kentucky retirement system

Kentucky Retirement System Lowers Return Assumption; More State Money On Way

CREDIT: The Center For Retirement Research

The Kentucky Retirement System has lowered its assumed rate of return on investments from 7.75 percent to 7.5 percent.

The reduced assumption means the system will experience an uptick in unfunded liabilities, but it also ensures a higher annual payment from the state.

The action took place at a Board of Trustees meeting on Thursday. More details from CN 2:

The changes, presented to trustees earlier this year by actuaries with Cavanaugh Macdonald Consulting based on a five-year experience study, lower assumed returns on investments, price inflation, wage growth and wage inflation.

The new assumptions, KRS Executive Director Bill Thielen said, will cost the state roughly $95 million more per year in contributions for the Kentucky Employees Retirement System for state employees in non-hazardous positions during the next biennial budget, based on current plan valuations and payroll figures. They will not take effect until next year’s year-end plan valuations, he said.

[…]

The updated assumptions would push KRS’s unfunded liabilities to $19.5 billion, up from $17.8 billion currently, according to figures presented by Cavanaugh Macdonald Consulting.

At least one of the KRS trustees voiced concerns about approving the new guidelines at Thursday’s meeting. Personnel Cabinet Secretary Tim Longmeyer suggested delaying a vote until January so the board could meet with the governor’s office, legislators and others affected by the change.

“My concern is we don’t live in a bubble, so $95 million a year is a significant uptick,” said Longmeyer, who abstained from voting on the updated assumptions.

KRS Trustee Randy Overstreet, though, urged the board to move forward with the proposal. Nothing would change between now and January, he said.

“I’m thinking that we almost have the responsibility to follow the experts’ recommendations, and you’re right, it’s not a science, but it’s the best information we have to act on and move forward on since we have for the 20 years I’ve been on this board,” Overstreet said.

More context on KRS’ new assumed rate of return, from the Courier-Journal:

KRS has forecast a 7.75 investment return since 2007. But earnings in KERS non-hazardous averaged only 6.52 percent over the past decade, leading some critics — including lawmakers — to argue for a more cautious outlook.

The National Association of State Retirement Administrators reported that of 126 public retirement plans surveyed in October, 48 assumed a return of 7.5 percent or lower, while 78 assumed a higher rate.

The median rate was 7.75 percent, but more than half have cut their assumption since 2008, the group said.

KRS administers nearly a dozen defined-benefit plans for state workers, including the 21 percent funded KERS non-hazardous plan.

Kentucky To Disclose More Details About Alternative Investments, But Some Data Will Remain Secret

About 30 percent of the Kentucky Retirement System’s investment portfolio is allocated towards alternative investments. That kind of investment strategy leads to significant fees and expenses. But much of the data surrounding the fees the System paid to firms to manage those alternative investments were hidden under lock and key…until now.

Yesterday, the KRS Board of Trustees approved a measure designed to increase transparency surrounding the fees the System pays to individual firms to handle its investments. From WFPL:

Kentucky Retirement Systems, which runs the $16 billion pension and health care funds for state, city and county workers and retirees, will be providing more detail about the fees it pays to the managers of its so-called “alternative” investments.

[Interim investment director David Peden] said KRS’ investment committee and the full board warmed to the idea after articles by the Kentucky Center for Investigative Reporting and the Lexington Herald-Leader on the level of transparency about fees paid to hedge funds and private equity firms.

Until now, KRS had disclosed the total amount of fees paid to investment firms — $53.6 million in the year that ended June 30, 2013 — but did not report the fee rates charged by individual firms. That practice will change in coming weeks, Peden said, as KRS staff posts fees for all current holdings on the agency’s website.

So, interested observers will be able to find the fee rates that KRS pays to individual firms.

But KRS still isn’t going to tell the public everything.

Among the information that will still be inaccessible to the public: the total dollar amount of fees paid to individual firms; the fee rates paid to “fund of funds”; and the specific make-up of the alternative funds, which are protected by confidentiality agreements between KRS and the fund managers.

Illinois, Kentucky Pension Funds Benefit From $17 Billion Bank of America Settlement

A handful of pension funds will be receiving large chunks of change after Bank of America agreed today to pay $17 billion to end a Justice Department probe into the bank’s sale of toxic mortgage securities.

The Justice Department alleged that Bank of America violated federal law when it marketed and sold investment vehicles tied to shoddy home loans and misled investors about the quality of the investments.

