Call to Order and Roll Call
The Public Pension Oversight Board meeting was held on Thursday, December 17, 2015, at 12:00 p.m., in Room 169 of the Capitol Annex. Representative Brent Yonts, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Joe Bowen, Co-Chair; Representative Brent Yonts, Co-Chair; Senators Jimmy Higdon and Gerald A. Neal; Representative Brian Linder; Tom Bennett, John Chilton, James M. "Mac" Jefferson, Sharon Mattingly, and Alison Stemler.
Guests: Representatives Arnold Simpson, Derrick Graham, Jerry Miller; Mike Harmon, Representative and Auditor of Public Accounts-Elect; Travis Mayo, Assistant Attorney General; Bill Thielen, Executive Director, Kentucky Retirement Systems; Beau Barnes, Deputy Executive Secretary, Kentucky Teachers’ Retirement System; Donna Early, Executive Director, Judicial Form Retirement System
LRC Staff: Brad Gross, Committee Staff Administrator; Greg Woosley, Assistant General Counsel; Terrance Sullivan, Analyst; Bo Cracraft, Analyst; and Maurya Allen, Committee Assistant.
Approval of Minutes
Senator Bowen moved that the minutes of the November 23, 2015, meeting be approved. Senator Higdon seconded the motion, and the minutes were approved without objection.
Kentucky Retirement Systems Actuarial Valuation/Financial Statements
Mr. Bill Thielen, Executive Director, Kentucky Retirement Systems (KRS), was present to provide an update regarding the systems’ actuarial valuation and financial statements. Mr. Thielen began by directing members’ attention to tables of financial information from the audited financial statements. He added that the full financial statements, which are comprehensive annual financial reports, and the valuation of all the plans are provided on the KRS website. The first item he covered was the net plan position at the end of the past fiscal year compared to the previous year. At the end of the 2014-15 fiscal year, KRS had $15.89 billion in assets, down from the $16.17 billion at the end of the 2013-14 fiscal year. Also, the pension fund had lost $369 million while the insurance fund had gained approximately $92 million during the year. The investment return data indicated that $204 million net return versus $1.6 billion in the prior year. Pension return rate was 2.01 percent and insurance return rate was 1.86 percent, both were well below desired rates.
The actuarial returns results were then covered, beginning with an overview of the equation used by the systems actuaries. The 2015 valuation results reflect assumption changes made by the Board of Trustees following the experience study covering the years of 2008-2013. The experience study showed how the actual experience of the plans differed from expectation and the assumptions changed were withdrawal rates (inactive members), retirement rates, mortality rates, and disability rates for three plans. Adjustments were also made regarding healthcare coverage. Senator Bowen asked what effect the withdrawal rates had on the system valuations. Mr. Thielen stated that when a member withdraws from the plan, that individual no longer accrues service credit, resulting in a liability. The actuaries make assumptions about how many individuals will withdraw in a year versus how many will remain, thus resulting in the liability of that to the whole system.
Mr. Thielen continued to explain that the actuaries had suggested a reduction in price inflation from 3.5 to 3.25, thus reducing the assumed rate of return on investment from 7.75 percent to 7.5 percent. All of these changes were adopted in August in order to be part of the valuation process. He then highlighted the funded status of each of the plans at the end of 2015 versus the end of 2014. Particularly, KERS Non-Hazardous pension fund decreased from 21 percent funded to 19 percent. Mr. Thielen largely attributed the decrease for all the pension plans to the change in assumptions. Alternatively, most of the insurance plans’ funded status improved. The State Police Retirement System (SPRS) pension fund also decreased to 33.8 percent funded. He stated that if KRS meets its expected rate of return next year, all plans except KERS Non-Hazardous and SPRS should increase in funded status.
