Pension system debts grow as board adopts more ‘realistic’ assumptions
As the Kentucky Retirement System (KRS) continues to be one of the country’s worst-funded pension plans, the system’s board voted Thursday to adopt new, lower assumptions in order to reflect a more accurate picture of the state’s pension crisis.
The KRS Board of Directors voted Thursday to make three changes to the way its funding status is calculated including lowering the assumed rate of return on investments from 6.75 percent to 5.25 percent, assuming zero percent in payroll growth rather than the current 4 percent, and adjusting the rate of inflation assumptions.
Because of these changes, the unfunded pension liability of KRS increases by $3 to 4 billion from the current $18.1 billion—lowering the overall funding status of the system to just 13.81 percent.
Those changes were made to the system’s pension plans facing the most danger including the KERS non-hazardous plan and state police plan.
Changing the assumptions and making decisions based off the more realistic figures will mean a much bigger actuarially required contribution (ARC) payment will be needed from the General Assembly to shore up the system.
Discussion over similar changes to the three other plans in the system, including the plan that serves county employees, was tabled and will require a special meeting to resolve.
Many members of the KRS board expressed concerns about lowering the return and payroll assumptions because of the burden it would place on those local governments and some pointed to the better returns seen from those plans, claiming there was no need to change those assumptions.
Thursday’s changes come after the board hired Milliman, a Seattle-based actuarial consultant, to suggest solutions to the woefully underfunded status of the system.
In the meeting, a representative from Milliman noted that the system currently has only two years’ worth of benefit payments on hand and suggested some questions for the board to consider in the future about funding methodology.
All the new assumptions and figures on the funding status of the system come days before the Public Pension Oversight Board is expected to hear the results from the audits conducted on the state’s pension systems ordered by the governor. That meeting will occur on Monday.
Among other discussions held at the meeting, it was announced that board members have decided to have KRS Interim Executive Director David Eager continue in that role for the time being and not hire a national firm to conduct a search to fill the roll permanently.