Call to Order
The meeting of the Public Pension Oversight Board (PPOB) was held on Monday, April 28, 2014, at<MeetTime> 12:00 Noon, in Room 154 of the Capitol Annex. Representative Yonts, Co-Chair, called the meeting to order.
Present were:
Members: Representative Brent Yonts, Co-Chair; Senator Jimmy Higdon, Representative Brian Linder, Robyn Bender, Tom Bennett, James M. "Mac" Jefferson, and Sharon Mattingly.
Guests: John Hicks, State Budget Director’s Office; Lowell Reese, Kentucky Roll Call, Frankfort, Kentucky; Mary Helen Peter, Kentucky Retirement Systems Trustee, Louisville, Kentucky; and Larry Totten, retiree, Frankfort, Kentucky.
LRC Staff: Brad Gross, Greg Woosley, and Marlene Rutherford.
Approval of Minutes
Mr. Bennett moved that the Minutes of March 24, 2014, be approved, which was seconded by Mr. Jefferson. The minutes were approved without correction.
Kentucky Retirement Systems Trustee Election Process, Procedures, and Issues
Chair Yonts said the 2014 General Assembly considered a bill relating to election of members to the Kentucky Retirement Systems (KRS) Board of Trustees when members die or resign from the board. The bill did not pass because the suggested language was not supported by the administration.
Mr. Thielen and Brad Gross provided an overview of the KRS election process. Mr. Thielen indicated that prior to the passage of Senate Bill 2, effective July 1, 2013, there were nine board members: the Secretary of the Personnel Cabinet, who served as an ex-officio member; five trustees elected by active and retired members of each system, two from the Kentucky Employees Retirement System (KERS), two from the County Employees Retirement System (CERS), and one from the State Police Retirement System (SPRS); and three trustees appointed by the Governor, two of whom were required to have investment experience as defined by statute, and one who was knowledgeable about the impact of the retirement system on local governments. In July, 2013, the board membership increased to 13 members: the Secretary of the Personnel Cabinet; six trustees elected by the active and retired members of each system, two by KERS, three by CERS, and one by SPRS; six trustees appointed by the Governor, of which one must be knowledgeable of the local impact of pensions, two must have at least ten years of investment experience as defined by statute, and three must be appointed from lists of nominees submitted to the Governor by the Kentucky League of Cities, Kentucky Association of Counties, and the Kentucky School Boards Association. Since the board’s annual meeting, held April 17, 2014, there is a full board membership. Mary Helen Peter is a newly elected trustee who was elected by the KERS membership. Thomas K. Elliott, a gubernatorial appointee, was elected as Chair of the board, and Dr. Daniel Bauer, was elected as Vice-Chair, to serve one-year terms.
The KRS board is responsible for the administration of the retirement systems, including the investment functions, which is a significant portion of the board’s responsibilities given the approximately $15.5 billion invested as of the end of February, 2014. Through the board and staff, the KRS provides retirement and health benefits, and pre-retirement services, to over 340,000 members and beneficiaries in the system, with 1,473 participating employers. Over $2 billion in health and retirement benefits are paid to retirees each year, 96 percent of which is paid to retirees and beneficiaries in Kentucky, which is a fairly significant impact on the economy of the state. All KRS functions are accomplished with approximately 250 employees, of which about 100 are retirement counselors. Mr. Thielen took exception with any notion that this was a bloated personnel system, given the complex nature of the system that they administer relative to other pension systems. As an example, he noted that KRS has three complex benefit tiers on the pension side and three complex benefit tiers on the health side, and 10 plans that are invested and accounted for separately. The counselors’ workload in 2013 included over 253,000 phone calls made and received in the call center, and over 13,300 on-site visits for counseling services.
Responding to a question by Chair Yonts concerning call center wait times to consult with a counselor, Mr. Thielen stated that the wait times vary, with the worst period of time being during open enrollment for health insurance. The phone system is an issue because KRS does not have the resources to handle calls at peak levels, which can be over 5,000 calls during open enrollment and result in wait times in excess of an hour. Conversely, the phone system is adequate for the approximately 800 or so calls in a normal month, which result in normal and relatively short wait times. Recently, $500,000 was spent upgrading the phone system. KRS will have additional upgrades to improve wait times and service to the members of the systems.