Mr. Thielen addressed state contribution rates resulting from the 2015 valuation. The 2016 rates were also highlighted, for both pension and insurance. This year, the state paid 38.77 percent of payroll, but next budget cycle, based on the 2015 valuation, the state will contribute 47.28 percent. The KERS Hazardous rate will decrease from 26.34 percent to 23.82 percent and SPRS will increase from 75.76 percent to 85.34 percent. The market value investment return for the system was less than anticipated at 2.01 percent for pensions, but because investment returns are smoothed over a five-year period, the actual value of investment returns was greater than the desired 7.5 percent because it is possible to factor in three years of double-digit returns. Senator Bowen asked if the language of Senate Bill 2 of the 2013 Regular Session, where smoothing for the purpose of calculation of benefits was addressed, supported the decision to smooth on the past five years instead of looking from the point where the bill took effect, meaning from 2014 onwards. Mr. Thielen stated that Senate Bill 2 was silent on the direction of smoothing, and if KRS had not looked backward, all of the members added from January 1, 2014 would not receive an investment return credit over and above 4 percent for an additional 5 years. Senator Bowen asked if anyone was retiring at that time for it to affect. Mr. Thielen stated that it was the impression of KRS that the intent of the General Assembly was, beginning January 1, 2014, to give individuals in the hybrid-cash plan the benefit of returns in excess of 4 percent. Senator Bowen asked if that was an assumption being made because it was not explicitly stated in the text of the law. Mr. Thielen stated that yes, and it was in an effort to not discriminate against individuals joining during the first four years. Senator Bowen stated that it doesn’t give a real impression of returns because the smoothing captures returns before the system had a hybrid-cash structure. Mr. Thielen said that the system uses a geometric average of returns to determine the amount over 4 percent guaranteed credit. Secondly, the actuarial smoothing method only dampens the volatility in the employer contribution portion. Senator Bowen stated that he was concerned that it was not the intent of the legislation to allow a retrospective smoothing process. Mr. Thielen answered that in the absence of having an explicit direction, the system had made its best interpretation of the legislation, but if the General Assembly wished to change legislation to make it more explicit, the system would comply.
Senator Higdon said that it had also been his understanding of the legislation. The current practice seemed contrary to the intent and smoothing would make it difficult going forward to truly understand the investment returns being made by the system. Mr. Thielen reiterated that smoothing did not have any impact on determination of the interest credit under the hybrid-cash balance plan. Smoothing only serves to take into account investment returns over a 5-year period so the systems do not absorb into the contribution rate gains or losses from a single year. Public pension plans all over the country utilize smoothing anywhere from five to fifteen years to dampen volatility of the contribution rate from year to year depending on market returns. Senator Higdon asked how other plans with a hybrid-cash balance structure handle the earned investment credit. Mr. Thielen said he did not have the language of the bill with him, but in his recollection the legislation guarantees a 4 percent investment return credit and then shares 75 percent of amounts over 4 percent based on a five-year geometric average. Nothing in the bill said to wait to implement this for five years, instead it incorporated a five-year geometric average. So the system made the assumption that with the legislation going into effect January 1, 2014, they would use an average of the immediately preceding five-year period to calculate the investment return credit.
Mr. Thielen stated that according to the actuaries there was a decrease in funding ratios for all the pension funds. The amortization period was reset in Senate Bill 2 of the 2013 Regular Session to 30 years effective with the 2013 fiscal year, so this valuation was based on 28 years. For the KERS Non-Hazardous and KERS Hazardous pension plans, the valuation results were compared showing 7.96 percent normal cost for the pension benefit under the benefit scheme currently set-up in KERS Non-Hazardous. The members pay 5 percent, the normal cost is 2.96 percent, and the administrative expenses are 0.64 percent. However, the rate to amortize the unfunded liability over a 28 year period is 35.33 percent. The total pension rate, based on the valuation, was 38.93 percent and the unfunded liability rose approximately $900 million, from $9.1 to $10 billion in the KERS Non-Hazardous plan. This equates to approximately 19 percent funded versus 21 percent at the end of 2014. Mr. Thielen briefly referenced SPRS and CERS plans, as well as insurance for KERS Non-Hazardous.
