Kentucky Retirement Systems cannot cite sovereign immunity to avoid a lawsuit alleging it has squandered hundreds of millions of dollars on “illegal and imprudent investments,” the state Court of Appeals ruled Friday.
The suit, filed as a class action in 2014 by the Northern Kentucky city of Fort Wright, alleges that KRS violates the law with risky investments in hedge funds, venture capital funds, private equity funds, leveraged buyout funds and other “alternative investments” that have produced small returns and excessive management fees.
KRS is the public agency responsible for providing retirement benefits to more than 355,000 past and present employees of local and state governments. In its defense against the suit, KRS said it could not be sued because of sovereign immunity — a legal concept that generally protects governments from legal liability.
A Franklin Circuit Court judge rejected KRS’ defense, a decision the Court of Appeals upheld on Friday. Among the flaws in KRS’ argument, the appeals court said, the law establishing the KRS board of trustees explicitly says the board can sue and be sued in return.
“As a contributor to (KRS) on behalf of its employees, the city has an interest in requiring the board to act in accordance with the law,” Judge Christopher Shea Nickell wrote for a unanimous three-judge panel.
The city’s suit now proceeds in Franklin Circuit Court.
KRS has $14.9 billion in assets, but more than a decade of inadequate funding by the state government has left it with billions of dollars in unfunded liabilities. Its largest pension fund for state retirees has only 17 percent of the money it’s expected to need for promised benefits.
The Herald-Leader reported last month that KRS is doubling down on a hedge fund that is one of its worst performers: Prisma Capital Partners’ Daniel Boone Fund, which represents 5 percent of the systems’ assets and produced a negative 8 percent return in fiscal 2015. KRS officials defended the investment, saying that hedge funds give the systems’ portfolio diversity over the long run.