Low- and moderate-income homebuyers in the State would benefit from greater State involvement with both the mortgage revenue bond program and the mortgage credit certificate program. The State could administer the mortgage revenue bond program, but would need to contract with bond underwriters, bond counsel, and loan servicers. It could operate the mortgage credit certificate program in its entirety. In both cases, there is the potential to achieve greater Statewide distribution of loans and certificates, reduce homebuyer fees, and increase oversight of the programs.
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.
Examining Differences in Costs for Issuing Bonds in Kansas
Although State law does not require bond professionals to be competitively selected for State-issued bonds, the Kansas Development Finance Authority has competitively selected such professionals for all State bonds issued for at least the past three years. Kansas municipalities generally are not required to competitively select bond professionals, but most we contacted had some elements of competition for selecting bond counsel and underwriters for general obligation and revenue bonds. This was not true for mortgage revenue bonds and industrial revenue bonds. Because bond professionals have been competitively selected for all State bonds issued in recent years, we were unable to provide meaningful information about differences in issuance costs for bonds with competitively selected professionals and those without.
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.
Compliance and Control Audit: Selected Correctional Agencies
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.
Review of Moneys Collected Through the Office of the Clerk of the Appellate Courts
For fiscal years 1989, 1990, and 1991, the moneys collected by the Office of the Clerk of the Appellate Courts were properly handled and recorded. In addition, we found that the potential for loss or misuse of receipts could be reduced by assigning the responsibility for handling receipts and the responsibility for recordkeeping for receipts to different employees, or by having periodic, independent comparisons of actual cash amounts to Office fee records.
The Community Development Block Grant program and the Rental Rehabilitation program have been adequately supported by the Department of Commerce. The two programs together have awarded Kansas cities and counties an average of about $1.4 million annually for housing rehabilitation and other housing-related activities.
Although the number of housing assistance programs in Kansas gradually has increased, the programs reportedly have received limited support, and the Department of Commerce's Office of Housing has not carried out all the activities authorized or mandated by the 1990 Legislature. Because several aspects of the Low Income Housing Tax Credit Program have not been well-managed, the Department cannot always show how tax credits are awarded, or whether the people who got them should have. The Department's failure to comply with federal requirements also may have resulted in some developers receiving excessive tax credits. Finally, Department staff kept checks totaling as much as $84,000 before depositing those fees in the State Treasury.
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’ Foster Care Program, Part IV: Summary Report
This report summarizes the findings and recommendations from the series of audits the Division conducted of the State's foster care program, plus an audit of the handling of reports of child abuse and neglect. The latter report was included because children can be placed in the State's custody if there is evidence they have been abused or neglected. This summary report discusses the need to place greater emphasis on preventing children from coming into the overburdened foster care system.
Review of State Grants to the Pittsburg Family Planning Clinic (100-hour audit)
Although State grant moneys were spent for the purposes provided for in the grant contracts, the Clinic's arrangement with Crawford County for the County to process and pay its payroll and other bills resulted in considerable confusion and in a lack of adherence to two provisions of the grant contract. One provision calls for establishing and maintaining an accounting system that records and reports specific financial information, and the other calls for single audit coverage of the organization in accordance with federal requirements. The report recommends that the Department of Health and Environment work with the federal granting agency to ensure that any deficiencies regarding previous audit coverage of grants made to the Family Planning Clinic in Pittsburg are resolved.
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.
The Board of Regents provided only general instructions to its institutions for budgeting Margin of Excellence moneys, but it approved all Margin budget requests before those requests were submitted to the Legislature. Individual institutions' plans for spending their Margin money appeared to comply with their mission statements. Except for Wichita State University, all the Regents' institutions pooled their Margin salary parity and merit pay moneys before distributing any salary increases in fiscal years 1989 and 1990. Tenured or tenure-track faculty at Wichita State and Kansas State Universities received average salary increases of 8-10 percent for 1989 and 1990; University administrators received average raises that were comparable to or less than faculty pay raises. Finally, both Wichita State and Kansas State used their Margin of Excellence program enhancement moneys for a variety of items such as hiring unclassified staff and purchasing library materials and equipment.
Kansas’ Foster Care Program, Part III: Staffing and Funding Levels
The number of social workers assigned to foster care has not kept pace with the growing number of children in the Department's custody. Although the Department could not provide information showing changes in caseloads over time, we estimated that average foster care caseloads were more than double the standard proposed by the Child Welfare League of America. It did not appear that funding affected placement and service decisions. The actual limiting factor appeared to be the lack of appropriate placements and services. Most foster care providers we surveyed thought the reimbursements they received from the State did not cover their costs, but this did not appear to be a major reason for them leaving the system.
On average, the 200 children in our sample were in the Department's custody for two years and had 4-5 placements each. The majority of these placements lasted six months or less, and were in foster homes or parents' homes. About one-fifth of all placements were not made as recommended, apparently because recommended facilities often were not available. Two-thirds of the children eventually were reunited with their families. Most children and families received services--such as individual or family counseling or clinical evaluations--but the Department did not always recommend services for those who needed them. Also, recommended services often were not started or completed. Many controls and procedures for the foster care system seemed to be adequate, but the Department lacked basic program management information.
Reviewing the Department of Commerce’s 1991 Bond Allocations
The Department's process for authorizing localities to issue tax-exempt bonds is inadequate. Some informal policies, procedures, and criteria for processing and evaluating applications exist, but they are not written and do not cover all aspects of the allocation process. The Department's process for allocating bonds in 1991 appeared to comply with applicable laws, but the allocation for mortgage revenue bonds was made much earlier than in previous years. Certain aspects of the allocation process were not adequately documented, but it appeared that decisions for allocating mortgage revenue bonds were, in essence, delegated to the bond underwriters on the Department's advisory committee.
Examining Whether the Department of Commerce Followed Its Procedures in Contracting For Services from Lane Marketing (100-hour audit)
The Department complied with State laws in contracting with Lane Marketing, but its contracting procedures were inadequate in several areas. For example, the contract with Lane Marketing called for payment upon receipt of an invoice. Lane often billed the Department for media advertisements--and the Department often paid those bills--before the advertisements were run. This prepayment practice is not standard for governmental agencies.
Compliance and Control Audit: Review of Cash and Investments
We found no statistically significant relationships between school districts' general fund expenditures and their students' performance on achievement tests, minimum competency tests, attendance rates, or dropout rates. We found a slight tendency for school districts' dropout rates to increase as the percentage of students receiving subsidized lunches increased, but saw no relationship between any areas of student performance and such factors as pupil-teacher ratios, enrollments, taxable incomes per student, and average teacher salaries.The State's 20 wealthiest school districts were able to spend more on education than other districts while assessing a low mill levy. For the remaining districts, general fund spending on education declined as district wealth declined, although assessed mill levies remained nearly the same regardless of wealth.