KRS Audit Finds KERS Drives up Administrative Expenses; CERS Payroll & Investments Bring in More Money

Posted on December 5, 2017

     The Kentucky Retirement Systems (KRS) Board of Trustees is meeting this week to approve contribution rates for the County Employees Retirement System (CERS) and to hear about the results of the FY 2017 KRS audit. Monday, the Audit Committee met to iron out last minute issues with the report. Representatives of Dean Dorton Allen Ford (DDAF), a Kentucky certified public accounting firm, gave members of the Committee an overview of the audit findings.

     Joseph Overhults, an accountant and business advisor at DDAF, reported the KRS total pension net position was $11.9 billion at the end of Fiscal Year 2017. That was a 9.6 percent hike from Fiscal Year 2016. The audit contributes the addition to positive investment income, higher contributions and an additional $98.2 million appropriated from the General Fund for the Kentucky Employees Retirement System (KERS) and State Police Retirement System (SPRS). Health insurance contributions went up in FY 2017, from $14.7 million to $17 million. The report says that increase was due to new employees in the Tier 3 hybrid cash balance plan. There was also a 4 percent growth in pension benefits paid in Fiscal Year 2017, attributed to a 16 percent rise in retirements.

     Investment returns saw a big jump in FY 2017. Returns went from -0.52 percent in FY 2016 to 13.47 percent for the period that ended June 30, 2017. That meant a net appreciation of almost $1.2 billion. (FY 2016 saw a depreciation of $212.9 million.) The audit says the FY 2017 surge was due to favorable market conditions.

     KRS pension administrative expenses went up in Fiscal Year 2017. DDAF representatives reported expenses totaled $33.1 million, compared to $32.3 million in FY 2016. The report says, “The increase was mainly due to the higher employer contribution to KERS Non-Hazardous retirement plan, for KRS staff.” Although the report states the increase was mainly due to KRS paying an increased employer contribution to KERS, the formula requires CERS to pay a majority of those fees. CERS, with accounts for 63 percent of the total KRS membership, pays 63 percent of the system’s administrative costs. Separating CERS could provide for a more efficient system. Other systems, like the Teachers Retirement System (TRS), function outside of KRS and spend less.

     The audit found an issue with the accounts receivable balance. A large amount was due in unpaid sick leave and pension spiking fees, most from SPRS. The audit warned not collecting the amount could have a significant impact on the unfunded liability. State Budget Director John Chilton, who chairs the Audit Committee, said his office is working to rectify the issue.

     Initial information was also provided Monday on the first quarter returns for Fiscal Year 2018, which ended September 30, 2017. Pension assets were $12.3 billion, up from the same time last fiscal year. That included a $6.7 million elevation in member contributions due to a climb in CERS hazardous and nonhazardous, KERS hazardous and SPRS payroll. Employer contributions went up $8.5 million in the first quarter due to a change in the contribution rate. Investment income was up in the first quarter, earning $441.2 million compared to $428.4 million last year. Insurance net assets saw an addition of $173.9 million.

     Overhults told the Committee DDAF is finalizing details of the report before it makes a presentation to the Board of Trustees at Thursday’s meeting. Karen Roggenkamp, executive director of the KRS Office of Operations, told the Committee the plan is to release the full audit before December 31. The next audit, done in 2018, will be conducted by the Kentucky Auditor of Public Accounts.

     In addition to the returns, the Audit Committee discussed requests from the cities of Scottsville, Erlanger, Richmond, Simpsonville and Maysville to move some police and fire positions into hazardous duty. The Committee approved forwarding the requests to the Board of Trustees. Roggenkamp reported that KRS is currently auditing 16 of the 22 contracted hazardous duty positions within KERS to determine if they meet the requirements for hazardous duty. They expect to complete that audit by the end of the month and then begin a similar audit of CERS hazardous duty participants.