A Northern Kentucky city sued the Kentucky Retirement Systems Monday over what it described as "illegal and imprudent investments" involving hundreds of millions of dollars in public pension money.
In its lawsuit, filed in Kenton Circuit Court, the city of Fort Wright said 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, possibly in excess of $50 million over the last five years.
KRS, which is publicly funded, is legally required to stick with relatively safe common stock and bond investments, at least with the local government pension and retiree health care money that it manages through its County Employees Retirement System, the city said.
"Some of the alternative asset investments selected by the board were start-up funds with virtually no track record," attorneys for the city wrote in the suit.
Fort Wright wants a court order keeping its money out of alternative investments; an accounting of where its money has gone so far, including the disclosure of all investment management contracts; and restitution in excess of $50 million, to compensate it for allegedly improperly paid fees.
KRS executive director Bill Thielen on Tuesday said he had not reviewed the suit and could not immediately comment. The KRS Board of Trustees has called a special meeting for next Wednesday to discuss pending litigation, but that portion of the meeting will be closed to the public.
Fort Wright's suit included, as attachments, Herald-Leader stories about two KRS investments that went awry. One was $24 million invested in a new private equity fund, the Camelot Group, whose founder and manager was indicted for fraud for allegedly stealing millions from the fund. The other was $100 million invested with Arrowhawk Capital Partners, a new fund that almost immediately failed and closed.
Fort Wright asked the court for class-action status so that other local governments could join.
Louisville should consider signing on, said Louisville Metro Councilman Jerry Miller on Tuesday. Miller sent an email to his council colleagues urging them to review Fort Wright's suit.
KRS manages pension and retiree health care money for several groups of public employees. The County Employees Retirement System is funded by local governments; the Kentucky Employees Retirement System is funded by state government and various nonprofit groups; and the State Police Retirement System is funded by Kentucky State Police.
The pension system for local governments is in better shape than the system for state workers because local governments, unlike the state government, have been making their annually required contributions. The largest pension fund for state workers, which covers more than 90,600 current and former state workers, has $2.6 billion in assets and $11.3 billion in assumed liabilities, making it only 23 percent funded. By contrast, the largest fund for local government workers is 60 percent funded.
As the condition grows more dire for the plan covering state workers, every KRS participant is being forced to contribute more money and watch their investments go into riskier ventures in the hopes of a bigger payoff, Miller said.
"It's a sinking ship over there," Miller said. "My argument is, let's cut our losses and separate CERS from the rest of the system and let CERS be managed more prudently, using plain-vanilla investment techniques instead of these risky equity funds that have enormous fees."
Fort Wright's suit is only the latest blow to KRS.
On Friday, a federal bankruptcy judge in Louisville cleared the way for a nonprofit mental-health agency, Seven Counties Services, to leave KRS and escape its soaring pension contribution rates. The decision — likely to be appealed — would mark the first time a KRS participant was allowed to quit, and it could set off a rush for the exits by dozens of quasi-governmental groups, potentially leaving KRS with an even worse unfunded liability.