Many pension funds were major investors in such investment vehicles and sustained major losses on those investments during the financial crisis.

But some funds will be getting a chunk of that money back, including numerous Illinois funds and the Kentucky Retirement System. From Red Eye Chicago:

For Illinois, the $16.65 billion national settlement means a cash payment of $200 million for the state’s pension system, making it whole for losses sustained as a result of the risky investments.

…

The Illinois pension entities that will receive the payments under Thursday’s deal are the Illinois Teachers Retirement System, the State Universities Retirement System and the Illinois State Board of Investment, which oversees pension plans for state employees, the General Assembly and judges.

Kentucky’s payout is substantially smaller than that of Illinois, but the KRS will still see some relief. From the Lexington Herald-Leader:

Kentucky Retirement Systems will get $23 million from Bank of America’s $16.65 billion national settlement with the federal government over accusations that the bank improperly dumped “toxic” mortgage-backed securities on the market, helping fuel the economic recession of 2008.

This isn’t the first major settlement stemming from toxic investments that have benefited pension funds. Earlier this year, CalPERS and CalSTRS received over $100 million combined when CitiGroup agreed to a $7 billion settlement.

Illinois was a beneficiary of the CitiGroup settlement as well, as three Illinois funds received a combined $45 million as reparations for their investment losses.

Photo by Mike Mozart via Flickr CC License

Lawmaker Comes Out in Support of Seven Counties in Kentucky Pension Dispute

Video courtesy of CNJ2

Pension360 has previously covered the story of the Kentucky-based non-profit, Seven Counties Services, leaving the Kentucky Retirement System due to the increased contributions that would have been required from the group to stay in the system.

A judge ruled last month that Kentucky-based non-profit Seven Counties Services could legally remove itself from the state’s pension system. But lawmakers weren’t happy with the pension obligations—allegedly to the tune of $90 million—that the organization was leaving behind.

In response, lawmakers chose not to renew Seven Counties’ contract with the state.

“This sends a signal that we are not happy with an agency that contracts with the state and leaves us a bill for $90 million,” said Rep. Brent Yonts, D-Greenville.

But at least one lawmaker says Seven Counties is getting the short end of the stick in the situation.

“Going forward they should be allowed to continue the good works they’ve always done,” said Rep. Julie Raque Adams, R-Louisville.

She also defended the non-profit against claims that they were leaving the system with a massive lump of pension debt.

“I think that the $90 million is in dispute as well. Seven Counties has made every single contribution required of them to this point — before they had to file for bankruptcy,” Adams said. “The problem is we have these agencies that are so vital to our most vulnerable citizens, because you can’t pay 40 cents of every dollar into a pension system and think they’re going to be able to keep serving the most vulnerable in our communities.”

Watch the full video of the exchange above.

A great refresher of the lead-up to this situation, from Leo Weekly:

Seven Counties was one of many nonprofits allowed to join KRS over the past few decades, hoping to lure qualified employees who would overlook meager salaries due to the security of a good pension after retirement.

Up until 2006, this arrangement appeared to work, as the employer contribution rate for pensions was only 5.9 percent of payroll. However, after a decade of Frankfort severely underfunding the required employer contribution, the growing unfunded liability of KRS — especially the Kentucky Employee Retirement System, which houses those nonprofits and is now the worst-funded public pension in the country — led to ballooning costs. By 2012, the contribution rate grew to 20 percent; last year it was 27 percent, and for the current year, it is almost 39 percent.

While the pension reform legislation SB 2 passed in 2013 aimed to solve this crisis by requiring full payment by employers, for nonprofits such as Seven Counties, it only exacerbated the problem. Unable to make such pension payments and stay afloat financially, they declared bankruptcy and filed suit to pull out of KRS. In May, the judge ruled in their favor, saying that the state is obligated to pay out KRS pension benefits to the employees of Seven Counties who paid into it.

Seven Counties Services was granted leave from the pension system in June through bankruptcy proceedings as their portion of the pension payments grew to nearly 40 percent of payroll. In the 2014 budget process the General Assembly provided $19 million to other mental health agencies — not counting Seven Counties — to help them meet increased pension costs.

The Kentucky Retirement Systems actuaries estimate that Seven Counties owes roughly $90 million in liabilities to the system.

Pension360 will keep you updated on subsequent developments.