State law requires an annual financial audit of the Kansas Public Employees Retirement System. CliftonLarsonAllen, a certified public accounting firm under contract with Legislative Post Audit, conducted this audit. The auditors expressed an unmodified opinion on the financial statements, meaning that the financial statements present the Kansas Public Employees Retirement System’s financial position fairly and in conformity with generally accepted accounting principles in all material respects. In addition, the audit disclosed no significant deficiencies in KPERS’ internal control over financial reporting and no instances of noncompliance with legal requirements that were material to the financial statements.
Kansas Public Employees Retirement System: Financial Audit of Fiscal Year 2015
State law requires an annual financial audit of the Kansas Public Employees Retirement System (KPERS). CliftonLarsonAllen, a certified public accounting firm under contract with Legislative Post Audit, conducted this audit. The auditors expressed an unmodified opinion on the financial statements, meaning that the financial statements present KPERS’ financial position fairly and in conformity with generally accepted accounting principles in all material respects.
The auditors did not report any deficiencies in KPERS’ internal control over financial reporting and disclosed no instances of noncompliance with applicable legal requirements that were material to KPER’s financial statements.
Kansas Public Employees Retirement System: Evaluating Controls to
Detect and Prevent Fraud and Abuse
The Kansas Public Employees Retirement Plan (KPERS) was created in 1962 to provide a financial foundation for Kansas public employees to retire. KPERS has about $16 billion in assets and administers three statewide defined-benefit retirement plans for about 295,000 state and local public employees. Because of the volume of applications, contributions and benefit payments handled on a regular basis, public pension plans are at risk for fraud and abuse, including the risk of making inaccurate benefit payments or that the plans will not collect enough in contributions. However, these risks can be mitigated by implementing controls such as requiring proof of identity, regularly monitoring to ensure that benefits are calculated correctly, and segregating duties. Our test work showed that KPERS had many, but not all, controls to help prevent and detect fraud and abuse. We found that since late 2013, KPERS has not conducted field audits to verify the accuracy of employer-reported information. Further, KPERS could strengthen its efforts to identify disability recipients who may be ineligible for those benefits. In addition, we found seven teachers who were incorrectly awarded KPERS service credits while working for education associations.
We also found that when calculating members’ retirement benefits, KPERS handled final average salary calculations appropriately. Legislation considered during the 2015 Legislative Session would have substantially limited the opportunity for retirees to include unused leave when calculating benefits. Finally, restricting or eliminating the inclusion of unused leave could reduce KPERS’ unfunded liability up to $80 million, but the actual impact likely would be far less.
Kansas Public Employees Retirement System: Fiscal Year 2013
State law requires an annual financial audit of the Kansas Public Employees Retirement System (KPERS). Cochran Head Vick & Co., P.A., a certified public accounting firm under contract with Legislative Post Audit, conducted this audit. The auditors expressed an unqualified opinion on the financial statements, meaning that the financial statements present KPERS’ financial position fairly and in conformity with generally accepted accounting principles in all material respects. The auditors did not report any deficiencies in KPERS’ internal control over financial reporting.
Reviewing How the Recent Economic Recovery Has Affected the Kansas Public Employees Retirement System's Funding Situation
State law requires a triennial performance audit of the Kansas Public Employees Retirement System (KPERS). Cochran Head Vick & Co., P.A., a certified public accounting firm under contract with Legislative Post Audit, conducted this audit. The auditors concluded that the recent economic recovery and favorable investment returns of calendar years 2009 and 2010 helped alleviate some of the impact of the recession. However, the unfavorable investment return experienced in calendar year 2011 have resulted in little impact on the unfunded actuarial liability or the funding ratios.
Compared with five public employee retirement systems with similar benefits structures, KPERS ranked towards the middle for most measures (funded ration, unfunded actuarial liability, contributions, and net investment income or loss)
Kansas Public Employees Retirement System: Fiscal Year 2012
State law requires an annual financial audit of the Kansas Public Employees Retirement System. Cochran Head Vick & Co., P.A., a certified public accounting firm under contract with Legislative Post Audit, conducted this audit. The auditors expressed an unqualified opinion on the financial statements, meaning that the financial statements present KPERS’ financial position fairly and in conformity with generally accepted accounting principles in all material respects. The auditors did not report any deficiencies in the system’s internal control over financial reporting.
