Kentucky Pension Oversight Board Gets Update on KRS Underfunded Liabilities
FRANKFORT — Kentucky Retirement Systems executive director Bill Thielen says losses from the 2008 economic downturn have finally been recovered after the conclusion of a five-year debt reduction plan, but Kentucky isn't out of the woods yet.
The Kentucky Pension Oversight Board met Monday for the final time this year to hear from Kentucky Retirement Systems officials about the state's $9.1 billion unfunded pension liability.
Investment returns, a central component in determining how quickly Kentucky can dig itself out of debt, for this year were flat—no major gains or losses. Current projections are at 7.75 percent growth, though new estimates show the rate slowing to 7.5 percent next year.
Though some board members expressed concerns at a drop in the projected rate, KRS Chief Investment Officer David Peden told the board that a slower growth rate comes from analyst recommendations to invest more in emerging global markets, which are lower yield but seeing steadier returns.
State Sen. Joe Bowen, an Owensboro Republican who chairs the board, cautioned members against chasing high growth rates at the expense of sure footing in the market.
"Your analysts never suggest that you go too much over 5 or 6 percent. Maybe we have been too aggressive with this," said Bowen. "Of course, this shows how vulnerable we are to the actuarial analysis and assumption they're making. We're married to that and if it's too aggressive, we're the ones that are liable for that aggressive posture."
Employer contribution rates are also used to determine how well state pensions will be funded in the coming year. KRS predicts an uptick from 30.84 percent to 33.57 percent. While the percent may seem marginal, they represent millions of state dollars.
Lawmakers were issued "Key Audited Financial Data" reports which read, "Total contributions reported for fiscal 2014 totaled $1,055.7 million compared to $1,027.2 million in fiscal 2013."
"Payroll contributions are up $69 million," said Peden. "But that's offset by the number of people retiring."
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."
Relieving some of the financial burden on the state, Thielen said, the state's responsibility to retiree insurance benefits has dropped significantly, and will continue to do so at a rate of about 1 percent every two years. Federal healthcare dollars, he said, are on track to relieve nearly $2 billion in retiree insurance liability in the coming years.
Overall, the insurance portion of state pension funds saw a net increase of $632.5 million this year.
During his presentation to the board, Thielen also addressed the Kentucky Chamber of Commerce's recent calls for a government audit of KRS. While Thielen believes audits help transparency, he says KRS has already proven its clean record with previous audits.
"We will cooperate fully with whatever State Auditor Adam Edelen decides to do as a result of that request," said Thielen, who went on to cite the numerous audits conducted by both state and federal agencies in recent years.
"And I might say that we have, over the last several years, done exactly that. None of those examinations have resulted in any type of significant findings," he said, noting only one violation of regulation which was rectified immediately.
Despite his willingness to cooperate, Thielen still argued against the approximately $125,000 expenditure that an audit would require.
"I think it's a costly exercise that's redundant in this respect," he said.
The Auditor's office left the door open to an audit, saying they'd not yet decided, but expressed a warning as well:
"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," read the release.
The biggest problem at the end of the year, lawmakers suggested, is that even though the legislature passed a watershed pension reform bill in 2013, KRS has to deal with continued problems until the 30-year plan can begin to show results.
Thielen compared it to a home mortgage.
"In the beginning you have small payments," he said. "It's not until the last eight years or so that you see a big difference in payment."
Board member Mac Jefferson and others pushed Thielen to bring more solutions to the next meeting. But Thielen cautioned that there are no quick fixes for the long-term pension problem, assuring him that KRS analysts are trying every solution.
"It's going to take 15 to 20 years, for instance, for people to get into the Cash Balance Plan," says Thielen, "I've even had someone ask me about putting a large one-time amount in ... but $250 million, when you've got a $9.1 billion, unfunded liability isn't going to have the kind of impact you need," said Thielen. "It's not even going to move the needle."
Thielen spoke frankly.
"If we meet all of our contribution requirement to [Kentucky Employees Retirement System], after about 20 years," he said. "It'll be funded at about 24 percent."
The board members, and the crowd in the committee room rumbled uncomfortably among themselves.
Thielen offered one final point of caution, telling board members that while Kentucky may be able to staunch the flow of debt, until the pension reform relief kicks in "we're at the mercy of another 2008."
Readers can view the full report from KRS here.