PensionsDecember 4, 2020

State Contributions Worry Kentucky Trustees Once More

At lowest funded US public pension fund, the same percentage of active worker payrolls will not net the same level of contributions as in the past.

Reported by Sarah Min

The Kentucky Retirement Systems (KRS) on Thursday approved full actuarially determined contribution rates for its lowest funded pension system, but trustees are concerned the employer funding will nevertheless fall short of what the pension system requires.

Contribution rates for the public pension fund, the Kentucky Employees Retirement System (KERS) Non-Hazardous Plan, will increase to 85.03% of the pension liability for fiscal year 2022, a slight increase from the 84.43% rate effective for fiscal year 2021, according to a Thursday board meeting. Both rates would represent the full actuarially determined contribution for the KERS system.

But trustees warned that state contributions would actually decrease over the next two years. In fiscal year 2022, state employers will pay $34 million less into the pension fund than they did in fiscal year 2021, because contributions will fall to $1.179 billion from $1.213 billion, despite the increase in contribution rates over the same time period.

Right now, the Kentucky system is one of the worst funded public pension plans in the United States, with roughly 14% of what it needs to meet obligations.

Earlier this year, state legislators passed a bill, Senate Bill 249, or “An act relating to retirement and declaring an emergency,” increasing the amortization period to 30 years, up from 24, which also decreased the employer contributions in the KERS fund to 84.43% in fiscal year 2021, down from the 93.01% the KRS board passed last year prior to the state change.

The move was praised by many in the state who said the bill would provide relief to a state budget hammered hard by the coronavirus pandemic.

At the same time, contributions from active worker payrolls in the funds are expected to diminish, given that the number of active workers has been on the decline, according to board materials. In fiscal year 2020, about 31,700 workers were counted in the KERS system, down nearly 2000 employees from the 33,696 workers counted in fiscal year 2019. A number of public jobs in the state, such as maintenance work, are increasingly outsourced to third-party employees who do not fall under state employment.

Some board trustees disapproved of the changes: “I think all of us understand it. I’m going to say it anyway. There’s always—and I really appreciate what the governor and the legislature has done in recent years—but there’s always an excuse for not stepping up,” said Joe Brothers, a member of the KRS Audit Committee.

“I know it’s tough times, but it’s my job to represent our retirees in the funding of their plan, and we need to bite the bullet and fund it,” Brothers said.

But KRS Executive Director David Eager defended the state government to CIO, saying, “Legislature’s gained an appreciation for what they have to do in terms of funding.”

In recent years, and after decades of underfunding, full actuarially determined contributions from the state legislature pushed the KERS system to cash flow positive in 2019 for the first time in nearly two decades.

Other issues remain: About 115 quasi state agencies in the KERS Non Hazardous plan have received a waiver for the past three years not to pay the full actuarial requirement. If that continues, KRS will have to raise contribution rates for non quasi employers in the KERS Non Hazardous plan to make up for the shortfall, according to Eager.

Other pension funds in the KRS system will also experience drops. Employer contribution rates for CERS Hazardous will fall to 44.33% in fiscal year 2022, down from 51.96% in fiscal year 2020.

Separately, the pension system is closer to announcing a new chief investment officer to replace former KRS CIO Rich Robben, who left in September to take up a consultant post at Florida-based AndCo Consulting.

On Wednesday, the investment committee met with two candidates over Zoom in a closed board meeting session. No other details were forthcoming from the pension system.

Last month, Eager said he found three applicants well qualified for the position.