On December 3, 2015, the KRS Board of Trustees made a decision to lower the assumed rate of return on investments for the KERS Non-Hazardous plan and SPRS plan based on the experience study and asset liability modeling study. The recommendation from the actuaries, based on expected rates of return, was 6.75 percent. Senator Bowen asked if when rate of return is figured, if that is net or gross of fees. He also inquired as to what was standard practice for pension plans. Mr. Thielen answered that KRS calculates the investment return as net of all fees and commissions. Continuing with his presentation, Mr. Thielen reiterated that the recommendation was to reduce the assumed rate of return for KERS Non-Hazardous and SPRS plans to 6.75 percent, which the Board adopted effective July 1, 2015 to be used for the 2016 valuation. KRS is required by statute to set contribution rates based on the valuation which last occurred before the first day of a new budget year so the rates were adopted based on recommendations, but if they had been able to use a different rate for the valuation study, there would be a significant difference. Because of this, the Board of Trustees adopted a resolution to notify the General Assembly of that difference. With the reduced assumed rate of return the unfunded actuarial liability increased from $10 billion to $10.9 billion, the funded ratio dropped from 19.02 percent to 17.69 percent, and the pension contribution rate increased from 38.93 percent to 40.24 percent. Impact to SPRS was also highlighted by Mr. Thielen. Senator Higdon asked which of the contribution rates the bond rating agencies expected. Mr. Thielen answered that he did not believe there was an expectation, however, the more money that is contributed, the better the rating by a bond agency.
Mr. Thielen discussed payroll. In 2015, total reported payroll was $1.669 billion, and he estimated a 2 percent increase by 2017 resulting in an estimated payroll of $1.7 billion. At 38.77 percent of payroll, which is the current contribution rate, the contribution would total $647 million. If the General Assembly appropriates the valuation rate, 47.28 percent, the contribution would rise to $806 million. This is just for KERS Non-Hazardous. If the 6.75 percent assumed rate of return is used, the percent of payroll necessary is 48.59 percent resulting in a total contribution of $828 million. Senator Bowen asked if the $158 million figure noted in the presentation was strictly the budget appropriation. Mr. Thielen answered that that figure included contribution from all sources. Senator Bowen asked what the specific contribution from the general fund would be. Mr. Thielen stated that he did not have that figure, it would come from the state budget office. It was his understanding that the general fund appropriation would be between 45 and 50 percent.
The actuarial required contribution for KERS Hazardous would actually decrease as a result of adjustments to the contribution rates, by approximately $3.6 million. The SPRS plan, using the valuation contribution rate, will see an increase of $5.6 million to its ARC. The total impact of using the assumed return rates of 7.5 percent used in the valuation study would result in an increase to the current contributions for the KERS and SPRS plans of $161 million. Using the adjusted rate of return of 6.75 percent, the increase would be approximately $184 million. The increase to CERS would be $49 million, due primarily to assumption changes. Mr. Harmon stated that he understood that KERS would rebound over time, and what the impact of changing contribution based on new assumed rates of return would have on the timing of that process. Mr. Thielen stated that increasing contributions in line with the new assumed rates of return would improve the process; however, he did not have those projections at this time. Senator Higdon asked if the change to the payroll growth assumption was an indication of change to come. Mr. Thielen answered that that assumption was one that had not changed in many years and that going forward, that figure will continue to be evaluated as changes to payroll, or lack thereof, become more apparent. He indicated that he had made some recommendations to the board regarding investigations into the payroll situation.
Chairman Yonts noted that Mr. Thielen’s suggestions had been incorporated into the document regarding recommendations of the board. Senator Higdon also asked about effects of the Affordable Care Act on the CERS Hazardous plan regarding dependent children. Mr. Thielen clarified that it was the insurance contribution for dependent children of members in the CERS Hazardous plan that was in error. The change will go into effect January 1, 2016 and estimated costs are as high as $21 million, but it is not possible to calculate until the system enters the new plan year. Senator Higdon commented that it was crucial for the system and the legislature to work well together toward a solution. Mr. Thielen agreed with Senator Higdon’s comments and encouraged members to attend Board of Trustees meetings as well to form an even more productive partnership between KRS leadership and the General Assembly.
