Public pensions in Kentucky

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Kentucky public pensions
Flag of Kentucky.png
Pension system
Number of pension systems 4
State pension systems: Kentucky Retirement Systems
Teachers' Retirement System
Judicial Retirement Plan
Legislators' Retirement Plan
System type:
Pension health (2012)[1]
Fund value: $26,060,180,096
Estimated liabilities: $52,270,572,067
Unfunded liabilities : $26,210,391,971
Percent funded: 49.86%
Percent funded change: Decrease.svg3.55%[2]
Percent funded rank: 49[3]
Pension fund members (2012)
Total members: 463,836
Active members: 215,687
Other members: 248,149
Other state pension information
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Policypedia
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Pension policy
Public pensions
State public pension plans
Public pension health by state
Kentucky public pensions are the state mechanism by which state and many local government employees in Kentucky receive retirement benefits. The Kentucky Retirement Systems (KRS) oversee three separate funds, which include:
  • Kentucky Employees Retirement System (KERS)
  • County Employees Retirement System (CERS)
  • State Police Retirement System (SPRS)

In addition, the Teachers' Retirement System (TRS), the Judicial Retirement Plan (JRP) and the Legislators' Retirement Plan (LRP) administer benefits to eligible retirees.

According to the United States Census Bureau, the state has 15 locally-administered pension systems.[4]

A 2012 report from the Pew Center on the States noted that Kentucky's pension system was funded at 54 percent at the close of fiscal year 2010, well below the 80 precent funding level experts recommend. Consequently, Pew designated the state's pension system as cause for "serious concern."[5]

The funding ratio for the state's pension systems decreased from 70.45 percent in fiscal year 2007 to 49.86 percent in fiscal year 2012, a decrease of 20.59 percentage points, or 29.2 percent. Likewise, unfunded liabilities increased from approximately $12.1 billion in fiscal year 2007 to more than $26 billion in fiscal year 2012.[6][7]

Features

Pension plans

In fiscal year 2012, according to the KRS and state Comprehensive Annual Financial Reports and the TRS Actuarial Valuation Report, Kentucky had a total of 215,687 active members in its retirement plans. Our membership figures divide plan participants into two broad categories: active and other. Active members are current employees contributing to the pension system. Other members include retirees, beneficiaries and other inactive plan participants (usually terminated employees entitled to benefits but not yet receiving them).[8]

The following data was collected from the KRS and state Comprehensive Annual Financial Repots and the TRS Actuarial Valuation Report. The "percentage funded" is calculated by taking the current value of the fund and dividing by the estimated amount of total liabilities. The assumed rate of return used to calculate fund value was 6.75 percent in fiscal year 2012. The Government Accountability Office (GAO) and Pew Research Centers cite a percent funded ratio of 80 percent as the minimum threshold for a healthy fund, though the American Academy of Actuaries suggests that all pension systems "have a strategy in place to attain or maintain a funded status of 100 percent or greater."[9][10] The column labeled "SBS figure" refers to a market liability calculation of the fund by the nonprofit organization State Budget Solutions. This analysis uses a rate of return of 3.225 percent, which is based upon the 15-year Treasury bond yield. The organization calls this a "risk-free" rate of return that would make it easier for states to achieve their pension funding requirements in the future. Since 2006, all private sector corporate pension plans have incorporated market costs into their funding schemes.[11]

Basic pension plan information -- Kentucky[6][12][7]
Plans Current value Percentage funded Unfunded liabilities Membership
State figure SBS figure[13] State figure SBS figure[13]
Kentucky Retirement Systems** $11,152,949,505 44.8% N/A[14] $13,758,046,495 N/A[14] 139,339 active members
Teachers' Retirement System $14,691,371,000 54.5% $12,282,483,000 75,951 active members
Judicial Retirement Plan $176,765,849 55.7% $140,637,791 273 active members
Legislators' Retirement Plan $39,093,742 57.2% $29,224,685 124 active members
TOTALS $26,060,180,096 49.86% 27% $26,210,391,971 $71,165,818,000 215,687 active members
**There are three sub-plans that comprise the Kentucky Retirement Systems. For specific details on those plans, see the table below.

