Politics & Government

Judge tosses city’s lawsuit over Kentucky Retirement Systems’ hedge fund investments

A judge has dismissed a Northern Kentucky city’s lawsuit challenging the Kentucky Retirement Systems for what it described as “illegal and imprudent investments” involving hundreds of millions of dollars in public pension money.

The city of Fort Wright sued KRS in 2014, saying the state pension agency violated the law with risky investments in hedge funds, venture capital funds, private equity funds, leveraged buyout funds and other “alternative investments” that produced small returns and excessive management fees, possibly in excess of $50 million over the previous five years.

KRS is legally required to stick with relatively safe common stock and bond investments, at least with the local government pension and retiree health insurance money that it manages through its County Employees Retirement System, the city argued.

The $16 billion KRS is responsible for providing benefits for 372,524 active and retired public employees in Kentucky. It faces an unfunded liability of $27 billion.

In its legal defense, KRS said state law gives its board of trustees “exclusive power” to invest the system’s funds where it chooses, including the categories of “alternative assets” to which Fort Wright objected.

Franklin Circuit Judge Thomas Wingate sided with KRS on Thursday and dismissed the suit.

“The sole issue on appeal is whether the investments made by the board of trustees of the (Kentucky) Retirement Systems are permitted by Kentucky law,” Wingate wrote in his opinion. “There is nothing in the record or in the city’s pleadings to this court that persuades this court that (KRS) did not follow the law or did not appropriately apply the facts to the law.”

Fort Wright Mayor Dave Hatter said Friday that he will have to consult his city council in coming days, but an appeal is “very likely.”

The city spends 11 percent of its budget on pension contributions, making it the third-biggest expense, Hatter said. But it feels like the city has no say over the quality of the investments at KRS or the governance of the agency’s 17-member board of trustees, only three of whom are elected to represent local governments.

“I can tell you that I’m quite disappointed,” Hatter said. “It’s pretty frustrating.”

By contrast, KRS executive director David Eager said he was pleased by the judge’s ruling.

“It affirms our position all along,” Eager said. “We had the legal authority to make these investments, and these investments were legal.”

In separate litigation in Franklin Circuit Court under a different judge, eight public employees are suing several hedge fund dealers, alleging that they have cheated the pension agency on up to $1.5 billion in investments. KRS declined to join that suit as a plaintiff. That case is still pending.

Hedge funds long have been a controversial investment for KRS, with their expensive fees and uneven returns. Critics, including some state lawmakers, have said there isn’t a place for the complex and often opaque investment funds when public money is involved. But pension agency officials, while scaling back hedge fund investments in recent years, have defended them to some extent as one tool to offset risk in down markets.