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Newsmakers

Despite Record Returns, Kentucky’s Pensions Remain Severely Underfunded

Even after investment gains of 25%, funding levels for the state’s public pensions range from only 16.8% to 60.4%.
By Michael Katz



Despite raking in record investment returns of 25% during fiscal year 2021, the funded levels for Kentucky’s public pensions remain perilously low, according to the recently released annual comprehensive financial report from the Kentucky Public Pensions Authority (KPPA).

Collectively, all funds operated by the KPPA earned an investment return of 24.95% net of fees for the fiscal year ending June 30, compared with a meager 0.48% return in fiscal 2020. The five pension funds KPPA manages are the County Employees Retirement System (CERS) Hazardous and Nonhazardous funds, the Kentucky Employees Retirement System (KERS) Hazardous and Nonhazardous funds, and the State Police Retirement System (SPRS).

KPPA ended the fiscal year with $22.9 billion in assets, based on market value, compared with $18.4 billion at the of fiscal year 2020. Its overall performance also easily topped its assumed rates of return, which are 5.25% for the KERS Nonhazardous and State Police pension funds, and 6.25% for the other pension funds.

And according to valuations conducted by KPPA’s actuary, the funded status of each of the plans improved during the fiscal year, which means employer contribution rates for fiscal years 2023 and 2024 will be lower than in recent years in all but one case. However, while this is certainly good news for the state’s long-underfunded public pensions, the funded levels for each of the five state pension funds remain well below what is generally considered to be a healthy funded position.

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KERS Hazardous was the best funded among the state pensions, as its funded ratio rose to 60.4% from 55.3% in fiscal 2021. CERS Nonhazardous’ funded level increased to 51.8% from 49.4% during the year, while CERS Hazardous saw its funded ratio move up to 46.7% from 45.1%. The funded level for SPRS grew to 30.7% from 28.1%, while KERS Nonhazardous remained a paltry 16.8%, though this was better than the 14.2% it reported at the end of fiscal 2020. Pension funds are generally considered to be in “critical status” if they have funded levels lower than 65%.

The actuary projected that all of the state’s pension and insurance plans could reach fully funded levels by fiscal year 2049, but that would only happen if KPPA receives the full actuarially determined contributions and all actuarial assumptions are met every year until then. That might be a lot to expect considering that many forecasters expect a low return environment in the coming years, while the number of active retirees paying into Kentucky’s retirement systems continues to decline.

“All retirement systems continued their downward employment trends,” the report said, led by the KERS Hazardous plan, which saw its active workforce drop 7.4% from the previous year. The number of KERS Nonhazardous plan employees fell by 4.7% in fiscal 2021, followed by CERS Nonhazardous, SPRS, and CERS Hazardous, which saw employment fall 3.7%, 2.9%, and 2.3%, respectively, for the year.

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Home > News > Risk > Jeremy Siegel: What to Buy to Be Insulated From Inflation
Risk

Jeremy Siegel: What to Buy to Be Insulated From Inflation

Hint: Not TIPS, which the Wharton prof terms ineffectual.
By Larry Light



Until recently, it has been good to be Jeremy Siegel, stalwart defender of equities. The S&P 500 finished 2021 with an advance of just under 27%. But the index is down 2.25% so far in the new year, including Thursday’s dip of 1.42%.

Nevertheless, Wharton School professor Siegel is making the case that stocks should weather the current inflationary spell fine, and that the best kind of stocks are the high dividend payers.

“Dividend stocks are protected against inflation because firms have been able to raise their prices, their cash flows, and increase their dividends,” Siegel said in a CNBC appearance.

The author of the classic book, Stocks for the Long Run, argued that even if interest rates go up, bond yields can’t rise sufficiently to offset inflation. “Why bother buying a bond paying 3.5% when inflation is 7%?” he said, referring to the latest Consumer Price Index (CPI) increase.

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So forget bonds, he said, even inflation-shielded ones. “You could go to TIPS at minus 1%” yield,” he said, in a reference to Treasury inflation-protected securities. “That’s not an answer.” On the other hand, “You have dividend-paying stocks at 2.5%, 3%, 3.5%, 4%—well-protected dividends that are rising, and you have capital gains.”

Siegel added that he could see the S&P 500 climbing to 5,100 this year (up 9.5% from now). “Stocks are the place to be,” he declared. The professor then cited the oft-used bull-market acronym, TINA, for “There Is No Alternative.”

To Siegel, inflation has a lot of momentum and will be around a lot longer than many on Wall Street believe. “Everything is pointing upward,” he said. “Oil is nearing an all-time high.”

To those who believe inflation will subside once supply-chain snarls are fixed, Siegel retorted that the nation’s money supply has expanded by a third since the March 2020 onset of the pandemic. “That’s way too much money chasing too few goods,” he said.

Numerous studies have shown that stocks benefit from moderate inflation—just not the double-digit kind prevalent in the 1970s. “Stocks are real assets,” he said, and thus best to offset CPI spirals.

He also contended that the oft-expected but seldom realized “rotation” into value stocks from growth will “have legs.” Value typically does better in inflationary times, than growth stocks.

The iShares S&P 500 Value exchange-traded fund (ETF) closed Thursday up 1.4% for the year, while its doppelganger, the iShares S&P 500 Growth ETF, is down 5.3%.

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