Annual Required Contribution

Annual Required Contributions (ARC) are calculated annually and are a sum of two different costs. The first component is the "normal cost," or what the employer owes to the system in order to support the liabilities gained in the previous year of service. The second component is an additional payment in order to make up for previous liabilities that have not yet been paid for. According to a report by the Pew Center on the States, in 2010 Kentucky paid 58 percent of its annual required contribution.[5][15]

On June 25, 2012, the Government Accounting Standards Board (GASB) approved a plan to reform the accounting rules for state and local pension funds. These revised standards were set to take effect in fiscal years 2013 and 2014.[16] As a result, ARCs were removed as a reporting requirement. Instead, plan administrators and accountants will use an actuarially determined contribution or a statutory contribution for reporting purposes.[17]

ARC historical data - KRS[18]
Fiscal year KERS CERS SPRS
Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed
2012 $461,359,224 51.1% $345,352,977 105.7% $20,497,924 74.9%
2011 $402,520,306 52.9% $297,780,230 112.0% $18,463,372 68.6%
2010 $366,309,308 44.1% $263,115,052 110.2% $18,764,941 50.6%
2009 $310,203,264 41.3% $230,153,516 111.9% $15,951,841 51.3%
2008 $278,890,326 43.0% $202,393,461 110.2% $13,823,490 53.8%
ARC historical data - TRS, JRP and LRP
Fiscal year TRS JRP LRP
Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed
2012 $757,822,190 74% $10,302,000 48.0% $2,140,000 48.0%
2011 $678,741,428 153% $10,302,000 44.0% $2,140,000 44.0%
2010 $633,938,088 76% $4,512,000 99.1% $375,000 85.3%
2009 $600,282,735 74% $4,512,000 99.1% $375,000 85.3%
2008 $563,789,483 83% $2,375,000 100.0% $428,000 100.0%

Historical funding levels

Historical pension plan data - all systems
Year Value of assets Accrued liability Unfunded liability Funded ratio
2007 $28,879,726,189 $40,993,561,987 $12,113,835,798 70.45%
2008 $29,247,943,898 $43,801,342,500 $14,553,398,602 66.77%
2009 $28,170,062,306 $46,178,097,531 $18,008,035,225 61.00%
2010 $27,399,345,765 $48,138,174,932 $20,738,829,167 56.92%
2011 $27,056,731,280 $50,660,918,657 $23,604,187,377 53.41%
Change from 2007-2011 -$1,822,994,909 $9,667,356,670 $11,490,351,579 -17.04%

Rate of return

The three plans that comprise the Kentucky Retirement Systems presume a 7.75 percent rate of return on their pension investments.[6] TRS assumes a 7.5 percent rate of return on its pension investments, while the JRP and LRP presume a 7.00 percent return rate on theirs.[12][7]

Analysis

Percent funded status of pension plans
in the 50 states as of November 2013
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Note: The data in this map was compiled from state CAFR reports and Actuarial Valuation documents. Figures reflect a combination of all of the state pension plans.
Funded ration of state public pension plans as compiled by State Budget Solutions.

According to a 2012 analysis by the Pew Center for the States, most state pension plans assume an 8 percent rate of return on investments.[20] Critics assert that this assumption is unrealistic, citing changing market conditions and significantly lower investment returns across the board over the past several years.[21] When states lower the rate of return in an effort to predict investment earnings accurately, it increases the current plan liabilities, thereby lowering the percent funded ratio and causing the ARC to increase. This is because future plan liabilities are discounted based on the rate of return, so smaller expected investment returns result in larger actuarially accrued liabilities.[22] For example, on September 21, 2012, the Illinois Teachers Retirement System voted to lower its rate of return from 8.5 percent to 8.0 percent. This change increased the state's fiscal year 2014 ARC from $3.07 billion to $3.36 billion.[23] Similarly, when California's CalPERS reduced its projected annual rate of return from 7.75 percent to 7.5 percent in March 2012, it cost the state an additional $303 million for fiscal year 2013.[24]