Kansas Public Employees Retirement System: Financial Audit of Fiscal Year 2011
State law requires an annual financial audit of the Kansas Public Employees Retirement System. Cochran Head Vick & Co., P.A., a certified public accounting firm under contract with Legislative Post Audit, conducted this audit. The auditors expressed an unqualified opinion on the financial statements, meaning that the financial statements present the System’s financial position fairly and in conformity with generally accepted accounting principles in all material respects. The auditors did not report any deficiencies in the System’s internal control over financial reporting.
Reviewing How the Recent Economic Downturn Has Affected the Kansas Public Employees Retirement System’s Funding Situation
State law calls for a performance audit of the Retirement System once every three years. The Executive Director requested that this audit address the impact of the downturn on KPERS. This audit was conducted by the joint venture of Allen Gibbs & Houlik and Berberich Trahan & Co., under contract with the Legislative Division of Post Audit. In the year’s time between the end of December 2007 and 2008, the KPERS group’s unfunded actuarial liability grew by $2.4 billion, from $5.3 billion to $7.6 billion (45%). Although the State and local subgroups’ unfunded liability grew at a faster rate, the school subgroup’s unfunded liability was about five times larger than each of the two other subgroups. On an actuarial basis, KPERS’ assets compared to its liabilities dropped from 68.6% to 56.9%. Investment losses were the main cause. The actual investment experience over the next four years may be able to offset some of the deferred loss if the experience is favorable. As calculated by the actuary, the level of contributions required to fully fund the KPERS group through 2033 would increase by 2% to 4% for each subgroup. However, State law limits increases in employer contribution rates to no more than 0.6% over the previous year’s rate. The auditors compared KPERS’ State and school subgroups combined to similar plans in five other states, some of which are in separate retirement plans. As a result, Kansas’ single plan (for the State and school subgroups only) was compared with 10 other plans in those five states. The auditors’ comparisons showed that KPERS ranked near the middle on employer contribution rates, near the bottom on the actuarial funding ratio, and in the bottom half on the amount of unfunded actuarial liability. However, if the five states’ plans are combined and compared with Kansas, Kansas’ unfunded actuarial liability is less than three of those five states. The report also summarizes what some other states have done in response to the recession.
Reviewing the Projections Presented by the Kansas Public Employees Retirement System Regarding the Need for a Long-Term Funding Plan
In August 2002, the Kansas Public Employees Retirement System issued a report that contained funding projections for the System based on current policies and practices and selected alternatives. This performance audit assesses the reasonableness of those projections and of the underlying assumptions and methodologies used by the Retirement System in developing those projections. The audit notes the limitations inherent in making such long-term projections, but concludes that the assumptions and methodologies used and the resulting projections are reasonable to assist in reviewing the System’s outlook to develop a long-term funding plan.
Reviewing Benefits Provided by the Kansas Public Employees Retirement System
This performance audit of the Kansas Public Employees Retirement System was done in connection with an annual financial-compliance audit as required by State law. The work was done by Berberich Trahan & Co., a certified public accounting firm under contract with Legislative Post Audit. The audit identified legal and practical issues arising from the Retirement System's new responsibilities for investing non-retirement moneys. The audit also compared Kansas' benefits to those provided by selected other states. In general, Kansas compared favorably with the other states, but had less generous cost-of-living adjustments and a longer vesting period.
Reviewing the Performance and Investment Practices of the Kansas Public Employees Retirement System
For fiscal year 1997, the Retirement System achieved an overall rate of return of 14.4%, which was lower than the six other states whose investment performance we compared. Kansas’ rates of return for most individual classes of investments were lower than the comparison states for fiscal year 1997. However, on a longer-term basis, Kansas’ overall five-year average rate of return was the second best. Also, on a five-year basis, Kansas’ average rates of return for four of seven investment classes ranked first or second compared to these other states. About half the Retirement System’s investment managers’ portfolios matched or exceeded the benchmarks established by the Retirement System, both during fiscal year 1997 and on a longer-term basis.
