Kentucky is in the midst of a financial crisis. The Kentucky Retirement System (KRS), which is responsible for the pensions of more than 365,000 current and retired state and local government employees, is facing an almost $50 billion shortfall, and at last one recent headline said it succinctly: “Unfunded Pensions Could Spell Disaster for Kentucky.” The KRS funds lost billions of dollars in the 2008 economic recession and have since struggled to recover. In 2010, the investment consultant to the KRS found that the largest pension fund in the system had just 38% of required funding. Since then the problem has only grown, with current estimates saying that it is now only 31% funded.
This is not new. The KRS Board of Trustees has been trying to deal with this looming pension crisis since the mid-2000s. In an effort to try and find higher returns, in 2006, the KRS Board of Trustees proposed riskier hedge fund investments. However, in the end, the KRS leadership and retirement board decided that hedge fund investing was just too risky. As their adviser said at the time, Kentucky cannot “invest their way out of crisis”, and went on to warn that such an aggressive approach to investing could lead to a completely depleted account in the near future. In the same report the State’s consultant warned, that even if the KRS hit their actuarial assumed rate of return of 7.75% for the next 20 years, the fund would still be grossly underfunded. It is important to remember that almost no state in the nation achieves so high an average yearly return—meaning that it in two decades, it will be even worse than “assumed.”
A higher assumed rate of return (ARR) equals less appropriated funds the Legislature needs to allocate to the pension system. Thus, a 7.75% ARR, while kicking the can down the road towards a future crisis, solves the state’s budget problems for today only.
Leaders of KRS are required through their fiduciary duty to provide “accurate and truthful information regarding KRS financial and actuarial condition.” Trustees instead took the moral low-ground and mislead pensioners – all for the sake of politics. By hiding the true status of the fund, these officials were able to hold their offices and coerce the public into believing that they were acting in the best interest of the people. In reality, KRS leadership acted only in self-interest, leaving future generations in the state to pay for their mistakes because of poor investment decisions.
This sort of irresponsible action must be stopped in American pension fund management. State treasurers and pension board officials must remember that their fiduciary duty to beneficiaries and taxpayers comes first. These members of state and local government hold an incredible amount of power – it is time citizens hold these officials responsible for their actions. The future of our American retirement security depends on it. Demand transparency, demand professionalism and above all demand responsibility from your state and local, pension fiduciaries.