Kentucky Government Retirees

Kentucky Retiree Group Calls For Lawmaker Action on Pension Funding

Jim Carroll, co-founder of the Kentucky Government Retirees group, has penned a column in the Courier-Journal calling for lawmakers to explore and implement solutions to the funding crisis facing the Kentucky Employees Retirement System.

Carroll explains how the KERS non-hazardous fund came to be one of the worst-funded systems in the country:

Imagine that you purchased a house with a 30-year mortgage and for 15 out of the past 22 years, you made only partial payments toward the principal and interest. Obviously, long before now, you would have lost that home. But in the bizarre world of state funding policy, a succession of governors and legislators has done precisely that with the state pension plan that covers 38,000 retirees and 40,000 active workers, the Kentucky Employees Retirement System non-hazardous fund.

Consistently for more than a decade, budgets have short-changed the employer contribution to the pension fund. That in a nutshell describes how the plan is “upside down,” is in deep fiscal trouble, and has no short-term prospect for asset growth without a substantial injection of new money.

When year after year, we stakeholders paid our employee contributions like clockwork, Frankfort decision-makers let the employer contributions slide. Actuaries for Kentucky Retirement Systems, the umbrella agency that administers various pension funds, calculated the amount of employer contribution needed to sustain the fund, and governors and legislators approved budgets that methodically and consistently allocated lesser amounts.

Carroll goes on to discuss how assets are declining despite double-digit investment returns, and how the system is one economic downturn away from disaster:

The harmful effects of underfunding can be seen in recent declines in assets. I testified before the legislature’s Public Pension Oversight Board in October, and I pointed out an alarming fact: that investment gains have become disconnected from asset growth. Two years ago, the plan made more than 11 percent on its investments, yet assets declined by more than $200 million. Last fiscal year, a bull market in full swing led to a 15.5 percent return on investments — twice the assumed rate of return. The result? A decline of $183 million in assets. We know of no other state pension plan in the country where investments have soared, but assets have dropped.

[…]

KERS non-hazardous assets now stand at a little under $2.5 billion, while the fund pays out $915 million annually in benefits and expenses. KRS officials delivered the bad news recently that the market was flat in recent months, a trend that if it persisted to the end of the fiscal year, would lead to a decline of $500 million, leaving the fund with a balance of about $2 billion. This takes into account the additional funds provided by the full employer contribution.

[…]

What happens if the market hits a trough before the cumulative effects of future full employer contributions take effect? The KERS non-hazardous fund saw $2.1 billion in assets vanish during the 2008-09 crash. At the time, the fund held $5 billion in assets. It is of course far more vulnerable now.

If assets dropped to about $1.3 billion, KRS would be forced to liquidate its non-cash investments to maintain liquidity. At that point, it would no longer be a sustainable defined benefit plan, because such a plan relies primarily on investment holdings to pay benefits. In today’s low interest-rate environment, KRS investment returns in cash equivalents would be negligible.

Read the full column here.

Kentucky Chamber of Commerce Calls For Audit of State Pension System

The Kentucky Chamber of Commerce is pushing for an audit of the Kentucky Retirement Systems – specifically, a review of its investment performance and policies.

Reported by the Courier-Journal:

Chamber President and CEO Dave Adkisson announced Thursday that the group wants a review of the investment performance and use of outside investment managers — among other issues — at Kentucky Retirement Systems, which has amassed more than $17 billion in unfunded liabilities.

While the state has made progress in addressing pensions, “serious problems persist that pose a significant threat to the state’s financial future,” Adkisson said. “The business community is concerned about the overall financial condition of our state.”

[State Auditor Adam] Edelen said in a statement Thursday that he shares the chamber’s concerns, but he also noted that at least three major reviews of KRS have occurred over the past few years.

[…]

KRS Executive Director Bill Thielen said officials will fully cooperate if Edelen decides to perform an audit. But also he pointed out that the system has been subject to continuous examinations, including audits, legislative reviews and a two-year investigation of investment managers by the federal Securities and Exchange Commission.

“None of those have turned up anything that is out-of-sorts,” he said. “A lot of the questions or concerns that the chamber seemingly raised have been answered numerous times.”

Thielen added that KRS doesn’t disclose the individual fees it pays managers because confidentiality helps officials negotiate lower rates.

State Auditor Adam Edelen said Thursday he hadn’t made a decision on whether to begin an audit of KRS. He said in a press release:

“For this proposed exam to add value and bring about real fixes to the system, it will require broad, bipartisan support and additional resources for our office to conduct the highly technical work…We have begun discussing the matter with stakeholders. No final decision has been made at this time.”