Reviewing the Kansas Public Employees’ Deferred Compensation Program
The State exercises limited oversight of the Deferred Compensation Program, with essentially no monitoring of Aetna Investment Services. This level of oversight is significantly less than that provided by other states we contacted. However, our reviews showed that customer services were adequate, that investment performance was comparable to the general market, and that costs were comparable to other similar programs we reviewed. Also, State employees we surveyed generally were satisfied with the services provided under the Program and the performance of their investments, but need more information about the Program’s fees, limitations, and restrictions. Finally, according to State law, the State isn’t liable for any loss incurred by an employee under the Program, including losses from insolvency or mismanagement of funds. However, we think State law is unclear as to whether participants’ moneys in fixed-return accounts are covered by the Kansas Life and Health Insurance Guaranty Association if Aetna were to become insolvent. Aetna operates in a highly regulated industry with controls in place to monitor its operations, which should minimize the likelihood of insolvency or mismanagement.
Reviewing Benefits Provided by the Kansas Public Employees Retirement System: A K-GOAL Audit
The Retirement System’s benefits and employee contribution rates are about average compared to other state retirement systems we reviewed. On the other hand, Kansas provides a smaller health insurance subsidy and fewer cost-of-living increases for its retirees than many other states. The amount the State pays to fund the system is among the lowest employer contribution rates we found. The System wasn’t as well funded as other retirement systems, in part because the Legislature has chosen to phase in increases in employer contributions needed to fund benefit increases granted in 1993. Compared to four private-sector employer’s defined-benefit retirement plans, the Retirement System’s benefits were just about in the middle. However, each employer provided additional benefits to their employees through a defined-contribution plan which substantially increased their overall retirement benefit. Defined benefit plans--like the State’s-- aren’t portable and tend to provide smaller total retirement benefits to employees who change jobs frequently. To increase portability, some states have made it easier for employees to withdraw at least part of the employer contributions when they change jobs. Other states are giving employees some options for how their retirement moneys can be invested, and still others are providing flexibility in computing retirement benefits that can provide an advantage to the employee. Most of these options require some cost to the State.
Reviewing the Compensation of Investment Managers by the Kansas Public Employees Retirement System
During fiscal year 1995, the Retirement System paid external investment managers about $16 million to handle its investments. Compared with seven other state retirement systems, Kansas’ total management fees were among the highest both on a one-year and five-year basis. One reason for high management fees was the cost to manage the direct placement and real estate portfolios. When we compared the fees Kansas and other states paid for similar investment portfolios, we found that Kansas’ fees were higher in two out of three cases. In one case, it appeared an investment manager may not have honored an agreement not to charge the Retirement System more than other systems with similar-sized portfolios and investment styles, or to report the reason why the fee was higher.
Reviewing Early Retirement Incentive Programs in Kansas Schools
Over the past six years, school districts with early retirement incentive programs have spent more than $50 million to pay for early retirement benefits. For fiscal years 1996 through 2000, the cost of these programs is estimated to be between $90 million and $210 million. Nine of 10 school districts we reviewed generated a cost savings ranging from $7,400 to $288,000 from their early retirement incentive programs in fiscal year 1995. Only one county, three cities, and 14 community colleges in Kansas offer early retirement incentive programs. Officials in 12 other states that have offered early retirement incentive programs reported they didn’t achieve long-term success. The reasons cited generally included inadequate planning, lack of controls over replacing retired employees, lack of good cost and savings information, lack of education about the program, and the tendency to offer early retirement incentive programs too often.
Reviewing Investments and Investment Practices of the Kansas Public Employees Retirement System
For fiscal year 1994, the Retirement System achieved an overall rate of return of 2.3%, placing Kansas’ return seventh among the 11 states we compared. All states reported lower rates of return than for the previous year. Kansas’ rates of return for most individual classes of investments were lower than current-year rates of return reported by the comparison retirement systems. The only exception was the rate of return achieved by the domestic fixed-income portfolio. About half the System’s portfolios (44.4%) achieved a rate of return that was equal to or higher than that achieved by standard indices the Retirement System used to measure those investments’ performance. On a longer-term basis, five of 11 managers who had been with the System five years or more outperformed the averages.
