Audit Shows KRS Funds' Misuse

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The Kentucky Retirement Systems(KRS) is under fire for funds misuse.According to the July 2009 Audit Report, the KRS invested over $700,000 in a real estate property, which was not valued at the time of purchase. The money invested in this property was drawn from an Insurance Fund set up only for purposes of covering retirees medical costs.

The property in question was previously owned by a veterinary doctor, who,in the event of failing to secure the required zoning clearance to allow outdoor kennels, decided to sell off the property to KRS in 2006 for $752,000, a 67% profit over the $450,000 she had originally bought the property (the veterinary doctor owned the property for about three months). Not only is such a deal questionable based on price, but KRS failed to secure an appraisal value of the property before cutting the deal. After securing the property however, KRS ordered for an appraisal, which put the value of the property at $135,000 to $290,000. The Audit also revealed that on the books, the $700,000 was classified as an unsecured loan to Perimeter Park West a subsidiary of KRS.

The Audit also highlights a conflict of interest involving Bill Crumbaugh, KRS property manager whose son works for Summit Realty Group that represented KRS in the deal. The auditors note that it is possible that conflict of interest affected the negotiation of the transaction.

Earlier in February 2009, the Quarterly Report of the Audit Committee found that KRS had 35 cases of members dead and overpayment and 12 cases of beneficiaries dead and overpayment. These cases could potentially be fraudulent transactions. The Audit Committee upon review found that KRS did not have any Fraud Management Policy to help deter fraud and inappropriate behavior. The Committee then recommended that KRS management should prepare a formal written Fraud Management Policy for the Board of Trustee's approval.

These findings are rather unsettling considering that KRS is charged with the responsibility of investing the Systems' funds with full compliance to the Prudent Person Rule. Such incidents underscore the fact that KRS is grossly mismanaged and further highlights the need for reform of the whole system.

As of June 30,2008,KRS had an funding ratio of 54.2%, with an unfunded liability of $4,926,776. With the poor economic performance over the past year, this figure could be bigger for the financial year ending June 30, 2009.

An unfunded liability refers to the excess of a retirement plan’s actuarial liability over the actuarial value of assets. Actuarial liability is the amount that the retirement system expects to pay out over the long-term. Actuarial value of assets is the amount that the retirement system expects to have available to pay retirement obligations over the long-term.

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