Teacher Sues Kentucky Pension System Over Funding Status, Transparency Issues

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A Kentucky teacher has filed a lawsuit against the Kentucky Teachers’ Retirement System (KTRS), claiming KTRS has “failed in their fiduciary duty” by letting the system become one of the worst funded teachers’ plans in the country.

From WFPL:

A Jefferson County Public Schools teacher filed a lawsuit Monday against the Kentucky Teachers’ Retirement System, which has been called one of the worst-funded pension systems for educators in the U.S.

The plaintiff, duPont Manual High School teacher Randolph “Randy” Wieck, told WFPL that the system supporting over 140,000 teachers in Kentucky is billions of dollars in debt; also that teachers pay about 12 percent of their paychecks into the retirement system.

“We have raced to the bottom and we’re neck and neck with the worst funded teachers plan in the country,” he said.

As WFPL reported, the General Assembly during this year’s legislative session funded KTRS at around 50 percent of what the retirement system requested.

The federal Government Accounting Office and Standard & Poor say Kentucky’s pension system is being funded at an unhealthy rate.

KTRS has “failed in their fiduciary duty by not aggressively and publicly demanding the full funding they need to stay solvent,” Wieck argues in a copy of the complaint he provided to WFPL. The complaint further alleges that KTRS has not been transparent enough in the “system’s dire funding status,” and that the investments made by KTRS are not responsible.

The teacher, Randy Wieck, is giving KTRS one year to become fully funded. After that, he says he will bring the lawsuit to the steps of Kentucky’s General Assembly; for many years, lawmakers have failed to pay the state’s actuarially-required contribution to the pension system – although they did make the full payment to the teachers’ system in 2011.

TRS’ attorney commented on the suit:

“I am very optimistic that we are going to find a solution for this,” said Beau Barnes, general counsel for KTRS.

There are positive signs among members of the General Assembly to come up with a plan, he said, adding that next week, KTRS will appear before the state’s Interim Joint Committee on State Government to discuss a financing plan for the pension fund. Wieck, who was joined by “Kentucky Fried Pensions” author Chris Tobe, seemed skeptical of previous conversations that seemed to excite Barnes.

The state legislature is not poised to discuss budget issues during the 2015 legislative session, but Wieck said Kentucky is violating its duty to keep the pension system solvent.

“You don’t actually have to wait for the bus to hit you to experience danger. And that is what is happening to Kentucky Teachers’ Retirement System. It is being damaged every year,” he said.

KTRS manages $17.5 billion in assets. The system is about 51 percent funded.

Kentucky Bill Aims To Increase Transparency, Accountability In Retirement System

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Kentucky State Rep. Jim Wayne has introduced legislation that would infuse a ray of transparency into the state’s retirement systems, including KRS, a system oft criticized for its opaque practices.

From the Independent:

The legislation, Bill Request 91, would require state-administered retirement systems to operate under the state procurement laws, which includes making contracts public. It would also prohibit the use of placement agents, intermediaries who have been involved in pay to play scandals in other states.

The legislation also seeks to tighten requirements for KRS board members appointed by the governor to ensure they have appropriate investment expertise. The current low-qualified “investment experts” on the board refused to comment on any investment issues for the Kentucky Center for Investigative Reporting story, Wayne said. He added the two investment experts on the board need to be knowledgeable, independent and willing to be accountable to the public.


“The current model smacks of the good ol’ boy system,” said Wayne, D-Louisville. “The system is closed. A small group decides behind closed doors who gets to manage billions of dollars in public money and what they’ll get paid for it, no questions allowed. That’s just way to chummy for my tastes.”

The urgency for such legislation was illustrated after two journalism organizations investigating the pension plans during the summer were denied information on fees and even the names of individual managers, Wayne said.

The Lexington Herald-Leader reported June 14 that KRS spent at least $31 million on managers of hedge funds, private equity, real estate and other “alternative investments” that hold just one-fourth of the system’s $15 million in assets and produced its lowest returns.

A July 24 report by the Kentucky Center for Investigative Reporting in Louisville found KRS potentially spent $156 million in mostly undisclosed fees to these “alternative investments.”

Wayne added one more comment:

“The health and well-being of public employee retirement systems should not be shrouded in mystery,” said Wayne. “No one should be required to invest their hard-earned money in a system that is not fully transparent. Not only should public employees know if the systems are financially stable, the taxpayers should also know.”

The Kentucky Retirement Systems holds $16 billion in assets and is about 45 percent funded, although certain parts of the system are unhealthier.

KRS allocates about 35 percent of its assets toward alternative investments, including real estate; the nationwide average is 25 percent, according to data from Cliffwater LLC.

Chart: How Did Kentucky’s Pension System Become So Underfunded?

KY systems funding

Here’s a chart of the funding situations of Kentucky’s largest public pension funds as of 2012. At 27 percent funded, the KERS non-hazardous fund was considered among the unhealthiest in the country. Since 2012, its funding ratio has dipped even further. But the entire system is experiencing big shortfalls.

