Graycarek said that as of FY 2011, KRSís unfunded liability was $12 billion, and KTRSís was $11 billion. Funded ratios are 36 percent for KERS, 63 percent for CERS, 45 percent for SPRS, and 57 percent for KTRS. Reported funded levels are likely to drop due to recently approved changes in accounting standards by the Governmental Accounting Standards Board (GASB). The primary reasons funded levels are falling is investment losses and employer contributions being less than the actuarially recommended rates. Investment gains generally account for approximately 70 percent of annual additions to a retirement system. Since FY 2005, KRS investment returns by year rose by as much as $1.9 billion and fell by as much as $2.3 billion. KTRSís investment returns rose by as much as $2.8 billion and fell by as much as $2.0 billion.

 

In response to a question from Representative DeCesare, Mr. Graycarek said that the unfunded liability included investment losses.

 

Mr. Graycarek said that over the previous 30-year period KRS averaged a 9.47-percent return per year, which was better than its actuarially assumed benchmark of 7.75. KRSís long-term benchmark is also 7.75 percent, which it has outperformed since inception. KTRS averaged a 9.7-percent annual return over this period, which was better than its actuarially assumed benchmark of 7.5 percent. KTRSís long-term benchmark is also 7.5 percent but it does not provide a period of evaluation for it.

The return for KRS in FY 2011 was 18.96 percent, which was below its 20.34-percent fund benchmark. KRSís 10-year return was approximately the same as its benchmark rate; its 3-year and 5-year returns underperformed benchmarks. KTRSís return in FY 2011 was 21.6 percent, which was above its 20.9-percent benchmark. KTRS outperformed its 3-year benchmark, but prior to 2008, KTRS did not benchmark overall fund performance.

 

In the report, staff compared KRSís and KTRSís investment performance to the average performance in the Bank of New York Mellon-Public Funds benchmark. KRSís returns were lower for the 1-, 5-, and 10-year periods and higher for the 3-year period. KTRSís returns were lower for the 10-year period but higher for the other periods.

 

Staff also identified state public employee and teacher systems comparable to KRS and KTRS. KRSís returns were lower than the median for its comparable systems for the 1- and 5-year periods, about the same over 10 years, and higher for the 3-year period. KTRSís returns were lower than the median for its comparable systems for the 1- and 10-year periods and higher for the 3- and 5-year periods.

 

KTRS was relatively late allocating assets to some riskier asset classes such as international equities. KTRS has administrative restraints on the types and amounts of assets invested.

 

Ms. Kennedy said that placement agents are third parties that are paid a fee to secure potential investors. A 2011 Kentucky Auditor of Public Accounts (APA) report found that a placement agent had ďquestionable accessĒ to a former Chief Information Officer at KRS. The APA made several recommendations, discussed in the study, that KRS has since implemented.

 

At the federal Securities and Exchange Commission (SEC) level, placement agents fall into the category of municipal advisors under the Securities Exchange Act of 1934. The 2010 DoddĖFrank Act required all municipal advisors to register with the SEC and to abide by its rules and regulations. In several states, the retirement systems themselves have instituted stricter controls on the use and disclosure of placement agents.

 

Other states, like Kentucky, require placement agents to register as lobbyists. The New York State Common Retirement Fund has banned the use of placement agents.

 

House Bill 300 enacted during the 2012 Regular Session requires placement agents to register as executive agency lobbyists. As defined in the statute, placement agent means an individual or firm who is compensated or hired by an employer for the purpose of influencing an executive agency decision regarding the investment of the KRS or the KTRS assets. In Kentucky, although a placement agent is a subcategory of executive agency lobbyist, a placement agent can be compensated on a contingency basis; other types of executive agency lobbyists cannot. The statute defines an unregulated placement agent as a placement agent who is prohibited by federal securities laws from receiving compensation for soliciting a government agency. Such a placement agent must register with the Executive Branch Ethics Commission but cannot be paid on a contingency basis. The circumstances under which a placement agent would not be allowed by the SEC to receive compensation is one of the areas of confusion surrounding placement agents. Staff were unable to determine from any source an example of an unregulated placement agent.

 

Recommendation 3.1 is that the Executive Branch Ethics Commission, KRS, and KTRS should confer on the implementation of the sections of KRS 11A.201 dealing with placement agents and unregulated placement agents. They should report to the Program Review and Investigations Committee at its December 2012 meeting on the status of implementation and should specify recommendations for any needed revisions to the statute.

 

Senator Buford asked for the number of retirees and beneficiaries who work for quasigovernmental entities and the annual amount of their pensions. Mr. Graycarek said that staff had talked to KRS about this and will provide the requested information to the committee.

