KRS Board Ignores Request and Practice of Phasing In Changes To Assumption Rates

     Decisions made Wednesday morning at the Kentucky Retirement Systems (KRS) Board of Trustees meeting will have a major impact on Kentucky cities. The Board voted on assumption rates for three of its retirement plans. It failed to agree on rates for the County Employees Retirement System (CERS) plans and the Kentucky Employees Retirement System (KERS) hazardous plan at its last meeting, leading to Wednesday’s special called meeting. Despite concerns from some members, the Board passed a new rate of return for all three plans and approved different payroll rates for CERS and KERS hazardous.

     Five board members voted “No” on the motion to set a rate of return of 6.25 percent for both CERS plans and the KERS hazardous plan. Reappointed board member J.T. Fulkerson, who was sworn in at the start of the meeting, was among the no votes. He represents the Kentucky League of Cities and voiced concern about the impact the drastic change would have on cities, which have limited revenue options. Betty Pendergrass, Jerry Powell, Vince Lang and Mary Helen Peter also voted “No” on the 6.25 percent rate. All five worried the change, from the current 7.5 percent, would inhibit employers in the CERS system from making additional hires, further impacting the pension system.

     KLC Deputy Executive Director J.D. Chaney told members of the Board during public comment that “the adverse employer consequences that are likely to be produced by the shock, without phasing in these changes, is going to have an impact on the long-term stability of CERS.” Chaney said it was part of the fiduciary responsibility of the Board “to consider how employers will respond and how it can impact the system.” Estimates are the changes made Wednesday could increase employer contributions by as much as 50 percent; but, the data is still being computed for a more accurate analysis. Chaney said the refusal by the KRS Board to phase-in changes that impact city and county budgets is a good indicator of why CERS needs to separate. “Hopefully the legislature has the foresight to approve this CERS separation bill sometime in the very near future,” said Chaney.

     Kentucky League of Cities Governmental Affairs Manager Bryanna Carroll met with KRS Board members before Wednesday’s meeting to discuss the need to phase-in rate changes. Many actuaries, including those used by KRS, encourage a phase-in of changes to prevent rate volatility. Carroll says “phasing in the changes over a three- to five-year period would have allowed for the statutorily required experience study to be conducted at the end of the phase-in to ensure those changes were accurate and modify those adjustments, if necessary.” Many state pension systems use a phased-in approach for rate changes. KRS Chairman John Farris dismissed questions raised Wednesday by other Board of Trustees members about a possible phase-in by simply saying that was not what the state’s actuaries recommended, even though the same actuaries have recommended the phase-in approach for other systems.

     The Board also voted Wednesday morning to set the payroll rate for CERS at 2.0 percent and for the KERS Hazardous plan at zero. When the Board last met in May, the Investment Committee recommended a zero percent payroll rate for all KRS plans, but that was amended to a 2.0 percent rate for CERS at Wednesday’s meeting. Members of the Committee told Board of Trustees members the decision to change the recommendation was made because the plans are so financially different. CERS is funded at a much higher rate (at 62 percent before Wednesday’s meeting, compared to other state plans funded at levels as low as 13 percent).

     Attempts by the Kentucky League of Cities to look at the financial data used to determine the payroll rate recommendation have been met with resistance. Open records requests filed on June 7 and June 19 are only partially answered. Chaney says KRS should be able to provide the data without delay. “The rate changes should be based on accurate data that KRS should already have in its possession as the recommendations have already been made. We are hopeful KRS will provide the data soon so our actuaries can review the information.”

     Confusion at the Board’s May meeting left some members unsure of what was voted on and approved. Chairman John Farris told Board members KRS staff reviewed audio tape from May and while many parts were inaudible they determined Board members voted at that time to set the inflation rate for all five pension systems at 2.3 percent. The Board approved the minutes of that meeting Wednesday with that information included. The Board also voted Wednesday to set the insurance rates at 6.25 percent; they also had been 7.5 percent.

     The Board was also scheduled to vote Wednesday on new bylaws but that was tabled after Board member David Rich voiced frustration. He pointed out he sent an email more than a year ago, pointing out problems with the current bylaws, but none of those concerns were addressed in the version submitted for the Board’s approval Wednesday. Chairman Farris said those issues would be reviewed and an amended version of the bylaws voted on at the Board’s September meeting.