Ms. Mattingly asked why the investment return assumption was 6.75 percent while the recommendation was 6.68 percent. Mr. Thielen answered that it was a result of an asset liability modeling study where the expected return was only 6.68 percent. In light of that, the actuaries made a recommendation based on investment management strategies which can better the return. Mr. Jefferson asked for a brief history of the changes to the assumed rate of return over the last several years. Mr. Thielen answered that when he began working at KRS in 2006 the assumed rate of return was 8.25 percent. In 2007 or 2008 the Board of Trustees lowered the rate to 7.75 percent. In August 2014, the rate was lowered again to 7.5 percent. Mr. Jefferson stated that what struck him from the valuation report was the change to funding levels and contribution rates, increasing far more following the last decrease of 0.25 percent than following the recommended decrease of 0.75 percent. The reason, as stated by Mr. Thielen, was the other assumption changes which had a major impact, such as the adjusted mortality tables. Mr. Jefferson also asked about how sensitive the contribution level is to the payroll assumption changes versus the assumed investment return. He wondered if the Board of Trustees had considered the ways in which changing the payroll growth assumptions would affect the contribution requirements. Mr. Thielen stated that in August, 2014, the Board of Trustees did discuss the changes to the payroll assumption along with other assumption changes. They had not discussed it in terms of sensitivity analysis, but actuaries have been asked to investigate that relationship more closely.
Representative Miller asked what the estimations would be based upon a flat payroll, particularly for the next two biennia. Mr. Thielen stated he did not have those numbers with him, but he would provide them to the board. Representative Graham asked about the privatization and the number of positions that have been lost. Chairman Yonts stated that that information had been requested and should be provided to the board by the January meeting. That information should help inform legislation intended to address the matter of payroll “leakage” from the system.
Kentucky Teachers’ Retirement System Actuarial Valuation/Financial Statements
Mr. Beau Barnes, Deputy Executive Secretary of Operations and General Counsel, Kentucky Teachers’ Retirement System, and Mr. Mark Whalen, Chief Financial Officer, Kentucky Teachers’ Retirement System, were present to key actuarial assumptions used by the system, updated actuarial assumptions, and updated financial statements. The assumed rate of return for Kentucky Teachers’ Retirement System (KTRS) was 7.5 percent. Unique to KTRS was its requirement to report under GASB 67, owing to the system not currently receiving the full actuarial required contribution, a different rate of return. For KTRS relative to this rate, which takes into account an eventuality where there are no assets to use to create investment returns, is a blending of the 7.5 percent return with a municipal bond index rate of 3.82 percent. The result is a rate of 4.88 percent. For the medical insurance fund, the assumed rate of return is 8.0 percent.
The amortization period is based on a level percentage of pay, as opposed to a fixed dollar amount, resulting in an increase as payroll increases. Chairman Yonts asked if, because of amortizing over 30 years, they were using a 20-year period going forward. Mr. Barnes answered that the legacy unfunded liability is projected to be paid off in 30 years which began on June 30, 2014. New liabilities, either losses or gains, accrued after that date, will be amortized using a 20-year amortization. Chairman Yonts asked how the difference between a 30-year and a 20-year amortization affected the contribution requirements. Mr. Barnes stated that there would be a smaller portion of the contribution going toward the 20-year amortization and a larger portion would go toward the larger legacy unfunded liability. This was part of the funding policy became effective in the 2013-14 fiscal year. Before that, there was an open amortization which renewed every year. The goal is to be fully funded within the 30 years, with less than 29 years remaining.
Mr. Barnes focused on the funded status of the medical insurance and pension funds. From 2014 to 2015, liabilities increased by $916 million. However, with an actuarial smoothed asset value, the actuarial value of assets increased from $16,174,000,000 to $17,200,000,000. Additionally, the funded ratio increased from 53.6 percent to 55.3 percent. This increase is largely due to the actuarial method of smoothing and having some good years where returns were high, for example in 2014 there was a return of 18.1 percent which cannot be expected going forward. Negative cash flow is also making it difficult to maintain an adequate funding level for investments. The funded status of the pension fund was described using two different measures, the first a traditional funding measure and the second was the GASB 67 measure described earlier which uses the 4.88 percent rate of return. Using the second measure, the liabilities increase from $39,685,000,000 to $42,477,000,000. The net asset position also declined from $18,093,000,000 to $18,049,000,000 over the year. Chairman Yonts asked how the GASB implication affect the request being made to the legislature for funding. Mr. Barnes answered that they use the traditional measure, not the GASB 67 measure, to determine the needs of the system and therefore the request for funding. Senator Bowen emphasized that that was an important distinction to make.