The 2008 financial crisis had a devastating effect on pension plans nationwide and has resulted in slower economic growth and increased market volatility. In light of this, some market strategists find the 8 percent assumption to be overly ambitious. Stanford University Finance Professor Joshua Rauh stated that using past investment performance in this economic climate was "dangerously optimistic."[25] Advocates for a lower assumed rate of return argue that the standard assumptions could cause pension fund managers to engage in more risky investments and imprudent stewardship of public funds. Further, if pension plans were using more conservative assumptions, such as the 3 or 4 percent assumed rate of return used in the private sector, and the plans grew more quickly than expected, the fund would have a surplus and smaller future ARCs, which would be preferable to using optimistic assumptions and potentially being caught with larger-than-expected deficits.[26][27][28][29][30]

On the other hand, traditional public pension plan advocates argue that the dip observed in recent years is not sufficient proof of a long-term, downward trend in investment returns. According to Chris Hoene, executive director at the California Budget Project, "The problem with [the market rate] argument is there isn’t significant evidence other than the short term blip during the economic crisis that there’s been that shift. It’s a speculative argument coming out of a very deep recession."[25]

The National Association of State Retirement Administrators compiled data on the median annualized rate of return for public pensions for the 1-, 3-, 5-, 10-, 20-, and 25-year periods ending in 2013. While the median annualized rate of return failed to meet the 8 percent assumption that most public pensions assume over the 5- and 10-year periods, it was just shy (7.9 percent) over the 20-year period, and it exceeded 8 percent for the 1-, 3-, and 25-year periods. It is important to note that the NASRA data is reporting the median returns, indicating that even though median annualized returns exceeded 8 percent in the 25-year period, the investment portfolios for half of the examined public pension funds failed to meet an 8 percent assumed rate of return.[31]

In September 2013, the nonprofit organization State Budget Solutions published an analysis of state pension funding levels. In its calculations, State Budget Solutions used a 3.2 percent rate of return, the 15-year Treasury bond yield as of August 21, 2013, to discount plan liabilities.

The research found that in all states combined, state public employee pension plans have only 39 percent of the assets they need to cover their promised payments—a $4.1 trillion gap. According to the report, Kentucky's public pension plans were 27% funded, making it the 48th most funded state.[32]

Moody's report on adjusted pension liabilities

On June 27, 2013, Moody's Investor Service released its report on adjusted pension liabilities in the states. The Moody's report ranked states "based on ratios measuring the size of their adjusted net pension liabilities (ANPL) relative to several measures of economic capacity." In its calculations of net pension liabilities, Moody's employed market-determined discount rates (5.67 percent for Kentucky) instead of the state-reported assumed rates of return (7.50 percent for Kentucky's largest plan as of July 1, 2011).[33]

The report's authors found that adjusted net pension liabilities varied dramatically from state to state, from 6.8 percent (Nebraska) to 241 percent (Illinois) of governmental revenues in fiscal year 2011.[33]

The adjusted net pension liability for Kentucky's two largest pension funds (TRS and KERS) in fiscal year 2011 was ranked the 10th highest in the nation.[33] The following table presents key state-specific findings from the Moody's report, as well as the state's national rank with respect to each indicator.

Adjusted net pension liabilities (ANPL) relative to key economic indicators - Kentucky
Governmental revenue* Personal income State GDP Per capita
State findings 140.9% 19.3% 17.4% $6,554
National ranking 3rd 4th 4th 8th
*Moody's uses governmental revenues as reported in each state's consolidated annual financial reports; this includes not only state-generated revenue, but federal funds, as well.[33]

Pension fund management fees

See also: Public pension fund management fees

In July 2013, the Maryland Public Policy Institute (MPPI) and the Maryland Tax Education Foundation released a report detailing the fees paid for the management of state pension systems. According to MPPI, the 10 state pension funds that paid the most in management fees relative to net assets experienced lower returns over a five-year period than the 10 state pension funds that paid the least in management fees. For example, in fiscal year 2012 South Carolina's pension system paid approximately $296.1 million in total management fees (1.31 percent of total net assets at the beginning of the fiscal year) and its five-year rate of return was 1.46 percent. By contrast, Alabama's pension system paid roughly $13.3 million in management fees (0.05 percent of total net assets) and its five-year rate of return was 7.53 percent.[34]

The table below presents the information collected by MPPI for Kentucky and surrounding states. For each state's pension system, total net assets are listed (both for the beginning and end of the fiscal year in question), as well as the total amount paid in management fees. In addition, the rates of return for the pension systems are presented. Compared to surrounding states, Kentucky had the lowest total net assets and five-year rate of return for the pension fund.