In response to a question on rates of retirement, Mr. Thielen stated that in 2013 there were approximately 9,000 retirements, which is compared to a normal year of 5,000 to 6,000 retirements, and that there could be a significant increase in the number of employees eligible for retirement over the next three years. Many recent retirements can be attributed to the required furloughs and lack of compensation increases over the last several years, which is causing employees to retire in greater numbers than historically seen. Chair Yonts asked if the recent salary enhancements, although small, will have any effect on the increasing number of retirements. Mr. Thielen responded that KRS believes retirements will continue to increase slightly over the next two or three years, which is likely somewhat attributable to the “baby boom” generation, eligible by either age or years of service, or both. The overall number of employees in state government is down, but this is not the case at the local level where it appears retirees are being replaced by new employees.
Mr. Thielen described the work of the KRS Board, which meets at least five times per year, with four quarterly meetings required by statute and an annual meeting. There are six board committees: investments; retiree health; audit; disability appeals/administrative appeals; human resources; and legislative and budget. The board members serve on at least two of the committees, and the committees meet regularly to cover issues related to their subject matter jurisdiction. Mr. Thielen said the board recently amended its bylaws to create a Disability Appeals Committee I and II to allow members on these committees to meet every other month, instead of every month, and to help alleviate some of the workload on the board members who serve on them. Members serve four-year terms, with a maximum of three consecutive terms, and they receive a $190 day per diem, plus expenses, on days they meet or have official business, which normally must be approved in advance.
Individuals may be placed on the ballot for the election process either by board nomination or by petition. The statute requires individuals seeking election to the board be active or inactive members, or retired members, of the system to which the election applies, such as KERS, CERS, or SPRS, and cannot be current or former employees of KRS. As for the election, the statutes requires the board to nominate, six months prior to the expiration of an elected term, up to three members for each available position. Elected member terms are four years and end on March 31, with one exception: the new CERS elected member position, created as a result of Senate Bill 2, whose term began on November 1 for a four-year term.
The board nominates up to three candidates for each available position six months in advance of the expiration of a term, which typically occurs at the September quarterly meeting. Information is contained in the KRS newsletter and on the website for the election for the next year, and applications and resumes are solicited from interested individuals in May preceding an election. Background checks are conducted on all individuals who submit applications. If a person is not nominated by the board but is still interested in being on the ballot, he or she may be nominated by the membership by submitting a petition with the names, last four digits of the social security number, and signatures of at least 10 percent of the number of members voting in the last election, which for the last election cycle was approximately 1,300 member signatures.
After the nomination process, the ballots are prepared in early January and distributed by first-class mail to all eligible voters, which for CERS elections amount to more than 227,000 ballots. The mailing includes the ballot and a postage-paid return envelope that must be submitted by March 1 in the election year, thirty days before the expiration of the term. The ballots are returned to the KRS external auditor via a post office box, and the auditor tallies the votes and certifies the results to the KRS board. The election ballots allow for write-in candidates. Vacancies in elected positions as a result of death or resignation during a term are filled by a majority vote of the remaining board members for the remainder of the unexpired term. Occasionally, there are issues of incompatible offices, meaning that an individual cannot be a member of the KRS board, a state office, and an officer in a city, county, town, or the General Assembly, or be an employee of any of those offices.
Chair Yonts said that one of the suggestions in Representative Graham’s proposal during the session dealt with how vacancies in elected positions are filled and would have specified that only those members who were elected to the board would select individuals to replace the vacancy. He asked Mr. Thielen to explain the pros and cons of replacement in this manner. Mr. Thielen suggested a “con” would be that, as a member of the board, the full board has the responsibility for all actions of the board. A “pro” would be that, if there were a dichotomy of positions between the elected and appointed membership of the board, the elected members might feel that only the elected members would reflect the perspective of the membership that elected the departed member. KRS staff avoids these types of issues, and those situations are within the purview of the KRS board.