The unfunded liability increased from $21,592,000,000 to $24,428,000,000 and the funded ratio declined from 45.95 percent to 42.49 percent according to the GASB 67 accounting measure. Mr. Barnes stated that the driving factor in these figures was the assumed rate of return being only 4.88. The blended rate consists of both the assumed rate of return and the municipal bond index rate which declined significantly since 2014. When highlighting the medical insurance funding, there was significant improvement as a result of legislation in 2010 which preserved health insurance for teachers. Liabilities did increase over the last year from $3,195,000,000 to $3,526,000,000. This was attributed to the fact that baby boomers are starting to retire. Smoothing is used on this fund, however, GASB 67 does not apply to medical funds. Mr. Barnes did emphasize that the fund is fully funded and the value of the assets has increased from $509 million to $639 million. While the unfunded liability did increase from $2,686,000,000 to $2,888,000,000, the overall funded ratio improved from 15.93 percent to 18.09 percent. Most important was the fact that this was possible with the existing contribution rates from teachers and school districts just phasing in from July 1, 2015.
Chairman Yonts referenced the fact that baby boomer teachers are beginning to be eligible to retire, and that potentially 15,000 teachers could retire en masse. He asked what the impact of that would be on the system. Mr. Barnes answered that it would have a significant negative impact on the system, however, it is more likely that they will slowly retire over the next 5-6 years. Mr. Barnes then turned to the budget request being made by KTRS, which had already been presented to the Governor’s office. For fiscal year 2017, the state portion of the shared responsibility contribution for retiree health to cover new retirees beginning on or after July 1, 2010 who are under age 65, was $71,300,000. Before that legislation went into effect, the Commonwealth attempted to cover all of the costs. The system now receives a contribution from teachers equal to the Medicare Part B premium. For this year, that was $104 per month which each retiree pays into the medical insurance fund. Because teachers do not participate in Social Security, and are required to make up the nations’ shortfall in Medicare payments, their contribution will increase to $121 per month next year. This will have the combined impact of saving the state money and contributing more to the medical insurance fund. For the 2018 fiscal year, the request will be $78,800,000 to cover more retirees retiring in that time frame.
Mr. Barnes drew members’ attention to the additional funding request of $544,985,400 being made by KTRS to have the pension fund funded on an actuarially sound basis. This is what the budget has been unable to support over time. In the second fiscal year of the upcoming biennium budget, there would be an additional request of $512,883,000. Senator Bowen asked if this was a general fund appropriation apart from any other contributions. Mr. Barnes answered yes. Senator Bowen asked if it had been considered to fund that portion statutorily in order to capture federal dollars at the district level. Mr. Barnes answered that it had not been calculated in that way, but it was his belief that approximately 10-15 percent could be represented with federal funds. Mr. Barnes concluded by stating the “all-in” figure, which included the state portion of shared responsibility, special appropriation for sick leave, COLAs, etc., and additional funding to make the pension actuarially sound. This figure was $730,622,900 for fiscal year 2017, and $710,699,100 for fiscal year 2018. In addition, a separate request from the Kentucky Department of Education, the statutory contribution for the SEEK formula was covered. That was $396,592,900 for 2017 and $405,432,100 for 2018.
Chairman Yonts asked if the $24,613,400 figure shown in the handout represented the budget shortfall. Mr. Barnes answered that yes, and it is a result of a deficit in the payroll projection. In past years the legislature has been very good at keeping up with that overage or underage. Chairman Yonts asked if that figure had been included in the additional funding request. Mr. Barnes said that it had been incorporated into the $544, 985,400 figure. Senator Bowen asked again for the total combined request. Mr. Barnes stated them to be $1.127 billion for 2017 and $1.116 billion for 2018. Representative Graham returned to the number of teachers who could potentially retire in soon. He asked if KTRS had considered that major changes to the system might prompt them to retire earlier than anticipated and if there was a plan for that eventuality. Mr. Barnes stated that they had not calculated that and it would significantly impact the numbers presented. He also said that discussions with the workgroup and others has emphasized the need to prevent the spread of misinformation and rash decision making based on bad press. Senator Bowen asked if there had been a large number of retirements as a result of the last change which changed eligibility from 30 years to 27 years. Mr. Barnes answered that some teachers took advantage of that and contributions were increased to help offset that, but it resulted in an overall negative actuarial impact on the system. That has since been offset with other measures, most notably the 2002 legislation which changed provisions regarding returning to work after retirement. He closed his presentation with the total contributions made for fiscal year 2015 of $867,739,053. Investment income was $907,703,719 and gross investment income was nearly $1 billion. Deductions totaled $1,773,357,690.
