Kentucky Retirement Systems reports a lackluster year as pension funds dip to $12.8 billion
The pension funds at Kentucky Retirement Systems lost a small amount of their asset value in the fiscal year that ended June 30, slipping from $12.9 billion to $12.8 billion, according to a draft financial report.
Despite more than $2 billion in contributions from the state and local governments, KRS saw a slight decline in the market value of its investments, according to the report, which the KRS Board of Trustees will review next Thursday. KRS pension funds had an investment return of 1.15 percent, with a net depreciation in fair value of investments of $98 million.
KRS’ investment gains fell short of its peer groups and its own assumed rates of return in Fiscal Year 2020, which KRS officials have blamed on the agency’s historic lack of funding. With more than $25 billion in unfunded pension liabilities, KRS must keep much of its money in short-term, conservative investments that don’t yield as much of a return, officials say.
KRS is responsible for providing pensions to most public employees across Kentucky other than school teachers. (Teachers are covered by another agency, the Teachers’ Retirement System of Kentucky.) In Fiscal Year 2020, it paid $2.2 billion in pension benefits to 131,574 retirees and beneficiaries, up from $2.1 billion the previous year.
The primary state government pension fund at KRS — long considered one of the nation’s worst-funded — ended the year in slightly better shape than it started. It had 14 percent of the assets it’s expected to need to meet future liabilities, up from 13 percent the previous year.
The state pension fund reached its all-time low of 12.9 percent in 2018, so the last two years have brought a modest improvement.
The state pension fund is in such terrible shape because of two decades of under-funding by Kentucky governors and legislators. But starting in 2017, state leaders began shoveling huge sums of money into the fund in an effort to replenish it. In Fiscal Year 2020, the pension fund collected $1.1 billion from the state’s $11.1 billion General Fund.
The General Assembly did give itself some breathing room last winter by passing Senate Bill 249. That reset the scheduled repayment period for the unfunded liability of all KRS plans from 24 years to a more generous 30 years, resulting in a lower contribution rate this fiscal year. For example, the contribution rate for the primary state pension plan dropped from an expected 93.01 percent of payroll to 84.43 percent.
One major obstacle to funding the state pension system is that state government has been shrinking in size — at least, in terms of full-time employees on the executive branch payroll — while the number of retired state workers drawing pensions steadily is rising, and living longer, too.
Pensions are funded by state and local governments as a percentage of payroll. KRS officials say this is no longer a viable funding model. The covered portion of state government’s payroll has fallen in recent years from $1.6 billion a year to $1.4 billion, while pension payouts are rising.
“Payroll last year dropped again, by 3.5 percent,” said KRS executive director David Eager on Thursday. “This has become the No. 1 issue for us.”
The General Assembly last winter considered a new pension funding model that would charge public employers based on their proportionate share of the pension funds’ liability, rather than continuing to charge all employers the same payroll percentage. But the measure died in the Senate after passing the House unanimously.
The primary pension fund for Kentucky’s local governments at KRS lost ground in Fiscal Year 2020, falling from a funded level of 50 percent to 47 percent, according to the draft report.
Investments in the local governments’ pension funds were KRS’ weak spot in Fiscal Year 2020, Eager said. The state government pension funds — with less money — were conservatively invested in more stable assets, such as real estate and private equities, he said. The local government pension funds were invested more aggressively, and in the turbulent markets that came with the COVID-19 pandemic and the recession, “it didn’t work,” he said.
“It was just a matter of the asset classes and who was holding what,” Eager said.
KRS won’t be managing the local government pensions for much longer.
City and county leaders, unhappy with higher pension contribution levels set by the KRS board, convinced the General Assembly last winter to approve a measure that will move their pension funds under the authority of a newly created board with local governments in charge. That administrative spinoff is underway.
