Call to Order and Roll Call
A meeting of the Public Pension Oversight Board was held on Monday, February 23, 2015, at 1:00 PM, in Room 149 of the Capitol Annex. Senator Joe Bowen, Chair, called the meeting to order. The roll was not called, but the secretary noted those in attendance.
Present were:
Members: Senator Joe Bowen, Co-Chair; Representative Brent Yonts, Co-Chair; Representatives Brian Linder and Tommy Thompson; Robyn Bender, Tom Bennett, Jane Driskell, James M. "Mac" Jefferson, and Alison Stemler.
Guests: Mike Robinson, Council of State Governments, among others.
LRC Staff: Brad Gross, Greg Woosley, Terrance Sullivan, and Marlene Rutherford.
Approval of Minutes
Co-Chair Yonts moved that the minutes of the January 26, 2015 meeting be approved. Mr. Jefferson seconded the motion, and the minutes were approved without objection.
Kentucky Retirement Systems Investment
David Peden, Chief Investment Officer of the Kentucky Retirement Systems, summarized the January performance and stated that he would do so each month. The total portfolio performance was a negative 0.04 percent versus the benchmark return of 0.19 percent. U.S. equity had a difficult month, which was reflected in the S & P 500 being down three percent in January. Non-U.S. equity was nearly flat, or down thirteen basis points, and the Kentucky Retirement Systems’ non-U.S. equity portfolio was down twenty eight basis points. Mr. Peden said the Barclay’s fixed income benchmark was up 1.9 percent, and the KRS fixed income portfolio was up 1.35 percent and trailed the benchmark due to credit exposure, rather than interest rate exposure, when compared to the benchmark. He said the ten year treasury yield on January 2, 2015, was 2.12 percent and ended January at 1.68 percent, an incredible move in the ten year treasury rate. He reminded the board that when rates go down the price of bonds go up, which is a good situation from a fixed income perspective. The real return in January was up 1.72 percent, led by Treasury Inflation Protected Securities (TIPS), which were up 2.47 percent, and was largely moved by swings in the oil markets and gains in the PIMCO All Asset Fund, a major holding for KRS in the real return portfolio, which was up 3.48 percent. The portfolio is down about one percent fiscal year to date versus the benchmark. Mr. Peden indicated it has been a challenge for the start of the fiscal year on an absolute basis and relative to the benchmarks. However, he noted that February performance has been tremendous thus far, and he is hoping he will be able to report good news next month both on an absolute basis as well as versus the benchmarks.
Responding to a question by Co-Chair Bowen, Mr. Peden said that the portfolio was up two percent month to date and more encouraging is that some of the asset classes that have been struggling either on a relative basis or an absolute basis are performing very well.
In response to a question to Mr. Thielen from Mr. Jefferson concerning the asset/liability study and actuarial audit and the timeframes for the completion and costs of those studies, Mr. Thielen said that the asset/liability study is being conducted on an on-going basis currently and will be reported to the KRS Board in its final draft at the May meeting. The cost of the last study was approximately $250,000 or about $50,000 per fund and he expected it to again be somewhere between $250,000 and $300,000. The RFP for the actuarial audit will be approved by the KRS Board at its next meeting on February 24 and will be issued the following day. That process will also be completed around May and hopefully KRS will be able to report to the PPOB the results of that audit at its May meeting. KRS is still in the process of evaluating other studies that would compare KRS to other public pension plans, including the complexities of the KRS program versus other programs for investment, fees, commissions, and costs in investment structure as well as for the KRS administrative costs and fees and administrative structure. The review process is taking some time because there is a lot of information and really only one firm with an international database that is capable of performing what KRS is requiring, and that if an RFP is required it has not yet been prepared. Costs of those studies could range from about $40,000 to $60,000 for the investment portion and approximately $60,000 to $100,000 for the administrative study. The actuarial audit budget has not been set and that it was his understanding that those audits are not normally expensive; however, in talking with the actuaries, it could cost as much as $80,000 to $100,000 given the complexity of the KRS system.
Mr. Thielen also recognized Vince Lange, a member of the KRS Board of Trustees.
2015 Legislative Proposals – LRC Staff
Brad Gross with the Legislative Research Commission discussed the 2015 legislative proposals related to public pensions, dividing them into separate categories of funding, “spiking,” housekeeping legislation, transparency and reporting, KRS agency participation, PPOB duties, and other KRS related measures.
