The accrued liability in our state pension systems is unarguably the biggest challenge facing our state economy. When reasonable assumptions are used, our total unfunded liability across all systems is much higher than previous reports of $32.6 billion.
In June of 2016, Gov. Matt Bevin appointed individuals to the Board of Kentucky Retirement Systems with significant investment experience. While the attorney general attempted to block these appointments, Franklin Circuit Judge Phillip Shepherd allowed some of us new appointees to stay, stating in his opinion that we could, “do no harm to the public interest.”
Since this ruling, the new KRS Board has been busy doing a lot more than “no harm.” Here are a few of our accomplishments over the last six months:
▪ Appointed a new interim executive director and are replacing the prior chief investment officer.
▪ Appointed four new members to the investment committee, including three chartered financial analysts and one certified public accountant. These new members, combined, have 112 years of experience in investment management — an average of 28 years.
▪ Exiting 25 underperforming hedge funds — $766 million worth. These withdrawals will result in savings of over $8.6 million per year in exorbitant hedge fund fees.
▪ Reducing the number of outside investment consultants, especially duplicative and redundant services, which includes one investment consultant charging $480,000 in retainer fees per year.
▪ Rewriting the KRS Investment Policy Statement to simplify our investment process, increase transparency and lower management fees. The policy serves as a guide to our investment making decisions.
▪ Working to match investment allocation decisions to expected required payouts. In other words, we are trying to match assets to liabilities of each of the plans. This is just smart investment management.
Finally, and most importantly, we are committed to using real numbers. More specifically, the payroll growth, investment returns and inflation assumptions used in the past were blatantly incorrect or wildly overstated.
Unfortunately, using the correct numbers will significantly increase the estimated pension liability.
The governor’s new KRS appointees are unpaid volunteers who believe in transparency, lower fees and accountability. We will certainly do far more than “no harm,” because there is a tremendous amount that needs to be done and no time to waste.
John R. Farris, a senior investment adviser in Danville, is chairman of the Kentucky Retirement Systems.