FRANKFORT Â-- Kentucky Retirement Systems, the state pension agency that officially faces an $18.1 billion unfunded liability, might be in far worse financial shape than previously thought. That means taxpayers could be on the hook for much more money to honor pension commitments to about 365,000 public employees.
KRS made serious math errors in recent years by relying on overly optimistic assumptions about its investment returns, the growth of state and local government payrolls, and the inflation rate, KRS board chairman John Farris told fellow trustees Thursday at a board meeting.
For example, KRS assumed that it would earn an average of 6.75 percent to 7.5 percent on money it invested, but it earned an average of 4.75 percent, Farris said. KRS assumed that public payroll would grow by 4 percent a year through pay raises or more government hiring -- a larger payroll means larger pension contributions by employees -- but public payroll has dropped overall because of repeated budget cuts, he said.
By giving inaccurate numbers to its actuarial advisers, KRS got back inaccurate numbers concerning its liabilities and how much the state and local governments needed to contribute, Farris said. He called for a new analysis of KRS' financial health so the next state budget, covering fiscal years 2019 and 2020, reflects the pensions' true needs.
"It doesn't make any sense," said Farris, a Lexington economist whom Gov. Matt Bevin appointed to the KRS board last year. "We wonder why the plans are underfunded. It's not all the legislature's fault. It's the board's responsibility to give the correct numbers."
Some of the other KRS trustees protested that they had thought that the assumed numbers were correct because the agency's actuarial adviser, Cavanaugh Macdonald Consulting, did not balk when it received them. "I rely on the actuaries to, on some level, verify our assumptions," trustee Joseph Hardesty said. "I've never heard our actuaries say that our assumptions were unrealistic."
In coming weeks, KRS will select a company to perform a more accurate assessment of its financial health so the board can decide by December what contribution rates to recommend to the state and local governments. The next two-year state budget is scheduled to be adopted next spring.
In a statement Thursday, Bevin praised the KRS board for discarding the "alternative data" it previously used. Bevin rebuilt the board last year by removing its chairman, Louisville banker Thomas Elliott, and adding four more gubernatorial appointees. Several of the agency's top employees since have been replaced.
"Today's unsettling revelations reaffirm that our state pension system is indeed in much worse shape than many stakeholders realize," Bevin said.
In his State of the Commonwealth Address last week, Bevin warned that Kentucky needs to raise more revenue to address its unfunded pension liabilities. Bevin said the state owes $82 billion to KRS and its other major pension agency, Kentucky Teachers' Retirement System, which covers educators, not the $33 billion that is officially owed to the two systems using their own assumptions.
KRS reports that its primary state pension fund has only 16 percent of the money it's expected to need to honor its future commitments.
"That's not a pension system," Bevin said. "That's a checking account, and it's about to go bankrupt."