Public pension fund management fees, 2011-2012
State Fiscal year Total net assets at the beginning of the year Total net assets at the end of the year Total management fees Management fees as a percentage of total net assets at the beginning of the year Five-year rate of return for the pension fund
Kentucky 2012 $30,179,958,000 $29,076,119,000 $75,473,000 0.25% 0.20%
Tennessee 2012 $33,663,308,000 $34,912,773,000 $32,379,360 0.10% 3.11%
Virginia 2012 $54,562,257,000 $53,309,180,000 $307,706,000 0.56% 0.80%
West Virginia1
1"Three states— Hawaii, Nevada and Rhode Island—were excluded because they hadn’t published CAFRs for fiscal years ending December 31, 2011 or later. West Virginia was excluded because its June 30, 2012 CAFR lacked sufficient disclosure."[34]
Source: Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland 49 Other State Pension Funds," July 1, 2013

Reforms

Enacted reforms

2013

S.B. 2

S.B. 2 proposed to place future state and local government employees hired on or after January 1, 2014 (including judges and state legislators, but excluding teachers, whose benefits are administered by the TRS) on a "hybrid cash balance" plan, as opposed to the more traditional defined benefit plan (the hybrid plan is similar to a 401(k), but a minimum 4 percent return is guaranteed). The bill was signed into law on April 4, 2013.[35][36]

Proposed reforms

2013

A number of bills providing for the closure of the Legislators' Retirement Plan were proposed in the Kentucky legislature in 2013, but each stalled in committee.[37][38]

H.B. 138 sought to create an unfunded liability trust fund for the Kentucky Retirement Systems and made an appropriation to that end. The bill was passed by the House on February 21, 2013, but died in committee in the Senate.[37]

2012

Several bills relating to the administration or closure of the Legislators' Retirement Plan were proposed in the Kentucky legislature in 2012, but none were brought to a vote.[39]

Local public pensions

See also: Local government public pensions

According to the United States Census Bureau, the state has 15 locally-administered pension plans.[4]

Transparency

See also: Public pension disclosure and Governmental Accounting Standards Board
  • Financial information, performance data, investment policies, and more are available on the Kentucky Retirement Systems' website.[40]
  • Pension information is not required to be posted under the state's sunshine law.[41]
  • Names of recipients and amounts disbursed to recipients are not available under the laws governing the operation of the Kentucky Retirement Systems.[42]
  • Fund investment performance information is posted on the Kentucky Retirement Systems' website.[43] The website includes quarterly performance analyses, quarterly investment results, holdings data, annual reports, investment policies, and oversight information.[43]
  • Unfunded liabilities are disclosed in each year's Comprehensive Annual Financial Report.[43]
  • State law requires board members and pension fund managers to file asset disclosure forms. KRS policies address conflicts of interest involving employees. State laws regarding gifts and hospitality apply to pension fund employees.[44]

Recent news

This section displays the most recent stories in a Google news search for the term "Kentucky + public + pensions"

All stories may not be relevant to this page due to the nature of the search engine.

