State employee pension drops to less than 18 percent funded with lowered investment assumptions
12/03/2015 10:19 PM
FRANKFORT — Financial prospects for the Kentucky Retirement Systems grew bleaker on Thursday after the KRS Board of Trustees lowered its assumed investment returns for the state worker and police pension funds from 7.5 percent to 6.75 percent.
The move drops the Kentucky Employees Retirement System non-hazardous’s pension funded ratio from 19 percent to 17.7 percent, possibly making it the worst-funded public pension in the U.S., and the State Police Retirement System’s funded status from 33.8 percent to 31.4 percent, according to figures presented by Todd Green, principal and consulting actuary with Cavanaugh Macdonald Consulting.
The board’s action also caused the funds’ unfunded liabilities and recommended employer contributions to grow, data show. For the KERS plan, unfunded obligations jumped from $10 billion to $10.9 billion with a recommended employer rate of 40.2 percent of state payroll, up from 38.9 percent. SPRS’s unfunded liabilities increased from $485.8 million to $542.1 million and a nearly 4 percent uptick in the recommended employer contribution rate.
“Lowering the assumed rate of return means less investment income to pay benefits, which means essentially the benefits stay the same but the amount of investment income is going to reduce, so contributions have to increase to offset that reduction,” Green said.
Thursday marked the first time the KRS board has had different investment assumptions within its 10 pension and insurance plans. The eight remaining funds still maintain a 7.5 percent return target.
As next year’s budget-writing session nears, lawmakers won’t be obligated to use the new assumptions in parceling out actuarially required contributions to KRS, which oversees $16.1 billion in assets against $36.8 billion in liabilities for more than 378,000 current and former public employees.
That’s because the two-year spending cycle will be based on the latest valuation of the 10 funds, which assumed investment returns at 7.5 percent across the board. That document, which covers the close of the 2015 fiscal year as of June 30, was the primary subject of Thursday’s meeting.
KRS trustees passed a resolution urging Gov.-elect Matt Bevin and the General Assembly to consider its lowering of the KERS non-hazardous and SPRS assumed rates of return to 6.75 percent in the upcoming budget. KRS Executive Director Bill Thielen said the higher employer contributions would amount to more than $20 million in all.
“If they don’t, then the rate in the subsequent years is going to be higher,” he told reporters after the meeting.
Jim Carroll, co-founder of the group Kentucky Government Retirees, called the KERS non-hazardous pension’s funding decline “dreadful news” while Larry Totten, liaison for Kentucky Public Retirees, said the figures presented Thursday were “ugly.”
“It’s getting worse and worse, and it’s hard to see what kind of solution we can come up with to deal with this crisis, but it has to be addressed immediately,” Carroll said after the meeting. “There’s absolutely no margin for error at this point.”
KRS trustees also discussed potential ways to increase funding, such as creating a dedicated funding source, selling pension obligation bonds or having participants in public pensions pay contributions for independent contractors.
Thielen said the group plans to send a list of four potential options to the Public Pension Oversight Board before its next meeting later this month.
With the General Assembly’s attention on resolving funding issues at the Kentucky Teachers’ Retirement System, which faces $14 billion in unfunded liabilities, Thielen said lawmakers shouldn’t lose sight of critical needs within the state employees’ pension plan.
“I believe based on everything I’ve heard that most of the legislators believe that with the Senate Bill 2 changes they’ve fixed KRS over time, and honestly, when you get out 12 or 15 years, yes,” he said. “… In the KERS system, the asset base has gotten so low that we have significant cash-flow problems. It can’t weather a year or two of really low investment returns or losses.”
Carroll said he was “agnostic” toward specific increased funding methods for the state employee pension fund.
“There aren’t going to be any good solutions. The time for that has passed. What we’re dealing with are just what are the least offensive solutions in terms of coming up with the money to deal with this crisis.”
Totten, stressing that he was speaking for himself and not KPR, said the state’s pension woes might force the General Assembly to consider raising taxes to generate revenue.
That issue, in the larger scale, has been a nonstarter in the state legislature as a means to boost revenue.
“Over the years where these funds were underfunded to the tune of $3 billion or so plus investment income, that money was diverted into other programs, funds, whatever so that taxes didn’t have to be changed, and it may just be honestly time to sit down and say, ‘OK, we got to suck it up,’” Totten said.
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