Mr. Barnes commented on the KTRS Funding Workgroup which was comprised of 25 members representing the General Assembly, appointed and elected public officials, K-12 educators, and various other groups such as Kentucky Chamber of Commerce. The group heard from experts such as Morgan Stanley Financial Services and an advisor hired by the group. Their last meeting was on December 1, 2015 where the group issued a report, included in member packets and available online. The report did not contain a consensus recommendation regarding the retirement system, however, it did make progress understanding the issues and the possible options are to address them. Mr. Barnes stated that the workgroup facilitated an excellent discussion which will be a foundation for later work.
Judicial Form Retirement System Actuarial Valuation/Financial Statements
Ms. Donna Early, Executive Director, Judicial Form Retirement System (JFRS) and Judge Larry VanMeter, Chairman, JFRS Investment Committee were present to speak regarding the JFRS actuarial valuation and financial statements. Ms. Early directed members’ attention to a handout provided in member packets. She stated that the actuarial formula for determining annual state funding appropriations to JFRS are prescribed in statute. The JFRS Board of Trustees sets the assumptions used by the actuaries and the key assumptions were also listed in the handout. The defined benefit and the hybrid cash balance plans are kept separate and the funds are not commingled. They are treated as two separate “tiers” much the same as the many tiers of KRS.
Regarding the results of the actuarial evaluation, the Legislators Retirement Plan (LRP) is 71.4 percent funded and the Judicial Retirement Plan (JRP) is 67.2 percent funded. Those figures are strictly in reference to the defined benefit plan. The hybrid cash balance plan only started in 2014 so assets for LRP Hybrid Cash Balance only total approximately $22,000 and $85,000 for JRP Hybrid Cash Balance. These are insufficient for meaningful results. The actuarial data is predominately used to inform the JFRS budget request, with separate requests made for the LRP and JRP. The LRP request is a part of the legislative budget bill, where the JRP request is part of the judicial budget bill. Ms. Early noted that the most relevant number was the total request for each year of the biennium, that being $2.4 million for the LRP and $13.2 million for the JRP. This represents a percentage of payroll of 49.11 percent for LRP and 41.25 percent for JRP. Ms. Early then said that full actuarial data had been provided to staff, but a complete copy could be distributed to members at their request.
The audit of JFRS was issued by an independent company, Blue and Company, on December 10, 2015. It was also distributed to staff and can also be provided to members at their request. The report was clean with no recommendations or discrepancies. The most relevant item was that the net pension liability for both funds decreased from 2014 to 2015. For the LRP the decrease was by $8 million and for the JRP the decrease was $16 million. Senator Bowen asked how JFRS calculated interest for benefits, compared to the 5-year retrospective approach taken by KRS. Ms. Early said that the hybrid cash balance plan is very small at this time, accounting for only 16 judges and 11 legislators. When the Board of Trustees looked at the provisions of Senate Bill 2 of the 2013 Regular Session, and met with outside counsel, they took the position that looking at a cumulative 5-years forward for the purposes of geometric average would be the most helpful. That will better allow the funds to grow and currently only one individual qualifies for interest because the funds are so new. Judge VanMeter commented that at this time, the hybrid cash balance plan is being tracked separately because it is easier to track than if it were commingled. It is always possible to combine them at a later date, but it would be very difficult to separate once they are combined. This allows for better understanding of the trends for the two different styles.
Senator Higdon asked, looking at the funding request, why it was so high if the funds are doing well. Ms. Early answered that the number is constantly changing and this reflects a recent decrease. This amount is what is currently necessary to maintain the current funding level. Judge VanMeter further explained that the funding request has decreased since the last request was made. Ms. Early said that when the JFRS reaches a strongly funded status, it is possible to reduce the request to nothing.
Ms. Early stated that in reference to last month’s questions about a website, she is in the process of learning how to create one. She has a contract established with Kentucky Interactive to build a shell for the website. She will then go to training starting on December 19, 2015 to learn how to fill the content of the website. The whole site should go live in a couple of months. Ms. Early said she would welcome comments and requests regarding the information to share.