Kentucky Public Pensions News Feed

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See also

Additional reading

External links

References

  1. Figures below are compiled by adding up all state pension plans
  2. This figure is derived by calculating the percent difference between the current year's funding level and the system's percent funded from the prior year.
  3. Rank is relative to the 50 state pension programs. "1" refers to the healthiest pension plan while "50" would be the least well-funded plan.
  4. 4.0 4.1 United States Census Bureau, "Public Employee Retirement Systems State- and Locally-Administered Pensions Summary Report: 2010," April 30, 2012
  5. 5.0 5.1 Pew Center on the States, "Widening Gap Update: Kentucky," June 18, 2012
  6. 6.0 6.1 6.2 6.3 6.4 6.5 6.6 Kentucky Retirement Systems, "Comprehensive Annual Financial Report, Fiscal Year Ended June 30, 2012," accessed November 11, 2013
  7. 7.0 7.1 7.2 7.3 7.4 Commonwealth of Kentucky, "Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2012," accessed November 11, 2013
  8. Organisation for Economic Co-operation and Development, "Pensions Glossary," accessed November 27, 2013
  9. United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "State and Local Government Retiree Benefits: Current Status of Benefit Structures, Protections, and Fiscal Outlook for Funding Future Costs," September 2007. accessed October 23, 2013
  10. American Academy of Actuaries, "Issue Brief: The 80% Pension Funding Standard Myth," July 2012. accessed October 23, 2013
  11. Governing Magazine, " Is There a Plot Against Pensions?" October 14, 2013
  12. 12.0 12.1 12.2 Teachers' Retirement System, "Report of the Actuary on the Annual Valuation for Fiscal Year Ending June 30, 2012," accessed November 11, 2013 (timed out)
  13. 13.0 13.1 State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  14. 14.0 14.1 Analysis only available for system totals and not individual funds.
  15. Government Accounting Standards Board, "Annual Required Contribution (ARC)," accessed October 17, 2013
  16. Reuters, "Little-known U.S. board stokes hot pension debate," July 10, 2012
  17. State Budget Solutions, "GASB's ineffective public pension reporting standards set to take effect," June 5, 2013
  18. Kentucky Retirement Systems, "Report on the Annual Valuation of the Kentucky Retirement System, Prepared as of June 30, 2012," accessed November 11, 2013
  19. 19.0 19.1 Commonwealth of Kentucky, "Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2009," accessed November 11, 2013 (timed out)
  20. "The Widening Gap Update,” Pew Center on the States, accessed October 17, 2013
  21. The New York Times "Public Pensions Faulted for Bets on Rosy Returns," May 27, 2012
  22. Benefits Magazine "Public Pension Funding 101: Key Terms and Concepts," April 2013. accessed October 23, 2013
  23. Crain's Chicago Business "State teachers pension board lowers expected rate of return," September 21, 2013. accessed October 23, 2013
  24. Huffington Post "California Pension Funds Expect Lower Investment Return," March 14, 2012. accessed October 23, 2013
  25. 25.0 25.1 Governing "Expert: Governments Are Masking Their Pension Liabilities ," October 25, 2013. accessed October 25, 2013
  26. The Washington Post "Kansas’s pension funding gap just grew by $1 billion," September 6, 2013. accessed October 25, 2013
  27. Topeka Capital-Journal "KPERS' unfunded liability rises to $10.2B," September 4, 2013. accessed October 25, 2013
  28. Wall Street Journal "Pensions Wrestle With Return Rates," October 10, 2011. accessed October 23, 2013
  29. The Courant "Promising Too Much On Public Pensions," August 10, 2012. accessed October 23, 2013
  30. Business Wire "NCPERS 2013 Survey: Public Pension Plans Report Increasing Confidence, Lower Costs, Growing Returns," October 22, 2013. accessed October 25, 2013
  31. National Association of State Retirement Administrators "Issue Brief: Public Pension Plan Investment Return Assumptions," October 2013. accessed October 23, 2013
  32. State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  33. 33.0 33.1 33.2 33.3 Moody's Investor Service, "Adjusted Pension Liability Medians for US States," June 27, 2013
  34. Cite error: Invalid <ref> tag; no text was provided for refs named report
  35. Kentucky Legislature, "SB 2," accessed November 11, 2013
  36. Kentucky Legislature, "This Week in Frankfort," March 1, 2013
  37. 37.0 37.1 National Conference of State Legislatures, "Pension and Retirement State Legislation Database - Kentucky 2013," accessed November 11, 2013
  38. Kentucky Legislature, "HB 138," accessed November 11, 2013
  39. National Conference of State Legislatures, "Pension and Retirement State Legislation Database - Kentucky 2012," accessed November 11, 2013
  40. Kentucky Retirement Systems, "Home page," accessed November 11, 2013
  41. Sunshine Review, "Public Pension Disclosure"
  42. Kentucky Revised Statutes, "61.878," accessed November 11, 2013
  43. 43.0 43.1 43.2 Kentucky Retirement Systems, "Investments," accessed November 11, 2013
  44. State Integrity Investigation, "Kentucky, State Pension Fund Management," accessed November 11, 2013