Reviewing Investments and Investment Practices of the Kansas Public Employees Retirement System
The Retirement System’s 14.7 percent rate of return for fiscal year 1993 was its highest rate in the past seven years. Only one of nine other retirement systems we contacted achieved a higher rate of return. Its return on individual classes of investments also compared favorably with other retirement systems, and its investment practices generally were similar to those found in other states. About two-thirds of the investment portfolios handled by individual investment managers achieved a rate of return that was higher than standard indices for their particular type of investment. The System paid investment managers about $16.7 million in fiscal 1993. Kansas had the highest total expense for external investment managers, and was second highest in fees paid to investment managers as a percent of the funds they managed.
Kansas Public Employees Retirement System, Reviewing Investment Practices and Performance for Fiscal Year 1992
The performance audit found that the Kansas Public Employees Retirement System’s investments performed above average when compared to industry benchmarks, and above average when compared to ten other state retirement systems. The System calculates its rate of return on investments on a monthly time-weighted basis, much the same as other state retirement systems. The System compensates its investment managers under a negotiated fee structure, based on the market value of the assets managed. This practice is also followed by most other state retirement systems contacted during the audit.
Kansas Public Employees Retirement System: Examining the Investment in the Ward Parkway Shopping Center
In December 1987, O’Connor Realty Advisors acquired 49 percent ownership in the Ward Parkway Shopping Center for the Retirement System for slightly more than $28 million in cash, plus an existing $16 million mortgage. The investment was made after O’Connor submitted the highest bid to refinance the Shopping Center; O’Connor did not obtain an independent appraisal of the Shopping Center before making the investment, but three other bids were within $1.5 million of the O’Connor bid. Through January 1992, O’Connor committed the Retirement System to an additional $31 million, primarily to remodel and redevelop the Center. The remodeling project appears to be about $5.8 million over budget, in part because major costs were not included in the original plan. Except for some payments to a law firm and a title company, moneys from this investment did not go directly to individuals or firms who were directly connected with other Retirement System investments. However, some of the funds from the initial investment were used to pay off a loan from a Frank Morgan bank. Through the end of 1991, the Retirement System has paid two subsidiaries of J.W. O’Connor and Associates nearly $3 million in fees associated with the Ward Parkway investment.
Analyzing Direct Placement Investments Made by the Kansas Public Employee Retirement System in the Kansas City Merchandise Mart
The investment in the Mart complied with the specific guidelines applicable to it, but only because the System’s Board changed those guidelines for this investment. Several things caused us to question the loan’s compliance with the “prudent-man” rule, for example, the Retirement System essentially bore all the risk of the venture, without funds committed by the developers and without recourse against the developers if the loan is not repaid. The appraised value of the Mart has decreased by 35 percent or more since the original appraisal, primarily because the lower level has never been leased. Without this lease income, the developers have had to contribute personal funds of about $1 million a year to meet the minimum interest payments on the loan. If this continues, there is an increased chance the developer could default on the loan. Based on interest the Retirement System has received, the average annual rate of return on this investment has been 10 percent. The Retirement System has not received any money it was supposed to receive from the cash flow of the Mart. A portion of this money accrues and will be payable in the future. If the accrued amount is counted, it increases the average annual return to about 12 percent. We estimate that Reimer and Koger was paid about $1.3 million to manage this investment.
Summary Report of Direct Placement Investments and Investment Practices of the Kansas Public Employees Retirement System
This report summarizes the major findings and recommendations from the series of audits conducted on the Kansas Public Employees Retirement System. In this series of audits, it is recommended that the Legislature decide whether it wants the Retirement System to continue making direct placement investments. If so, it is recommended that the Legislature consider specifying the type and amount of such investments that should be allowed. Given the extent and nature of the problems identified in the audit, however, it is concluded that public employees’ retirement funds should not be invested in the types of direct placement investments the Retirement System has made in the past.
Kansas Public Employees Retirement System: Examining Investments in Tallgrass Technologies, Part II
In general, we found that Reimer and Koger Associates learned of Tallgrass Technologies as a possible investment from Gateway Mid-America Partners, an investment group that eventually became a co-investor in Tallgrass. When the initial Retirement System investment was made, most of the moneys Tallgrass Technologies received were used to pay down the balance of the company’s line of credit with Commerce Bank of Kansas City. After the initial investment in 1986, Reimer and Koger loaned an additional $7.8 million of Retirement System moneys to Tallgrass Technologies. These loans apparently were made to keep the company in operation through a period of heavy financial losses, with the hope that the company eventually would return to profitability. Reimer and Koger also used more than $1.6 million of Retirement System moneys to purchase additional stock in the company, primarily to eliminate dissent between the company’s founder and the company’s outside investors. The Retirement System’s oversight was minimal for the Tallgrass Technologies investment, as it was for other direct placement investments. We made a series of recommendations for improving oversight of the System’s direct placement investment program.