Discussion of Recommendations for the Annual Report
Chairman Yonts began discussion of a series of recommendations proposed by members of the board regarding public pensions. Some of the recommendations were administrative in nature while a majority were legislative. The first was an administrative recommendation by Chairman Yonts that KRS, KTRS, and JFRS should report investment returns on a net of fees basis on all public documents produced. Senator Bowen moved to approve the recommendation, seconded by Mr. Jefferson. The motion passed by voice vote.
The second recommendation was also administrative by Chairman Yonts that the KRS Board of Trustees shall, by January 25, 2015, provide no more than 3 options for addressing the cash flow issues facing the KERS Non-Hazardous pension fund. The options shall be detailed with specific research performed for each option which shall include specific savings/costs for each option identified. Senator Bowen moved to approve the recommendation, seconded by Senator Higdon. The motion passed by voice vote.
The third was an administrative recommendation by Chairman Yonts that KRS, KTRS, and JFRS shall study and report to the Public Pension Oversight Board by January 25, 2016 on the fees paid directly or indirectly by each system (i.e. through incentive or partnership agreements) and shall provide a consensus recommended standard for investment fee reporting to be utilized by all systems. Representative Linder asked if this recommendation was going to be codified in legislation, because that would be difficult to accomplish by January 25, 2016. Chairman Yonts stated that this was an administrative recommendation, no a legislative measure at this time. Mr. Jefferson moved to approve the recommendation, seconded by Ms. Mattingly. The motion passed by voice vote.
The fourth was administrative and legislative proposed by Chairman Yonts that the KRS Board of Trustees shall by January 25, 2016, study issues related to agency participation, including but not limited to KRS participating agencies who are utilizing contact employees or who are not offering employees to participate in the systems, and shall provide a listing of all agencies who are attempting various means to avoid paying contributions on employees along with the estimated number of employees not being reported as well as the anticipated impact to the systems. Based upon this information, the General Assembly should enact legislation to address the loss of employer contributions from KRS participating agencies who are utilizing contract employees or who are not offering employees the opportunity to participate in the systems. Mr. Jefferson moved to approve the recommendation. Ms. Stemler seconded the motion. The motion passed by voice vote.
The fifth was administrative and legislative proposed by Chairman Yonts that the JFRS should develop a website to provide greater access to information to their members and the public. Legislation to require specific information to be posted on the JFRS website similar to what is currently required for the KRS and KTRS websites under KRS 61.645(19) and KRS 161.250(4) should also be enacted. Ms. Stemler made a motion to approve the recommendation, seconded by Mr. Jefferson. The motion passed by voice vote.
The sixth was a recommendation for legislation from Senator Bowen that should be enacted to make KRS and KTRS subject to KRS Chapter 45 (Budget and Financial Administration) and 45A (Kentucky Model Procurement Code). Senator Bowen directed members’ attention to a letter he submitted for member packets that further explained his recommendations. Senator Higdon made a motion to approve, seconded by Representative Linder. The motion passed by voice vote.
The seventh was a legislative recommendation from Senator Bowen that legislation should be enacted to require Senate confirmation of the KRS and KTRS Executive Director/Executive Secretary and all non-elected board members. Representative Graham asked about the legislation passed in previous sessions regarding gubernatorial appointment to replace previously self-elected board members. He suggested including language that if an elected board member vacates the seat that the organization be allowed to select the board member, not be appointed by the Governor. Chairman Yonts recommended that Representative Graham work with Senator Bowen to address that when drafting the legislation. Senator Higdon made a motion to approve. Representative Linder seconded and the motion passed by voice vote.
The eighth, ninth, and tenth recommendations were all legislative and were combined into a single motion as they all addressed the same issue. The recommendations were by Senator Bowen, Mr. Jefferson, and Chairman Yonts that legislation should be enacted to require two of the gubernatorial appointees be a chartered financial analyst (CFA) and ask the CFA Society of Louisville to submit a list of potential applicants. It was also required that the individuals serve on the KRS investment committee. Senator Bowen made a motion to approve the combined recommendation, seconded by Mr. Jefferson. The motion passed by voice vote.