Most of the legislation relating to the retirement systems would contain an actuarial audit or “AA” in the Legislative Record. Any retirement bill that impacts plan liabilities is required to have an actuarial analysis under KRS 6.350 and some bills will also have a local mandate (LM), which identifies the impact on local governments, mainly in the CERS, and that sometimes a fiscal note (FN) is attached that identifies the impact on the state budget. As it relates to funding, the PPOB had recommended that the General Assembly secure additional funding for the KERS nonhazardous pension fund to avoid insolvency issues and that Senator Bowen had filed Senate Bill 94 to address this issue, which would limit the state debt ceiling to six percent in future years. The current debt level is higher than that amount and the bill would specify that as the debt level is reduced any additional savings would be re-directed as a supplemental employer rate to the KERS nonhazardous pension funds above and in addition to the actuarially required contribution (ARC). The impact would be $8.8 million in fiscal year 2017 and would trend up to $177.1 million in fiscal year 2022, for a total impact of about $500 million. There would be no impact on the plan liabilities, but the bill would provide additional funding to insure KRS is able to pay its liabilities and would help increase the funding levels over time.
Mr. Bowen stated that even though the unfunded mandate is in the billions of dollars and that “only” millions were being identified by the bill’s savings, he noted that one of the current challenges is managing cash flow, which involves an ongoing deficit in the millions of dollars and therefore identifying any savings that can be redirected to the systems serves a good purpose.
Mr. Gross stated there has been a lot of discussion about the pension “spiking” issue. “Spiking” occurs when an employee receives significant increases in pay in the last couple of years of employment that results in higher lifetime benefit payments because pension payments are based on the high three or five years of salary. Senate Bill 2 enacted by the General Assembly in 2013 requires employers to pay for the additional actuarial costs of pension spiking for any increases in creditable compensation that exceed ten percent per year, with exemptions for bona fide salary increases from a promotion or salary advancement or due to lump sum payments for compensatory time, which is effective for employees retiring on or after January 1, 2014. During the 2014 session, Senate Bill 142 addressed this issue, and the bill would have removed the employer payment for spiking and in lieu thereof would have limited future annual creditable compensation growth to ten percent annually for employees participating in KRS. In other words, it would have limited future salary growth used for retirement purposes, but would not have limited the salary the employee could receive. The bill also retained the existing exemptions, but added additional exemptions relative to worker’s compensation and unpaid leave. The PPOB recommended that this issue be addressed through measures similar to those contained in Senate Bill 142 or by increasing the threshold to which an employer surcharge would occur from ten to fifteen percent. Three measures have been introduced in the 2015 session relative to pension spiking, Senate Bill 157 and House Bill 444 are the same bill and essentially the same as Senate Bill 142 from the 2014 session, but they also include additional exemptions related to school boards where there is a payment of sick leave upon termination of employment and adjustments to the unpaid leave exemptions. There is no actuarial impact of those bills. Representative Yonts has also introduced House Bill 116, which retains the existing employer charge but exempts any costs to the employer less than $2,500.
The KRS housekeeping bill was supported by the PPOB. House Bill 108, sponsored by Representative Yonts, includes several measures requested by KRS, one of which requires all remaining KRS retirees who are receiving paper checks to receive those payments through EFT. This proposal was removed from the bill by a floor amendment, but it is a part of the cost savings that had been identified by KRS. Other measures include allowing KRS to conduct trustee elections electronically rather than by paper ballot; to impose interest charges on omitted contributions, which occurs when an employer fails to report an employee and contributions are later due; to synchronize the CERS trustee elections; and to make technical and clerical changes to conform to federal law. There is no actuarial impact and according to KRS the bill would result in a reduction in administrative expenses. Mr. Gross noted that the bill passed the House and is before the Senate State and Local Government Committee.
In response to a question from Co-Chair Bowen regarding an estimated cost savings, Mr. Gross said that synchronizing the CERS trustee election was estimated by KRS to save approximately $100,000 to $125,000. Co-Chair Yonts said that passage of all the cost saving bills would result in a savings to the system of approximately $350,000 to $400,000, but that the amount would be reduced about $65,000 because of the objections to converting paper checks to EFT and the bill being amended to remove that provision so that the bill would pass. Mr. Thielen also noted that if elections were being electronically conducted, and if the CERS elections were synchronized, that the cost savings could be between $400,000 and $500,000.
