Pension systems detail positive impact of new two-year budget, shortfalls still expected

Additional funding put toward the state’s retirement systems in the two-year budget passed by the legislature will save the systems from having to sell off additional assets and experiencing unhealthy negative cash flow years, according to their representatives.

At a meeting of the Public Pension Oversight Board (PPOB) Monday, representatives from the Kentucky Retirement System (KRS) and Kentucky Teachers’ Retirement System (KTRS) presented to the group on the impact of the two-year budget passed by the legislature this month—which provides $1.2 billion in additional funding to the systems.

In the budget, state pension systems will receive additional funds to the tune of $973 million for Kentucky Teachers’ Retirement System (KTRS) and $186 million for Kentucky Retirement System (KRS).

KRS Executive Director Bill Thielen explained Monday that the additional money over and above the actuarially required contribution (ARC) coming into the system, which currently sits at below 20% funded, will help from having excessive shortfalls in the next two years.

In the current year, before the funding of the new budget kicks in July 1, the system will experience a negative cash flow of $348 million based on how much the system is bringing in through employee (state worker) and employer (state) contributions and how much they are having to pay out in benefits over the year.

Once the additional funding is added into the system, KERS non-hazardous—the plan in the worst shape of all state funded pension plans—will experience a negative cash flow balance of $56 million in 2017 and $57 million in 2018. (See the graphics below.)

However, as was noted in the meeting, those figures are based on the assumption that the system will meet their assumed rate of return for investments of 6.75%, which is unlikely as it was stated Monday that the system’s year to date rate of return is -1.8%.

Meanwhile, KTRS Deputy Executive Secretary of Operations and General Counsel Beau Barnes began his presentation to the group by stating that the teacher’s pension system is “deeply appreciative and very thankful” for the additional funding provided in the budget by the legislature and the governor, calling it “absolutely tremendous.”

Barnes went on to note that the system got 94% of what they requested last summer in terms of additional money for the system, which he said will save the system from having to sell a total of $1.1 billion in assets. (See graphics below to see more about the KTRS funding.)

An issue not addressed at the meeting was the fact that Gov. Matt Bevin recently issued an executive order removing KRS Board Chair Tommy Elliott from his position, an order ignored by KRS and Elliott as he attended and ran the KRS board meeting that same week.

Bevin’s replacement for Elliott, Madisonville physician Dr. William Smith, who has been outspoken on pension issues through op-eds and public remarks, attended the PPOB meeting Monday but was not introduced and the controversy over the executive order was not addressed.