STUMP » Articles » Kentucky Pension Blues: What's Up With ERS? » 7 June 2015, 11:27

I’m tired of Illinois and Chicago right now. I’m waiting on Rauner to decide on the bill passed by the General Assembly, so I thought to look at some other pension plans that people have pointed out to me.

First up: Kentucky ERS.

I started looking at what’s available in the Public Plans Database, and whoa, this is bad.

But first, let me point to Kentucky Fried Pensions a book by Chris Tobe. The book is available through Createspace:

Kentucky Fried Pensions is my new book that follows my journey as the first public SEC whistleblower as I attempt to use the new Dodd-Frank law to clean up the culture of cover-up and corruption in Kentucky Pensions. It explores the national links between corruption in investments via placement agents and corruption in underfunding that plague states like Illinois and Kentucky. It explores the Kentucky Employee Retirement System (KERS) for State Workers the worst funded state plan in the country (worse than any single IL plan) and how others can learn from its current death spiral. It also discusses the need for a Federal Bailout which is currently being discussed for Detroit and Chicago. It looks into the lack of transparency as evidenced by no disclosure of holdings in SAC Capital buried in a Blackstone fund for nearly a year after the scandal broke. It connects a placement agent network to New Mexico, California (CALPERS) Illinois, New York, Connecticut and Rhode Island. The book has received glowing reviews in Forbes and Public Sector Inc. and has made the non-fiction bestseller list in Kentucky

This new and expanded 2nd Edition provides updated coverage of Kentucky’s ongoing pension funding crises and provides comparison with those of Detroit and Rhode Island.

I haven’t read it, but just looking at the graphs, Kentucky ERS that he refers to is, indeed, in a death spiral.

Let me show you what an asset death spiral looks like:

Now that probably doesn’t look dramatic to most people. I mean, sure, there’s a big drop down between 2008 and 2009, but didn’t that happen to all the plans?

Yes, it sure did. And since 2011, we’ve been in a bull market. Why are the assets continuing to go down, albeit slowly?

Let’s look at Kentucky ERS’s most recent CAFR for an explanation.

Go to page 27.

In 2014, there was $1 billion in contributions for the pensions. There were $1.8 billion in pension benefits paid.

Yes, there was enough in investment income to cover that difference. But look back to 2012 — that year, there wasn’t enough in investment income (indeed, it was negative, probably due to having to sell investments to cover benefits). There were multiple years where they had to sell assets to cover benefits.

That’s why the asset amounts haven’t increased since 2009. They’ve had to sell them off.

Again, the fund was in a positive position for 2013 and 2014, but those were good years for the market. What if the bear wakes up?

Let’s take a look at their funding pattern:

What the hell are they doing?

I’m looking through the reports, and I will just say as this specific plan is new to me, I don’t know what’s going on. I’m having trouble comparing numbers from the Public Plans Database with what I see in the CAFRs, because it looks like KERS is split into two plans – Hazardous and Non-hazardous.

Even though I can’t get the numbers to match, the comparison of the actual contributions vs. the recommended contributions do have similar trends:

So yes, they’ve been undercontributing for quite some time. Reading the legislative history, it sounds like whatever funding method they were using in the past was insane, inasmuch it does not make for stable funding patterns, even when you don’t undercontribute. Way too responsive to investment results.

The reason this is an issue is that such methods generally require increased funding just when you’re least able to pay for such funding. This is called countercyclical, and it’s very unstable. You don’t want to make a bad situation worse.

In any case, this is what happens when you’re in an asset death spiral:

Look at that — the plan used to be (in official numbers, at any rate) overfunded. And then it cratered.

The trouble did not start in 2009. It started well before then.

And this is an increasing problem because the number of retirees is increasing, so that the percentage of payroll to try to make up for the shortfall is only going to keep climbing.

I have more to say about this another time, but being 20% funded in the pensions when you have only a handful of retirees and your workforce are in their 30s is not necessarily concerning. You’ve got a few decades to make up the problem.

When most of your liability is retirees, and you’ve got a large shortfall — you’re essentially in pay-as-you-go range.

Let us go to the CAFR once more. This is from page 146:

This solvency test checks to see if the liability portion for active member contributions are covered (100% for all! Woo! They can get their own money back!) and then once that’s taken care of, how much of the liability for the current retirees/beneficiaries can be covered…. um. That’s not good. The hazardous plan doesn’t look as bad, but the KERS non-hazardous is in a hideous position.

So yes, neither Illinois nor Chicago are in the worst position for pensions.

I will have to go digging through the Public Plans Database to see if I can find a worse statewide pension plan.

To be sure, I’m using their official numbers, and, well, there are a variety of discount rates used as well as other assumptions. It does make it a bit difficult to do a fair comparison between states.

But even without that, the Kentucky ERS is in a pretty bad state.

Compilation of Kentucky posts