Mr. Gross discussed statistics and costs of board elections. KRS provided statistics on the number of ballots that were mailed and received to indicate the level of participation in the election process. In SPRS, approximately 25 percent of the membership returns a ballot, versus CERS and KERS with an average of 12 percent participation. The housekeeping bill in the 2014 session would have permitted the board to authorize electronic voting, in whole or in part, which the board believes would be a cost savings. The total cost for the election process is over $100,000 per election for CERS, and approximately $70,000-$75,000 KERS. The cost for a SPRS election is significantly lower due to the smaller number of its membership. Ballots must be mailed by first class mail because they contain a specific identification code and related information in a bar code unique to each member, which allows the ballots to be tallied by an external auditor. The mailing expense and use of an external auditor represent significant portions of the total costs of an election.
Mr. Gross addressed a couple of issues that had been brought up about electronic balloting and how other states or systems conduct elections. The Kentucky Teachers Retirement System has a nine member board, of which seven are elected, and KTRS follows a similar paper ballot process as used by the KRS. However, the KTRS nomination process is conducted through the Kentucky Education Association, which has a nominating committee that nominates the candidates for any open seats. Also, due to staggered terms, KTRS has elections essentially every year, and similarly to the KRS process of filling vacancies, any KTRS board vacancies are filled by the vote of the remaining board members. Although KTRS has a uniform population, the response rate on the elections is about the same as with the KERS elections. The total cost for printing ballots and postage in the 2013 KTRS election was about $0.52 per mailed ballot, but there is no cost to KTRS for an auditor to tabulate the results of its elections because that function is performed at no cost by the Commissioner of Education.
Since 2006, there have been three elected board member vacancies, one in the KERS and two in the CERS. Two of these vacancies were open for some time because there was no majority vote of the remaining members to fill either vacancy. The proposed amendments in the KRS housekeeping bill would have required the vacancies to be filled by the remaining elected board trustees. One difference between the KTRS and KRS board structures is that the entire KTRS membership is elected, with the exception of two lay trustees or ex officio members, whereas the KRS board has gubernatorial appointments.
Mr. Gross stated that staff did an informal review of other states to determine how board election processes are handled. There are a variety of processes for establishing boards, with some states having all appointed trustees and others with a mix of elected and appointed or ex officio members. As for state employee retirement systems, about 54 percent had no elected board members. Of the twenty-three states with elected board members, seven allow some type of electronic or on-line voting by members, and 16 exclusively use paper ballots. The Maryland state retirement and pension system moved to electronic voting in 2005. In Maryland, members receive a postcard with a unique voting identification that they enter with the last four digits of their social security number on-line to cast a ballot. Maryland also allows voting by phone using this method. A concern of moving to electronic voting is the capabilities of the membership. Maryland addressed this concern by providing two methods of voting: on-line and by phone. A similar process is used in Alabama and Louisiana, which utilize an outside election consulting firm that mails ballots to members who may return the paper ballot by mail, or vote on-line or by phone. In Kansas, members vote on-line, but the members can request a paper ballot. Texas, Minnesota, and Massachusetts allow paper ballots but also allow on-line voting. Ohio, Mississippi, and Missouri have statutory authority to conduct electronic trustee elections, but they have not implemented the process to date.
Mr. Gross also noted that Senate Bill 2 established an additional CERS elected member, but because this new member position started off cycle with the remaining member terms, there is a situation where two CERS elections could occur in the same future year at different times of the year, creating duplicate costs. The KRS housekeeping bill in the 2014 Regular Session would have set the election cycle on the same terms and adjusted the future term of office of the “new” member seat to bring it in line with the other terms, thereby avoiding the additional $100,000 or more in election expenses.
Responding to questions by Mr. Bennett, Mr. Thielen stated that the Secretary of the Personnel Cabinet is a voting member of the Board of Trustees. The members who recently resigned did so because of a variety of factors, one because of personal workload and not being able to devote the necessary time to serve on the board, another because of an incompatible office, and a third for personal reasons.