How did they get this way? Pension360 covered earlier today the system’s lackluster investment performance — but the state’s funding shortfall has been influence by a confluence of factors.

KY shortfall breakdownOne of the largest reasons for the shortfall is the state failing to make its actuarially-required payments into the system:

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Chart credits: Pew Charitable Trusts

Kentucky Pension CIO Talks About “Challenging Start” To Fiscal Year As Investments Decline

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The first quarter of fiscal year 2015 ended last month, and investment performance at the Kentucky Retirement Systems came in below benchmarks for the period.

Including October, KRS investments are down 3 percent since July 1.

The system’s chief investment officer, David Peden, revealed the performance data at a board meeting on Tuesday.

Reported by the Lexington Herald-Leader:

Hedge funds and other alternative investments are the only assets currently gaining value for the Kentucky Retirement Systems, however controversial they might be otherwise.

For the first quarter of fiscal 2015, ending Sept. 30, its investments declined 1.41 percent overall, worse than the comparable benchmark, David Peden, chief investment officer for Kentucky Retirement Systems, or KRS, told the Public Pension Oversight Board on Tuesday.

“It’s been a challenging start to the year,” he said. “October hasn’t helped any. It’s actually a little worse — down by about 3 percent if you include October.”

After the meeting, Peden said KRS’ worst losses were in public equities — traditional stocks and bonds, especially those based in other countries. By contrast, he said, hedge funds were up 0.74 percent, private equities were up 1.49 percent and real estate was up 2.03 percent.


Experts consider KRS the weakest state retirement system in the country. It faces $17 billion in unfunded liabilities due largely to inadequate state payments for most of the past 15 years, starting during Gov. Paul Patton’s administration.


Jim Carroll, co-founder of the advocacy group Kentucky Government Retirees, told the board that KRS needed a massive infusion of cash, possibly from a pension bond that would require legislative approval. KRS now has so little money that even a booming stock market isn’t enough to prop it up, Carroll said.

“Over the last three years, the fund has exceeded its assumed rate of return and yet lost a staggering $952 million,” he said. “In other words, positive market performance has become disconnected from asset growth. The run-out date — the date when the fund would be depleted if there were no more assets coming in — has shrunk to two years and 10 months.”

KRS investments returned 15.5 percent in fiscal year 2013-14.

Chart: How Kentucky’s Alternatives Allocation Compares To Other Funds

KY alternatives percentage

The Kentucky Retirement Systems, more than almost any pension fund in the country, allocates a significant chunk of its assets toward alternatives.

But how does KRS compare to other pensions funds in that area? Check out the chart above.

The data is from the Public Fund Survey, which polls 98 pension funds every year on a variety of topics, including asset allocation.

Only 4 funds in that 98 fund sample allocated a higher percentage of its assets toward alternatives than Kentucky.

Chart is courtesy of the Kentucky Center for Investigative Reporting.

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.

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

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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.

Moody’s Report Reveals Cost of Seven Counties Departure From Kentucky Pension System

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CREDIT: Insider Louisville

Seven Counties, a mental health agency, removed itself from the Kentucky Employees Retirement Systems Non-Hazardous Plan earlier this summer in an attempt to avoid the mounting pension obligations it claimed would leave it insolvent.

Soon after, a judge affirmed that Seven Counties could indeed leave the system—a decision that sent shockwaves through Kentucky because of the precedent it set for similar agencies facing similar problems.

The problem for Kentucky, of course, is that it now has to contribute more money annually into the system to cover its growing funding shortfalls.

A new report from Moody’s delves deeper into the extra costs Kentucky faces in the wake of Seven Counties’ departure—and the costs that could come if other agencies follow in Seven Counties footsteps.

The Moody’s report is behind a paywall, but Insider Louisville did everyone the great justice of giving us the details:

Debt rating agency Moody’s Investor Services has just issued a new report finding the departure of mental health services provider Seven Counties Services from Kentucky Employees Retirement Systems Non-Hazardous Plan means the state now assumes an additional $1 billion or so in pension costs.

If the remaining mental health organizations leave the state pension system, that amount could rise to $2.4 billion, according to the New York City-based agency.

Which of course has sparked a big political battle, with legislators and state officials panicked at the thought all community health agencies could exit the pension systems, leading to a meltdown.

The chart at the top of this post illustrates the burden Kentucky is, and could be, facing.

Insider Louisville pulled out one jarring quote from the Moody’s report:

The Commonwealth of Kentucky (rated Aa2/stable outlook) has Moody’s third highest adjusted net pension liability for all states at 211 percent of its revenue.

But Moody’s was quick to point out that they don’t think Kentucky will be falling apart in the near future; the agency believes the state can “absorb” the mounting pension costs as a result of cost-cutting measures elsewhere.

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.

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