Drew Curtis, the independent candidate for governor, said Wednesday that the state public pension system’s taste for high-fee alternative investments through secret contracts “looks bad” and should be scrapped in favor of conventional, less-expensive approaches.
Curtis took aim at Kentucky Retirement Systems, the $16 billion pension fund for state, city and county employees and retirees, after learning that KRS pays 75 percent more in annual money-management fees than previously disclosed. Most of the $46 million in newly disclosed fees go to private equity firms. The new annual total is $108.3 million.
In an interview with the Kentucky Center for Investigative Reporting, Curtis said he would dump “high-fee, high-risk” private equity and hedge fund managers, whose fee structures and investment holdings are concealed from public view with KRS’ consent. For example, KRS’ “funds of funds” accounts are not broken out into holdings. Curtis said he has a “huge problem” with such secrecy.
“At best, it only looks like corruption, and that’s a really bad starting point for the outcome range we’re looking at here, because the problem is whenever things are put in opaque boxes, that’s where bad stuff happens,” Curtis said.
Curtis, a Versailles businessman who created the news aggregation website Fark.com, said he would “totally throw open the doors” to KRS contracts and investments if elected governor.
“It’s obviously what you would do,” he said. “I would give them a shadow of the doubt and say maybe everything’s on the up-and-up here, but, man, it really doesn’t look like it.”
One of Curtis’ opponents in the Kentucky governor’s race, Republican Matt Bevin, recently told WFPL News he has no problem with KRS putting workers’ money in alternative investments. Democrat Jack Conway said pensionholders “deserve an open and transparent process when it comes to KRS’ investments.” He said he is concerned about the higher investment fees and that they “should be monitored closely.”
Curtis challenged his major party opponents not to accept campaign contributions from “Wall Street firms making millions off of KRS and KTRS in no-bid contracts.” Curtis was not asserting that they had. The first campaign finance reports for the Nov. 3 election aren’t due until the first week of October.
KRS invests in different asset classes to diversify its portfolio, and roughly 35 percent of its holdings are alternative investments, which include real estate funds, timberland and venture capital funds. Curtis said he would favor steering KRS pension-holders’ money into low-cost and liquid investments such as the S&P 500 index, which outperforms managed funds over the long run.
“If they (KRS) are buying hedge funds and paying fees on them, then in the long term, this is a losing proposition, and I have a serious problem with that,” he said.
Two weeks ago, members of the KRS Board of Trustees received a copy of an independent report showing that KRS’ investment costs were higher and its five-year net returns lower than the median of comparably sized public pension plans. The study was done by CEM Benchmarking of Toronto.
Jim Carroll, a co-founder of the Facebook group Kentucky Government Retirees, said KRS should follow the lead of public pensions like CalPERS in California toward more transparency in alternative investments.
“We see no reason for KRS to be a willing partner with the alternatives industry in keeping some aspects of investments secret,” Carroll said in an email. “After all, it is public money being invested, and secret deals are antithetical to the expenditure of public funds.”
State Rep. Jim Wayne, D-Louisville, introduced a bill in the 2015 legislative session calling for KRS’ investment holdings, fees and contracts to be posted on the agency’s website. The bill was assigned to the House State Government Committee, where it died.
This story was reported by Louisville Public Media's Kentucky Center for Investigative Reporting.