Responding to questions from Senator Higdon concerning the budgeted amount for board meetings, committee meetings, travel, and how much compensation a board member may accrue in a given year, Mr. Thielen said there is no separate board budget, but he estimated that it would be about $35,000-$40,000 per year. Board members receive an hourly amount for preparation time, which is calculated at the per diem rate of $190 divided by 7.5 hours and equates to about $25 per hour, but the maximum number of hours is limited to three hours for disability and administrative appeals committee members and two hours for other members. The average board member receives about $3,000-$4,000 per year, but a member on the disability or administrative appeals committees could receive $7,000-$8,000 per year because those committees meet more frequently. The Chair of the Board of Trustees receives no additional compensation. A proposal to allow chairs of the different committees to have an additional hour or two of preparation time has been considered, but the board has taken no action.
In response to a question from Chair Yonts, Mr. Thielen said the board is a hardworking board, and there have been no issues of board attendance or participation.
Responding to questions from Mr. Jefferson concerning counselors and the KRS staff who may be retiring in the future and whether there would be the expertise, especially in the investment area, to oversee the complex functions of the system and if there had been any discussions with the other retirement systems about sharing employees, Mr. Thielen said they had not had discussions of that nature. He said he believed it would be extremely difficult to implement an employee-sharing process because each system is complex and different. As an example, the training period for KRS counselors is six to nine months, and it is very difficult to get those employees educated on all of the complexities of the KRS systems, let alone the differences that would be seen across systems.
Mr. Thielen summarized the recent investment returns for the systems, stating that as of the end of March there was an 11.37 percent return in the pension plan and a 10.6 percent return in the health insurance trust, compared to last year at 10.7 percent in the health insurance trust and 11.3 percent in the pension plan. KRS is ahead of the benchmarks for the systems this year, which is a reflection of the better economy and investment allocation decisions.
Senator Higdon inquired about the administrative costs of the systems, and Mr. Thielen stated that he received a monthly budget report. He noted that the overall administrative budget for the fiscal year is about $38 million, with a good portion being dedicated to salaries and benefits paid to staff, and that the overall administrative costs have amounted to about 0.5 percent of the assets under management.
Mr. Hicks inquired about the five year smoothing of the actuarially required contributions for the valuation on June 30, 2014, noting the year that occurred during the last major recession will be dropping off that valuation, and asked about the return on investment. Mr. Thielen said that, in fiscal year 2009, there was a loss of about 17 percent on investments, or just over $2 billion. The funding status of most of the plans will begin to increase, but that the KERS nonhazardous full actuarially required contribution will not be paid until fiscal year 2015-2016, which will have some negative impact in the 2014 evaluation. The actuaries are conducting a five-year experience study that will be reported to the KRS Board of Trustees at its meeting on May 15, and will include recommendations about whether the actuarial assumptions should be changed, with the most important being the assumed investment rate of return that is set at 7.75 percent.
Responding to Chair Yonts as to how Kentucky compares to other states on improvement in pension plans, Mr. Thielen said that Kentucky has 10 separate plans, taking into account pension and health insurance benefit plans, and nonhazardous and hazardous plans, separately. The KERS nonhazardous plan is about 23 percent funded. The much smaller SPRS plan is about 40 percent funded, the CERS plans are about 60 percent funded, and the KERS hazardous plan is about 67 percent funded. Looking at the plans separately, the only plan that is severely underfunded is the KERS nonhazardous plan, which is the second largest plan to the CERS nonhazardous plan.
Chair Yonts announced that a final legislative update was contained in the members’ folders. The Board will not meet in June and July. The normal meeting date for the May meeting is also Memorial Day, thus an alternate meeting day would need to be chosen. He asked the members contact staff about May availability.
Chair Yonts asked if it would be appropriate if the Board met with the KRS board in a joint meeting to develop a working relationship with the KRS board, and if not in May, at a time later in the year. Mr. Thielen indicated he would discuss the topic with the KRS board, and said that the board is scheduled to meet at 9:00 a.m. on May 15 for about six hours. The actuary will meet with staff and external accountants on May 14.
Chair Yonts said that Board had discussed having the actuary attend its next meeting to review the experience study recommendations and, if unavailable, to participate by videoconference.
The meeting adjourned at about 1:00 p.m.