 

Senator Buford said it appears that statutory language is vague on what a placement agent is. Mr. Graycarek said that the report recommends that the interested parties confer on the implementation of the statute. Senator Buford suggested that consideration should be given to having placement agents register with the Legislative Branch Ethics Commission too.

 

Senator Buford asked how investment returns were impacted after the New York State Common Retirement Fund banned the use of placement agents. Mr. Graycarek said that staff could check into this.

 

In response to questions from Representative DeCesare, Mr. Graycarek said that KRS may be able to provide information on how much is paid out by KRS per year to placement agents. He noted that KTRSís policy is not to use placement agents. KRS uses them but has a disclosure policy. He said KRS staff can address what information is required to be disclosed about the use of placement agents.

In response to a question from Representative DeCesare, Ms. Kennedy said that placement agents are registering with the Executive Branch Ethics Commission.

 

Upon motion by Representative DeCesare and second by Representative Simpson, the report was adopted by roll call vote.

 

Representative Simpson asked if there are any substantial differences between the report sent to members prior to the meeting and what was presented today. Mr. Hager said that staff correct any typos and writing errors in the previous draft. Committee members are notified when any substantive revisions are made.

 

Representative Simpson said that he would like more information on the relative contribution of the pension and medical insurance plans to KTRSís liability. Mr. Graycarek said that staff could get more information on this.

 

Mr. Barnes said that a medical insurance benefit for KTRS members was established in 1964 on a pay-as-you-go basis. Beginning in the late 1980s and early 1990s, contributions were no longer sufficient to pay benefits. In late 1998, KTRSís actuary approved redirecting some contributions from the pension fund to the medical fund. In 2004, KTRSís actuary advised that pension contributions could no longer be redirected without being repaid. In 2005, the General Assembly agreed to continue redirecting some pension contributions to the medical insurance fund but with the promise to repay. To repay the pension fund, the state made payments on a 10-year amortized schedule. In 2010, interested parties developed a shared responsibility plan enacted as HB 540, which mandated higher contributions from teachers, school districts, and retired teachers under age 65. The state pays the net cost of new retirees under age 65.

 

In response to a question from Representative Simpson, Mr. Barnes said that there is no inviolable contract for medical insurance. The only requirement is that members have access to group insurance coverage.

 

Representative Steele asked for a timetable for the future funding status. Mr. Barnes said that it is hard to tell. According to KTRSís actuary, there should be $1 billion in assets in the medical insurance fund within 10 years.

 

In response to a question from Senator Seum, Mr. Barnes said that provision of healthcare through KTRS is not part of the inviolable contract. The only requirement is that members have access to a group plan, which could be paid for by members.

 

Senator McGaha asked whether the effects of the statutory and regulatory constraints on KTRSís investments were more negative or positive. Mr. Barnes said that KTRS is an outlier among public employee retirement systems and has less flexibility to change. In response to a follow-up question from Senator McGaha, Mr. Barnes said that the regulations are not as constraining as they used to be.

 

In response to questions from Representative Rand, Mr. Barnes said that the state has repaid in full the amount the medical insurance fund borrowed from the pension fund and it is on pace for paying benefits for those under 65.

 

In response to a question from Representative Rand, Mr. Barnes said that KTRS is actively involved at the state level and is a member of the Health Policy Board that establishes benefit levels of the health insurance policies on the state health insurance policy. Internally, KTRS has been making many changes to the medical insurance plan and takes advantage of available federal programs which has resulted in substantial reduction of unfunded liabilities for the medical insurance fund. On the national level, KTRS is a charter member of the National Public Sector Healthcare Roundtable, which makes recommendations to Congress about improvements and best practices.

 

In response to questions from Senator Buford, Mr. Barnes said that the ratio of active to retired members is 1.7 to 1. He said there is no state obligation for health care for teachers. Senator Buford referred to a previous attempt to change healthcare benefits and asked whether this could still be done. Mr. Barnes said yes.

 

Senator Buford said that some teachers qualify for Social Security benefits through other jobs but they do not receive the full amount of benefits because they are members of a system, KTRS, which is not a participant in the Social Security. In response to a question from Senator Buford, Mr. Barnes said that Congress has been lobbied on this issue, but to his knowledge no one has pursued a challenge in court.

 

Representative Simpson said that the ultimate issue is the funding ratio and unfunded liability. In response to questions from Representative Simpson, Mr. Barnes said that KTRS will be requesting funds in the next budget cycle to cover any shortfall as recommended by the actuary.

 

Senator Higdon asked whether a shared responsibility solution could work for other state pension systems. Mr. Barnes said that the KTRS situation is unique in that medical insurance is not part of an inviolable contract.

