By Chris Tobe
Special to NKyTribune
There has been a lot of tough talk out of government officials and candidates on cleaning up the pension mess, especially in Frankfort. Harvard recently ranked Kentucky State Government as the single most corrupt in the nation. However, one government entity has stood up to the corruption in Frankfort with official action, the small Northern Kentucky city of Ft. Wright.
The Kentucky Retirement Systems (KRS) is made up of three distinct plans, the Kentucky Employees Retirement System (KERS), the County Employees Retirement System (CERS) and the State Police System (SPS). Commingling these three plans under the KRS system significantly blocks transparency and enables the Frankfort corruption machine to work mostly behind closed doors.
Leaving out State Police because the fund is so small, the focus is on the odd couple: KERS and CERS. Both have similar size liabilities (that is money owed to pensioners) but that is where the similarities end. KERS, with only $3.1 billion of assets to support $12.3 billion in liabilities at 25 percent, is the single worst funded state pension plan in the nation. CERS with $8.6 billion in assets to support $13 billion in liabilities is 65 percent funded still below the Morningstar threshold for solvency at 70 percent, but far better off than KERS.
Almost all Kentucky cities, counties, and school districts (non-teachers) pay millions every year into CERS. By Kentucky state law they have to pay the full Actuarially Required Contribution (ARC) which how most private sector pensions work.
However, Frankfort exempted themselves from this law and pay whatever they feel like into KERS, which has averaged around paying 50% of the ARC over the last 10 years.
In my book Kentucky Fried Pensions I quote the late Jim King, CPA and Louisville Metro Council President: “Any solution for solving the pension crisis should include separating or otherwise protecting the participants of CERS from the dangerously underfunded KERS.”
The Louisville blog the Ville Voice says, “Most everyone we speak with in Frankfort believes operating costs and other expenses are being unfairly put on the back of CERS.”
The Kentucky Association of Counties, or KACO in 2013 started advocating that CERS leave the KRS system.
LaRue County Judge Executive Tommy Turner, then KACO chairman, provided this testimony to the General Assembly in August 2013:
Separate CERS as a stand-alone governing board. County governments have been consistent in paying 100 percent of the contribution amount required of us. ….. Under its current makeup, the Kentucky Retirement System must operate with decisions based on … the most poorly funded program in the system, which is Kentucky Employees Retirement . . .With a separate board, CERS would be in a better position to adjust investment options and maintain less liquidity than the current system must keep on hand to pay out benefits.
Commingled reported investment returns defy logic. The horribly underfunded KERS paying out more benefits than getting in contributions and investment returns (cash flow negative) needs to hold much more cash. Cash with near zero returns this past five years would indicate significantly higher returns for CERS. However this does has not been case as the returns seem to have been equalized between the two.
For 2012 I calculated that CERS, by providing this liquidity to KERS, lost around $30 million in returns.
The Northern Kentucky Tribune recently covered the Legislative Pension Review Committee hearing that showed that the commingled investment returns of the KRS system trailed its peers in recent years by hundreds of millions of dollars primarily because of an over-allocation into Hedge Funds and Private equity with massive fees and secret contracts.
The Chamber of Commerce last month demanded that the auditor look into KRS private equity and hedge fund investments.
However, as documented in the KRS Independent Counsel Report by former SEC attorney Edward Siedle, the Kentucky State Auditor is on record blindly supporting these investments and secret contracts and would have to contradict himself.
Hidden behind the commingled returns, I think that there has been an effort to prop up KERS (of which KRS staff belongs) at the expense of CERS. For example, the private equity fund Camelot, a KRS investment that is under SEC and Criminal investigation, has lost over $12 million. Nearly 90 percent over $11 million of the loss was stuck onto CERS, while only 10 percent or a little over $1 million of the loss was stuck onto KERS.
‘Every county and city and every taxpayer in Kentucky owes gratitude to the City of Ft. Wright for standing up . . .’
Another example from my book, while I was a KRS trustee I discovered that we had a secret currency manager who lost $125 million and that we paid $7 million in fees. However at the February 7, 2012, investment committee meeting they also reported an accounting shift of $5 million of currency losses to CERS from KERS. I feared this might violate IRS rules, so I asked for our counsel Ice Miller to look into it. KRS staff refused, citing costs. I also felt that the holding of currency forward contracts could be a violation of state law. I wrote a very specific request to the Kentucky attorney general to look into three specific state law violations, but he refused to even look at it.
Jim Wayne’s legislation HB49 for 2015, would require the Legislative Pension Oversight board to look at CERS separation and to fully disclose the fees and terms of the secret investment contracts. One large private equity and hedge fund company alone has 11 lobbyists in Frankfort who I believe will act to kill this legislation.
After the failure of all other forms of state oversight I am now looking to the courts. However, the same Harvard study that ranked Kentucky state government as one of the most unethical also gave low marks to the state judiciary.
For the Ft. Wright case, KRS has chosen as its attorney Robert Kellerman, who has a record of favorable rulings for KRS with Judge Wingate in Franklin County Circuit. Kellerman was able to get the trial moved from Northern Kentucky to Judge Wingate.
While I attended closed meetings as a KRS trustee on legal matters, KRS staff attorneys spoke openly on how they always wanted to be in front of Judge Wingate. Kellerman this summer hired Wingate’s son as his law clerk.
The attorneys for Ft. Wright have asked the judge to recuse himself, and he is reportedly going to address this on February 24.
Every county and city and every taxpayer in Kentucky owes gratitude to the City of Ft. Wright for standing up to Frankfort’s corruption. Hopefully the judiciary in Kentucky will prove the Harvard study wrong and act to bring transparency and accountability to pensions in Kentucky
Chris Tobe, CFA, has 25 years of institutional investment experience with a focus on public pension plans and is author of the best-selling book “Kentucky Fried Pensions.” From 2008-2012 he served as a trustee and on the investment committee for the $13 billion Kentucky Retirement Systems, but his involvement goes back to 1997 when he worked with Kentucky State Auditor Ed Hatchett and published a 40-page report on the investments of both the Kentucky Retirement Systems and the Kentucky Teachers Retirements Systems. In his consulting practice, he has worked with major public plans in Texas, Maryland, Oklahoma, Missouri, Michigan, North Carolina, Rhode Island and the District of Columbia.
Email Chris Tobe at christobe@kentuckyfriedpensions.com
Follow Kentucky Fried Pensions on Facebook at https://www.facebook.com/KentuckyFriedPensions
As a nearly 40-year veteran of law enforcement in NKY, I have placed nearly all of my pension eggs into the County Employees Retirement System CERS. My city and county employers have dutifully made their expensive ARC matches to my contribution. Kentucky Retirement Systems the administrator of CERS has invested the combined funds in private equity and hedge funds with excessive fees going to fund managers. Even Warren Buffet has declared this type of investment inappropriate for public pensions. While many Kentuckians tend to bleed blue or Cardinal red, CERS is bleeding $ green. Too many of the pension dollars are going to “alternative investment” fund managers at the expense of cities, workers and retirees. When I became an officer I accepted the risk to my personal safety, but I never expected to have my financial future endangered by imprudent investment of my pension assets. THANK YOU City of Ft Wright for filing a suit to protect those who protect and serve the citizens of the commonwealth!