Kentucky pension official: 'It's been a challenging start to the year'

FRANKFORT — Hedge funds and other alternative investments are the only assets currently gaining value for the Kentucky Retirement Systems, however controversial they might be otherwise.

For the first quarter of fiscal 2015, ending Sept. 30, its investments declined 1.41 percent overall, worse than the comparable benchmark, David Peden, chief investment officer for Kentucky Retirement Systems, or KRS, told the Public Pension Oversight Board on Tuesday.

"It's been a challenging start to the year," he said. "October hasn't helped any. It's actually a little worse — down by about 3 percent if you include October."

After the meeting, Peden said KRS' worst losses were in public equities — traditional stocks and bonds, especially those based in other countries. By contrast, he said, hedge funds were up 0.74 percent, private equities were up 1.49 percent and real estate was up 2.03 percent.

A number of critics in Kentucky have urged KRS to divest itself of hedge funds, and CalPERS — the nation's largest state pension fund, in California — announced last month that it was selling its $4 billion in hedge fund holdings, citing their cost and complexity. But KRS expects alternative investments, including hedge funds, to help balance the market losses of stocks and bonds, Peden said.

"We're happy with our program. It's accomplishing the goals we set out for it," he said. "When you consider that we have to send checks out every month on the 14th, it's so important for us to have as smooth a return profile as we can manage."

KRS provides pension and health care benefits for 340,626 current and future retirees from state and local governments.

Experts consider KRS the weakest state retirement system in the country. It faces $17 billion in unfunded liabilities due largely to inadequate state payments for most of the past 15 years, starting during Gov. Paul Patton's administration.

Several nonprofit agencies are suing for the right to exit KRS. In addition, some cities and counties have talked about the possibility of spinning off their pension system — which is operated by KRS but is much better funded than the system for most state workers — into its own, separately governed venture.

Some counties are spending more on their mandatory pension contributions than on jails, a trend referred to as "retirement creep," Shellie Hampton of the Kentucky Association of Counties told the oversight board Tuesday.

Jim Carroll, co-founder of the advocacy group Kentucky Government Retirees, told the board that KRS needed a massive infusion of cash, possibly from a pension bond that would require legislative approval. KRS now has so little money that even a booming stock market isn't enough to prop it up, Carroll said.

"Over the last three years, the fund has exceeded its assumed rate of return and yet lost a staggering $952 million," he said. "In other words, positive market performance has become disconnected from asset growth. The run-out date — the date when the fund would be depleted if there were no more assets coming in — has shrunk to two years and 10 months."