 

Representative Graham referred to the slide in staffís presentation that compared KTRSís investment performance to other systems. He asked whether KTRS has also underperformed compared to other systems that do not participate in Social Security. Mr. Graycarek referred to a table in Appendix G of the Program Review report. He said that staff identified five systems similar to KTRS in that most members did not participate in Social Security. Over a 10-year period, their investment returns ranged from 5.4 percent to 6.5 percent, all higher than KTRSís return of 4.8 percent. He noted that results for some of the systems were gross of fees; some were net of fees.

 

Representative Butler noted that Appendix C of the report indicates that for the Kentucky Employees Retirement System, the average benefit payment is much higher for nonhazardous employees than hazardous. For employees in the County Employees Retirement System, the relationship is reversed. He asked why this would be the case. Mr. Graycarek said that KRS would be better able to answer this.

 

Senator Higdon asked whether the 7,102 KRS members who are receiving benefits and are members of two systems are getting two checks. Mr. Graycarek said that this is not necessarily the case but that he can get more detailed information.

 

Senator Higdon said the chart on page 30 of the report seems to indicate that KRSís expenses are high and increasing. Mr. Graycarek said that the increase is primarily due to a change in how expenses are accounted for.

 

Senator Higdon said that he would like to know the amounts, not just the percentage rates, of the actuarially required contributions listed in Appendix A of the report.

 

Representative Graham said that the report should go to the staff of the Kentucky Public Pensions Task Force for distribution to members of the task force. Senator Higdon agreed and said that the other handouts from todayís meeting should also go to staff and members of the task force.

 

Representative Simpson asked for clarification that members of the KRS board of directors are volunteers and part time. He noted that the executive director is not part of the investment side of the organization. Mr. Carlson replied that Representative Simpson is correct about the board members. As chief investment officer, he is responsible for investments. He reports to the investment committee and the board. He reports to the KRS director for administrative purposes.

 

Mr. Carlson showed the organizational chart for KRS and noted that everyone is directly reachable by email. He described the educational qualifications of the 10 investment department staff. Together, they have more than 150 years of pension fund experience. The struggle will be to retain the high level of staff. He listed some of the information available on the KRS website and noted that many of transparency items required by statute were already being provided. There is a new self-service program for plan members to use online. He showed a chart of asset allocations for the different KRS plans. It has become more important that plans be managed independently. He described investment performance for the year to date. Total equity and real estate are performing below their benchmarks. He noted that KRSís real estate investments focus on current cash flow so performance below the benchmark is not unexpected. Fixed income, private equity, and cash investments are performing better than their respective benchmarks, as are two relatively new investment categories: real return and absolute return. Overall, KRS investments had a return of 11.3 percent over 3 years, underperformed on a 5-year basis, returned 6 percent over 10 years, and returned 9.36 percent long-term. He showed charts to illustrate that KRS has traditionally been managed with a lower risk profile than is typical of other systems. He showed a chart with fiscal and calendar year returns since 1990.

 

In response to a question from Representative DeCesare, Mr. Carlson said that the benchmarks in the report and the benchmarks in the presentation do not match because the benchmarks in the report are for FY 2011 and the benchmarks in the presentation are for FY 2012.

Senator Higdon noted that KRSís return of 9.36 percent since inception is above the actuarial assumed rate of 7.75 percent. He asked, given that KRS is meeting this goal, why its liability is so high. Mr. Carlson said that an actuary did a study for KRS. The numbers he will give from memory may not be exact, but about 18 percent of the liability is due to investment underperformance over recent years, about 20 percent is due to unfunded cost-of-living allowances, about 5 percent is due to missing other actuarial assumptions, 20 percent is due to employers not making full actuarially required contributions, and about 30 percent is due to foregone investment returns due to the other reasons. A white paper on this topic is being presented to the investment committee next week. If the committee approves, he can send a copy to the committee.

 

Senator Higdon noted that KRS had investment expenses of $57 million in FY 2011. In response to a question from Senator Higdon, Mr. Carlson said that there is no requirement for KRS to issue requests for proposals, but KRS often does issue RFPs. Whether to use an RFP depends on the specific investment being undertaken.

Senator Higdon asked what the source of health insurance funding is. Ms. Jones said that it is prefunded. It is an inviolable benefit for those hired prior to July 1, 2003.

 

In response to a question from Representative DeCesare, Mr. Carlson said that the difference in assets reported in the Program Review report and todayís presentation is that the amounts were for different years.