Mr. Gross stated that the PPOB had recommended that transparency or reporting requirements for the systems and legislation to require the systems to conduct an actuarial experience study should be enacted this year. The latest actuarial experience study was completed in May of 2014 and is required once every ten years, although it is typically completed once every five years. There was also a recommendation to incorporate sensitivity analysis into the evaluations on key assumptions to see how that might impact plan funding and the financial health of the systems. Senate Bill 22, sponsored by Senator McDaniel, would require state-administered systems to establish a placement agency disclosure policy and to disclose the information to the KRS board and the Government Contract Review Committee, which has passed the Senate. The PPOB also discussed at its May meeting concerning actuarial audits requiring KRS to engage a different actuary to perform an actuarial audit of KRS assumptions and funding methods and to report those findings to the PPOB, which was included in the PPOB’s recommendations and is reflected in House Joint Resolution No. 7. This resolution has passed out of the House State Government Committee.
House Bill 306, sponsored by Representative Yonts, requires the retirement systems to perform an actuarial experience study once every five years and to perform a twenty-year projection of the impact of changes made by the systems that affect plan liabilities. The bill would require a similar analysis on any incremental assumption changes, such as retiree health benefit selection or any change that impacts plan liabilities, as with assumption changes resulting from an actuarial experience study. It would also require specific items to be included in the actuarial valuation, and require KRS to produce an estimate of employer rates on or before August 15 prior to the budget year and to report those values by December 31 and forwarded to the LRC and the chairs and committee staff with jurisdiction over those systems. The bill does not have an actuarial impact and has passed out of the House State Government Committee.
House Bill 49, another transparency reporting bill sponsored by Representative Wayne, includes provisions to place the state-administered retirement systems under the state procurement laws, bans the use of system assets to pay placement agents, requires KRS and KTRS to post additional information on their websites relative to the pension plans, restricts the requirements for KRS board members that are appointed by the Governor to individuals with investment experience, and requires the PPOB to study and make recommendations on whether the administration of the CERS and KERS systems should be separate and whether to transfer administration of the judicial and legislators’ retirement plans to the KRS. The bill has no actuarial impact and has been assigned to the House State Government Committee.
Mr. Gross stated that the PPOB also recommended that legislation to address KRS agency participation should be enacted. House Bill 62, sponsored by Representative Yonts, would allow certain agencies to voluntarily discontinue participation in KERS or CERS provided they pay the actuarial costs for no longer participating. The agency would be required to pay for an actuarial study to determine the cost of the agency discontinuing participation and to pay the full actuarial costs of discontinuing participation. It would also require any discontinuing employer to establish another qualified plan for its displaced employees. There is no actuarial impact. The bill passed the House and has been assigned to the Senate State and Local Government Committee.
The PPOB also recommended that legislation include Kentucky Teachers Retirement System, the Judicial Retirement Plan, and the Legislative Retirement Plan in the oversight responsibilities of the PPOB. House Bill 47, sponsored by Representative Yonts, incorporates this recommendation, as well as changes the reporting deadline for the PPOB to December 31 and specifies the terms of appointed members and allows appointed members from the Speaker, President, and Governor to be a member of the retirement systems. There is no actuarial impact for the bill, and it has passed the House and has been assigned to the Senate State and Local Government Committee.
Among other retirement-related measures before the General Assembly is House Bill 287, sponsored by Representative Graham, which provides that vacancies in elected positions on the KRS board be filled by a majority vote of the remaining elected trustees rather than by a majority vote of all remaining trustees. The bill has passed out of the House State Government Committee. Senate Bill 62, sponsored by Senator Schickel, House Bill 163, sponsored by Representative Belcher, and House Bill 181, sponsored by Representative Butler, all deal with re-employment after retirement. Senate Bill 62 would void the retirement of any elected official that retires following re-election but prior to assuming the new term of office. House Bill 181 would add state police retirees to the House Bill 363 provisions passed in 2014 and would allows sheriff’s offices to hire SPRS retirees as deputy sheriff’s if they meet certain qualifications and would exempt the sheriff’s office from paying employer contributions and health reimbursements on those individuals. Senate Bill 20 would require disclosure of retirement benefit information of current and former members of the General Assembly and has been assigned to the Senate State and Local Government Committee. Senate Bill 194 would provide that new members of any of the state-administered systems who commit certain felonies not related to their duties would forfeit their pension benefits, and the bill has been assigned to the Senate State and Local Government Committee.
In response to a question from Co-Chair Bowen, Bill Thielen said that the information and bills discussed today would be discussed with the KRS Board in the legislative update to the board of the bills that impact the KRS or its members.
Co-Chair Bowen reminded the PPOB members that the board will continue to meet on the fourth Monday of each month and that the next meeting would be March 23rd at 1:00 p.m.
There being no further business, the meeting adjourned at approximately 1:45 p.m.
A copy of the PowerPoint presentation used by Mr. Gross is on file in the Legislative Research Commission Library.