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State pensions have lost $5 billion in 10 years

FRANKFORT — By relying too heavily on U.S. stocks, Kentucky's public pension systems have lost an estimated $5 billion over the last 10 years, according to a study by a Missouri consulting firm.

The poor returns mean taxpayers will have to make up the difference, reported The Courier-Journal of Louisville in Saturday's editions. The study by Hammond Associates was conducted last summer for Gov. Steve Beshear's public pension working group, which is studying the system.

"It's quite upsetting when you think $5 billion for a small, poor state like Kentucky being lost over a 10-year period," said state Rep. Jim Wayne, D-Louisville. "That's serious money."

The Kentucky retirement system covers more than 316,000 current employees and retirees and has $17 billion in assets.

The state teachers pension system covers roughly 115,000 current employees and retirees and has $15.6 billion in assets.

Retired teachers and state and local government employees will still get their benefit checks each month, Finance Cabinet Secretary Jonathan Miller said.

"In the end, the state employees are going to get their retirement benefits," Miller said. "The less we earn in investing means the more we are going to have to contribute."

Because of the lack of diversification, Miller said the systems have likely lost more in the recent financial crisis than other public pension funds.

The Hammond report states that the Kentucky Teachers' Retirement System has 55 percent of its total portfolio invested in U.S. stock, compared with 35 percent by peer pension funds.

That, the report says, is "outsized exposure" and "violates sensible diversification principles."

It goes onto read: "Committing more than 50 percent of a portfolio to a single asset class exposes the investor to the preventable risk of large losses."

The report states that the teachers retirement system has just 9 percent of its investments in international stocks, compared with 20 percent by its peers.

And, both KTRS and the Kentucky Retirement Systems, which manages investments for retired state and local government employees, have not invested enough in alternative assets, such as real-estate trusts, hedge funds and venture capital, according to the report.

Both state retirement systems allocate 10 percent and 4 percent, respectively, to alternative investments, compared with 14 percent allocated by their peers.

The teachers retirement system has sustained a greater share of the $5 billion loss by both systems — $3.5 billion compared with $1.5 billion by KRS.

Officials with both retirement systems said Friday they disagreed with Miller's assessment although both are looking to diversify their holdings.

"We have not lost as much as other systems," said KRS Executive Director Mike Burnside.

"It's not a question of do we want to or are we satisfied with returns being where they are," he said. "We always want go be better. We are making strong headway right now, moving into asset classes that will put us in good stead."

In all, the systems are facing a nearly $27 billion shortfall, and lawmakers have been struggling to find ways to close the gap.

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