Kentucky Employees Retirement System

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.

Newspaper: Kentucky Pension System is Public Business

Pension360 covered the push last week by several Kentucky lawmakers to make the state’s pension system more transparent.

But at least one lawmaker wasn’t on board with those plans. House State Government Committee Chairman Brent Yonts had this to say about his colleagues’ proposals, which included public disclosure of pension benefits, management fees, and other data:

“Frankly, I don’t think that’s the public’s business,” Yonts said. “They have access to the public payroll and salary information. They can theorize about what we’re going to collect in pensions. But the public is not entitled to know every last little thing about us.”

The Lexington-Herald Leader editorial board weighed in on the issue on Wednesday. The newspaper’s stance: public pensions should be public business. From the editorial:

Rep. Brent Yonts, D-Greenville, is certainly right that the public “is not entitled to know every little thing about us.”

We don’t need to know Yonts’ blood pressure or where he gets his hair done, or which, if any, bourbon he likes to sip of an evening.

But taxpayers are entitled to know how much he and every other state employee will receive from our public pension systems.

Yonts, chairman of the House State Government Committee, made his “every little thing” remark while explaining his opposition to two bills — prefiled for the upcoming session — that would increase transparency in the beleaguered public retirement systems.

Specifically, Yonts thinks the public just doesn’t have the right to know how much retirees are drawing in public pension benefits.

“Frankly, I don’t think that’s the public’s business,” he told reporter John Cheves.

It is all the public’s business: How much people draw and how much the retirement systems pay hedge fund managers and other investment advisers.

Right now the largest of these funds, the Kentucky Employees Retirement System, which covers workers in non-hazardous jobs, is at a perilous 21-percent funding level. That means it has only about one in five of the dollars it is obligated to pay out.

This has happened for several reasons, undoubtedly the most important being that governors and the General Assembly have balanced too many budgets by forgoing the state’s annual match to the money paid in by employees. That’s a breach of promise and an unconscionable slap at state workers.

[…]

And, then there’s the $55 million that the retirement systems paid to investment managers with very little disclosure about what we got for that money.

It’s impossible to fix Kentucky’s public pension mess without laying all the cards on the table. How much do the spikers, double-dippers and well-retired lawmakers cost the system? No one knows, or if they do they’re not telling. How are the investment advisers’ fees set and what do we get for them?

Yonts and public employees who say retirement benefits are none of our business should get over it.

Employees are absolutely right that they took jobs and paid into the retirement system on the belief the money would be there.

But taxpayers funded those salaries and will pay the lion’s share of the bill to solve the pension mess. They have the right to know every little thing.

The full editorial can be read here.

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.

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

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.

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

Chart credits: Pew Charitable Trusts