KRS Board votes to lower assumed rate of return as system continues to fall short
The Kentucky Retirement System (KRS) Board of Trustees voted Thursday to lower the system’s assumed rate of return on investments from 7.5% to 6.75% for two of the state’s retirement plans.
The change was approved quickly with no discussion from board members and will impact the KERS non-hazardous fund, the state’s most underfunded system, and the state police fund beginning July 1, 2016.
A lower assumed rate of return will change what the state needs to pay into the systems in order to make up the difference. Because of this reality, the KRS board clarified that the new rate will be effective for half of the next budget session but the system plans to “give the General Assembly the option” to use the new rate when crafting the next two year state budget.
While it is currently unclear just how much in additional funds the system will ask for in the next budget, the system’s actuary explained that the change will cause the funding ratio and unfunded liabilities to go up.
See how the change will impact the KERS non-hazardous fund in the image below (unfunded liability can be seen in the top line followed by the funded ratio):
How the change will impact the state police fund:
The new rate of return for two of the system’s multiple funds signifies the first time that they have expected different rates of return for different funds as the others will remain at 7.5 percent.
Before the change Thursday, KRS was already looking at higher contribution rate requests from the state which they planned to ask for in the next session.
In addition to the rate of return change, the system’s board also discussed ideas they plan to take to legislators to help the severe underfunding of KRS.
Among those ideas, looking at bond options to shore up the plan is one thing that was mentioned in the meeting. Previously, KRS has looked into the potential benefits of a $5 billion dollar bond. KRS Executive Director Bill Thielen said in past legislative sessions the system would not be pushing for such an option.
A list of ideas presented by board members included:
- A dedicated funding source
- Appropriations based on the new 6.75% assumed rate of return
- Contributing additional funds over and above the actuarially required contribution (ARC)
- Possible pension obligation bonds
- Passing “housekeeping” bill pushed by system in recent years
- Requiring agencies in KERS to pay a contribution to the system and health plans for independent contractors
On the last point, Thielen explained that the use of independent contractors reduces the number of active members in the system which ultimately reduces contributions.
A board member also suggested in the meeting that legislator pensions be put on hold for “at least ten years” to ensure the KRS funds are shored up, citing the shorting of funds to the system made by General Assemblies and governors over the years.
Thielen explained that the recommendations would be put into writing and reviewed by board members before being presented to members of the Public Pension Oversight Board on Dec. 18.