 

In response to a request from Representative Simpson, Mr. Carlson said he would provide a memo detailing the elements of the unfunded liability. In response to a question from Representative Simpson, Mr. Carlson said that the total liability for health plans is about $10 billion, with about $3 billion in assets. Kentucky health insurance is a little ahead compared to other states because it is prefunded.

 

In response to questions from Representative Simpson, Mr. Carlson said that it is unclear whether the new GASB requirements will affect reporting of healthcare. He added that calculating liability to the employer level will be problematic because there are so many employers in KRS. Ms. Jones said that KRS pays a portion of the health care premium for those hired before July 1, 2003, based on numbers of years of service. For those hired after this, a defined contribution amount per year is paid.

 

In response to questions from Representative Simpson, Ms. Jones said that nongovernmental participants in CERS pay the same employer contribution rate; all outside entities in KERS came in by executive order and are paying the same rate as the state is paying. Representative Simpson asked if anyone has analyzed rejecting an entity based on how great a burden its employees would be. Ms. Jones said the requirement is that an entity be sufficiently governmental based on IRS standards.

 

In response to a question from Representative Simpson, Ms. Jones said KRS is in litigation with the Kentucky River Community Care, which fired its employees and rehired them through a new company.

 

In response to a question from Senator Higdon, Ms. Jones said that the inquiry into KRS by the US Securities and Exchange Commission is ongoing, and the SEC has interviewed some KRS employees and board members.

 

In response to a question from Senator McGaha, Mr. Carlson said that any fees paid to placement agents are paid by investment managers. When placement agents are used, the details must be provided to the investment committee. KRS has not made an investment with a placement agent in 3 years. KRS requires detailed disclosure from investment firm members prior to any investment recommendation, and this information is provided to the KRS investment committee.

 

In response to a question from Senator McGaha, Mr. Carlson said that the Auditor of Public Accounts report indicated that there is no correlation in fees paid to placement agents and KRSís performance. Based on the latest information, investments with placement agents involved have outperformed those without but the difference is minimal.

 

Senator McGaha asked for clarification that KTRS does not use placement agents. Mr. Barnes said that this is correct, it does not.

 

Senator McGaha said that not using placement agents seems to remove some of the complexity of managing investments. Mr. Carlson noted that placement agents are involved in more than 50 percent of private equity deals in the US. The KRS will consider investments with placement agents but with guidelines.

 

Mr. Barnes said that for almost all teachers, KTRS is the only source of retirement benefits, not Social Security. He described the high quality of the KTRS Board of Trustees and how important this is. He described the actuarial status of KTRSís pension and medical benefit funds. The pension fund, which is 57.4 percent funded, has assets of $14.9 billion and liabilities of $26 billion, for an unfunded liability of $11 billion. The medical fund, which is 8.6 percent funded, has assets of $295 million and liabilities of $3.4 billion, for an unfunded liability of $3.1 billion. He mentioned HB 540, which he described earlier in answering a question. He described the qualifications of KTRSís two independent investment advisors, Bevis Longstreth and George M. Philip, who serve on the investment committee.

 

Mr. Carrico showed an organizational chart for KTRSís investment staff. KTRS has broadened and deepened its staff in recent years. A change in KTRS leadership in 2004 and the economic crisis in 2008 were driving forces behind KTRS making changes in asset allocations. He discussed these changes, including a decrease in the percentage of investments in fixed income and increases for international stocks, real estate, alternative investments, and opportunistic credit. The majority of alternative investments are in private equity, which has become more attractive after the financial crisis.

Mr. Kelly said that KTRSís returns net of fees had outperformed a broad universe of public funds for FY 2012 (2.2 percent versus 0.7 percent), over 3 years (11.9 percent versus 11.5 percent), and over 5 years (2.4 percent versus 1.5 percent).

 

In response to a question from Representative Simpson, Mr. Carrico said that KTRS does not have credit default swaps, but they would be classified as fixed income or opportunistic credit.

 

Representative DeCesare said that he would like to know what percentage of those who have the option of participating in the KTRS plan or another plan choose KTRS. He asked whether KTRS would offer an optional plan for anyone outside universities. Mr. Barnes said that he will consult with the actuary and provide a response.

 

In response to a question from Representative DeCesare, Mr. Steffen said that it is unknown how many placement agents have registered with the Executive Branch Ethics Commission. Placement agents are just another type of executive agency lobbyists who have to register. By statute, the ethics commission registers lobbyists, but it does not track types of lobbyists. Representative DeCesare said that when the retirement systems report back to the committee, it may be recommended that a way be added to be able to identify placement agents. Mr. Steffen said that his concern with HB 300 is that lobbyists who are placement agents can be paid on a contingency basis.

 

The meeting adjourned at 12:48 pm.