KERS non-hazardous | Pension360

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 Pension Director: Fewer Active Workers, More Retirees Is Problem For Fund

Kentucky Retirement Systems (KRS) executive director Bill Thielen spoke in front of the state’s Pension Oversight Board on Monday, and revealed an as-yet unaddressed trend that spells bad news for the pension system.

The trend involves the balance of active workers to retirees receiving payouts – and the balance is not shifting in the pension system’s favor.

Reported by WFPL:

One problem that remains unaddressed, said Thielen, is the imbalance created by fewer employees paying into KRS and more retirees receiving benefits this year. Board members were told that between 2007 and 2014, the number of active members in the Kentucky Employee Retirement System dropped from 47,913 to 40,365, while the number of retirees grew from 33,849 to 41,223.

That difference represents $228.9 million in losses this year (not counting payouts for hazardous jobs), and Thielen said the state will see more increases in benefit payout during 2015. Overall pension benefits (for all sectors) paid “for fiscal 2014 totaled $1769.7 million compared to $1706.2 in fiscal 2013,” according to the audited data report.

“Our own staff at KRS, also. About 40-45 percent of staff will be eligible to retire,” he said, explaining that private sector wages have begun to lure state employees into early retirement as Kentucky employees go into a fifth year of wage freezes.

“Without raises, we’ll probably see a lot retire.”

The 21 percent funded KERS Non-Hazardous plan is a sub-plan of the Kentucky Retirement Systems.

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 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.