KRS fund one of the worst-financed nationwide

Non-hazardous retirement plan at 24 percent

By Kevin Wheatley Published:

Kentucky’s largest retirement fund for state employees, the Kentucky Employees Retirement System non-hazardous plan, has less than a quarter of the money needed to pay projected benefits, say actuaries with Cavanaugh Macdonald Consulting.

Tom Cavanaugh, CEO of the actuarial firm, told the Kentucky Retirement Systems Board of Trustees Wednesday that the KERS non-hazardous plan is projected to dip below 10 percent funded in 2019 before improving.

The projection takes current pension reforms, namely a gradual increase in state contributions, and unfunded cost of living adjustments into account.

As of June 30, the KERS non-hazardous plan is 24.5 percent funded, he said, down from a 27 percent funding level last year.

The plan, with more than 42,000 active members and 39,000 retirees and their beneficiaries, is among the worst funded of its type in the nation, Cavanaugh told reporters during a break.

“Boy, if it’s not (the worst funded), it’s awfully close,” he said. “Illinois has some really badly funded systems, but KERS non-hazardous is pretty darn low.”

The main issue with KERS non-hazardous, Cavanaugh says, is the gradual increase of contributions by the state, part of a reform package passed in 2008.

Under the phase-in schedule, actuarially required contributions to KERS non-hazardous won’t be fully paid until 2025. That’s later than the phase-in for the KERS hazardous and State Police Retirement System plans.

“We’re getting a lot closer to the full contribution for those two systems, but we’re still way off on the non-hazardous system,” Cavanaugh said.

KRS Executive Director Bill Thielen said if the legislature agrees to fully pay contribution rates starting in 2014, as recommended by the Kentucky Public Pensions Task Force, “that is going to greatly improve the situation.”

“We still have to face market risks and the risks that we don’t meet our actuarial assumptions,” Thielen said. “But the influx of money is the real key right now.”

Thielen noted that the KERS non-hazardous plan currently has about $2.9 billion in assets and pays some $800 million in benefits each year.

“It doesn’t take too long to eliminate your asset base, especially if you lose money on the market,” he said.

But while unfunded pension liabilities are on the rise in the $14 billion KRS, which oversees retirement funds for state and municipal workers and their beneficiaries, the program’s total unfunded obligations in pensions and health insurance have dropped from $19.2 billion to $18.1 billion, according to figures presented to KRS trustees.

Every plan saw pension obligations rise while assets decreased, but health insurance liabilities dropped sharply, according to numbers presented by Cavanaugh. Funding levels for all plans, except for KERS non-hazardous, improved.

The KERS non-hazardous plan faced $11.3 billion in combined unfunded liabilities last year, but the gap closed slightly to $11 billion as of June 30, figures show. The plan’s health insurance obligations sank from $4.3 billion in 2011 to $3.1 billion as of June 30.

KRS officials said actuaries lowered projected insurance liabilities after the system moved from a self-insured health plan to Humana’s Medicare Advantage plan for retirees older than 65. The new health plan takes effect Jan. 1, the midpoint of the 2013 fiscal year.

The shift trimmed about $2.5 billion from unfunded liabilities in health insurance for KRS and decreased contribution rates for cities and counties in the County Employees Retirement System.

It also means lower contribution rates for cities and counties in the County Employees Retirement System.

Local governments and other participants in CERS are expected to save $24.7 million in the upcoming fiscal year, which begins July 1. Last year, actuaries projected local governments would pay $61.3 million more starting July 1.

CERS participants pay 19.55 percent of payroll into the CERS non-hazardous plan and 37.6 percent to the CERS hazardous plan. The rates will drop to 18.89 percent for CERS non-hazardous and 35.7 percent for CERS hazardous in the coming fiscal year.

Next year’s rates will save the City of Frankfort $185,187 and Franklin County Fiscal Court $87,753, according to numbers presented by KRS.


>KERS non-hazardous: 24.5 percent (27 percent in 2011)

>KERS hazardous: 74.1 percent (68.4 percent in 2011)

>CERS non-hazardous: 61.3 percent (58.9 percent in 2011)

>CERS hazardous: 58.9 percent (56.6 percent in 2011)

>SPRS: 39.1 percent (38.1 percent in 2011)

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  • Former Executive Director Bill Hanes warned this would happen, if the Legislators did not return the funding levels to where they should be, years ago.