Kansas Public Employees Retirement System: Overview of Selected Investment Practices
Certain investment practices used by the Retirement System’s direct placement investment managers before June 1991 may have increased by the compensation they were paid. The System’s use of directed brokerage fees should be a cost-effective way to reimburse its investment consultants, but some public pension funds do not use them because they provided opportunities for misuse and are outside the public system. The Retirement System’s reported rates of return for direct placement and real estate investments have been overstated by an unknown amount in the past, which renders many comparisons meaningless. Finally, the Retirement System appears to have more of its portfolio in direct placements and real estate, and has less oversight of the System, than other state employee retirement systems.
Kansas Public Employees Retirement System: Examining Investments Made in Hydrogen Energy Corporation
During the audit of the investment in Hydrogen Energy Corporation, we found that some of the individual investment transactions raise questions about compliance with the Retirement System’s general investment policies. When Reimer and Koger made the initial investment in Hydrogen Energy, the company was already in financial difficulty. In subsequent years, Reimer and Koger made an additional 15 loans to the company and made five large stock purchases while the company’s financial condition continued to deteriorate seriously. Only two loans have been repaid in cash, and less than half the interest owed was paid in cash. The investment in Hydrogen Energy earned an average annual return of about 2.3 percent. However, the investment may never be recouped, resulting in a loss to the Retirement System of up to $6.5 million.
Kansas Public Employees Retirement System: An Overview of Investment Manager Compensation Practices
During fiscal year 1990, the Retirement System paid investment managers more than $10 million. These managers were allowed to set the value of the investments they managed for the System, and were paid based on those values. They generally did not report that investments had dropped in value, even when those investments appeared to be significantly impaired. Some investment managers also were paid fees based on how well their investments performed, or on realized gains if their investments were sold at a profit.Retirement System staff did not always adequately monitor compensation payments and expense reimbursements to investment managers. Finally, in accordance with generally accepted accounting principles, the System reported direct placement investments at cost, unless the managers reported that the value of those investments had experienced a permanent decline below cost. Such impairments would be reported as investment losses.
Kansas Public Employees Retirement System: Examining Investments in Tallgrass Technologies Inc., Part I
Reimer and Koger's investments in Tallgrass Technologies complied with specific requirements for direct investments in private companies, but some investment transactions did not comply with the "prudent-man" rule adopted by the Board of Trustees. Tallgrass' growth had begun to slow before April 1986, when Reimer and Koger made the first investment in the company on the Retirement System's behalf. It loaned the company more money to pay the principal and interest on previous loans, even though the company's financial condition had deteriorated seriously. Reimer and Koger also converted $8 million in debt to common stock in the company, putting the Retirement System behind every other creditor if the company is liquidated. The System's investment in Tallgrass may never be recouped, resulting in a loss of about $14 million. We estimate that Reimer and Koger was paid about $292,000 to manage this investment.
Kansas Police and Firemen’s Retirement System: Part II
Statutory changes proposed or enacted over the past 10 years relating to the Police and Firemen’s Retirement System are summarized. The audit also compares benefits available to school and non-school members of the Public Employees Retirement System, and describes the differences in the disability experiences of surrounding states.
Entry Into Retirement Annuity Plans at the Regents’ Institutions
Most employees who were signed up immediately for a retirement annuity plan either had a valid contract or the required experience when they started work. But many of those employees got their contract just before they started; they had not been enrolled in a valid plan at another school. The State incurs a cost of about $250,000 a year to pick up these employee’ retirement contributions. The Legislature will need to determine if it intended for these contibutions to be picked up.
Kansas Police and Firemen’s Retirement System: Part I
Benefits available to members of the Kansas Police and Firemen’s Retirement System are more generous than the benefits available to public employees covered by KPERS, but they are similar to benefits provided to public safety personnel in other states and Kansas localities. Any change in benefits would require a change in the public policy of encouraging an experienced but relatively young public safety workforce.