The founder of one retiree advocate group laid blame for the system’s underfunding on the state’s contributions, not investment policy, and was skeptical that the audit would yield fruitful results. Quoted in the Courier-Journal:

Jim Carroll, co-founder Kentucky Government Retirees, a pension watchdog group organized on Facebook, called the proposed audit a “red-herring” and argued that the financial problems in KERS non-hazardous are the result of year of employer underfunding.

He said KRS investments don’t yield the returns of some other systems because the low funding levels force them to invest defensively.

“I’m skeptical that anything useful would come out of another audit,” he said. “Not to say that there shouldn’t be more transparency, but that’s a separate issue.”

KRS’ largest sub-plan – KERS non-hazardous – is 21 percent funded.

Kentucky Pension Committee Recommends Measures For Funding Improvement, Other Policy Changes

Kentucky’s Public Pension Oversight Board, a panel of lawmakers that “assists the General Assembly with its review, analysis, and oversight” of the Kentucky Retirement Systems (KRS), has made 13 recommendations aimed at improving the health of KRS and altering other KRS policies.

A handful of the key recommendations, from the Courier-Journal:

– The General Assembly should secure additional money to stave off any insolvency problems in KERS non-hazardous — the largest pension plan for state workers, which has only 21 percent of the money it needs to cover benefits.

– The Kentucky Teachers’ Retirement System, along with pension plans for lawmakers and judges, should be reviewed by the oversight board as part of its official duties.

– KRS should better publicize its board meetings, particularly to employee, retiree and interest groups.

– The General Assembly should enact legislation to regulate how agencies withdraw from the pension system — a concern that has emerged amid the bankruptcy of Seven Counties Services, the community mental health center for the Louisville area.

More on the measures related to improving the system’s funding situation, from CN2:

Of 13 recommendations tentatively approved by the oversight board, two dealt directly with securing additional funding for KERS non-hazardous. One, submitted by Sen. Jimmy Higdon, R-Lebanon, would seek financing to maintain the plan’s solvency while the other, filed by Rep. Brent Yonts, D-Greenville, and Sen. Joe Bowen, R-Owensboro, would support increased funding to KRS and particularly KERS non-hazardous to improve its cash flow issues.

One other recommendation seeks to cut down pension “spiking”. Eliminating “spiking” is not likely to have a big effect on the system’s funding situation.

Retiree advocacy group Kentucky Government Retirees released this statement on the proposals dealing specifically with improving funding:

As stakeholders in Kentucky Retirement Systems, we were gratified that the Public Pension Oversight Board today approved a recommendation calling upon the General Assembly to provide additional funding to avert insolvency in the Kentucky Employees Retirement System non-hazardous fund. The nation’s worst-funded state pension fund desperately needs an infusion of funds above the employer contributions. We hope the 2015 General Assembly will make the difficult decision to act on this recommendation.

Kentucky Non-Haz Pension Funding Falls to 21 Percent

KERS funding status — Credit: The Lexington Herald-Leader

The Kentucky Employees Retirement System (KERS-Non-Hazardous) is already notorious for being one of the worst funded pension plans in the United States.

But the situation got worse Wednesday, as KERS revealed the funding status of the plan has fallen from 23 percent to 21 percent over the course of the last fiscal year.

Retiree advocacy group Kentucky Government Retirees issued this statement:

The audit committee of Kentucky Retirement Systems learned today that the funding ratio for the pension plan covering most state employees dropped to an alarming 21 percent in the fiscal year that ended June 30. The funding ratio compares current assets to total long-term liabilities. The KERS non-hazardous fund dropped by 2.1 percentage points over the fiscal year. Meanwhile, the fund continued to lose assets in the first three months of the fiscal year. The fund held only $2.48 billion in assets at the end of September, representing a decline of $95 million. Given these alarming figures, and in view of the commendable efforts of the Kentucky Teachers’ Retirement System to secure funding for its financially challenged pension plan, we as stakeholders urge the KRS board of trustees to actively engage Frankfort decision makers in a funding solution for the nation’s worst-funded state pension plan.

Video: Fixing the Kentucky Retirement Systems

Watch the above video for an in-depth discussion on the problems and politics surrounding the Kentucky Retirement Systems and potential solutions to the funding woes that plague the system, in particular the “non-hazardous” portion of the system.

The interviewee is Jim Carroll, who runs the Facebook group Kentucky Government Retirees and has taken an active role in raising awareness among citizens and pushing lawmakers for change.

As Carroll points out in the video: “There aren’t any good answers to this [funding shortfall].”

There are, however, options to improve the system’s health – although none are particularly pleasant.

The KERS non-hazardous plan is among the unhealthiest in the country. The system is only 23 percent funded and is one market downturn away from complete insolvency.