The eleventh recommendation was by Senator Bowen that the General Assembly should enact legislation to add additional gubernatorial appointed members to the KTRS Board of Trustees, and some or all of the additional members should have investment experience. Senator Higdon made a motion to approve the recommendation. Ms. Stemler seconded and the motion passed by voice vote.
The twelfth, thirteenth, and fourteenth recommendations were again taken as a single item as they were all similar in subject matter. The recommendations were proposed by Chairman Yonts and addressed the KRS, KTRS, and JFRS housekeeping bills. Members were directed to view the legislation on the LRC website. Senator Bowen made a motion to approve the recommendation, seconded by Ms. Mattingly. The motion passed by voice vote.
The fifteenth recommendation was from Chairman Yonts regarding legislation similar to the ‘pension spiking’ measures of Senate Floor Amendment 2 of House Bill 306 of the 2015 Regular Session. This measure would have added future ‘pension spiking’ charges as a surcharge to the employer contribution rate in each system instead of billing individual employers. Chairman Yonts made the motion to approve the recommendation, seconded by Ms. Stemler. Senator Higdon asked to record a pass vote. The motion passed by voice vote.
The sixteenth recommendation was made by Chairman Yonts to enact measures to require KRS, KTRS, and JFRS to establish placement agent disclosure policies similar to the measures included in Senate Bill 22 of the 2015 Regular Session which did not pass. A copy of that legislation could be viewed on the LRC website. Senator Bowen made a motion to approve the recommendation, seconded by Mr. Jefferson. The motion passed by voice vote.
The seventeenth recommendation was made by Senator Higdon that the General Assembly should require and provide funding for a performance audit of KRS conducted by the State Auditor to evaluate administrative expenses, investment fees and expenses, staffing levels, and overall administration of the funds. The performance audit should provide recommendations for any means of reducing administrative and investment related expenses for KRS. Senator Bowen made a motion to approve the recommendation. Senator Higdon seconded and the motion passed by voice vote.
The eighteenth recommendation was made by Chairman Yonts that legislation similar to House Bill 306 of the 2015 Regular Session relative to actuarial and financial reporting requirements for KRS, KTRS, and JFRS be enacted. Mr. Jefferson made a motion to approve, seconded by Senator Higdon. The motion passed by voice vote.
The nineteenth recommendation was made by Chairman Yonts that legislation should be enacted to: (1) require that an actuarial audit be completed for KRS, KTRS, and JFRS at least once every ten years by an actuary retained by the Public Pension Oversight Board and paid for by the systems to evaluate the reliability of the actuarial assumptions and methods; (2) require that the employer contribution rates be reviewed by December 31st in the year prior to each budget biennium by an actuary retained by the Public Pension Oversight Board that is paid for by the systems; and (3) require actuarial valuations for KRS, KTRS, and JFRS be completed and submitted no later than November 1st following the close of the fiscal year. Chairman Yonts amended his recommendation to change November 1st to November 20th after discussions with KERS staff. Senator Bowen asked if ten years is a standard interval because it seemed too infrequent. Chairman Yonts answered that he believed that was standard, but there are sometimes more frequent audits performed and sometimes less frequent. This would codify the ten year minimum. Mr. Jefferson stated that they should occur no greater than ten years apart, with an option for greater frequency. Senator Bowen made a motion to approve, seconded by Mr. Jefferson. The motion passed by voice vote.
The twentieth recommendation was made by Chairman Yonts that legislation to address paid volunteer issues with KRS similar to House Bill 488 of the 2015 Regular Session and prefiled in Bill Request 33 of the 2016 Regular Session be enacted. Senator Higdon made a motion to approve, seconded by Senator Bowen. The motion passed by voice vote.
The twenty-first recommendation was made by Chairman Yonts that the Governor and the General Assembly should include in the 2016-2018 biennial budget, the employer contribution rates recommended by the KRS Board of Trustees, for KERS and SPRS, based upon the 6.75 percent investment return assumption adopted for the KERS Non-Hazardous and SPRS pension funds. Ms. Stemler made a motion to approve the recommendation. Senator Bowen seconded and the motion passed by voice vote.
The twenty-second recommendation was made by Chairman Yonts that the General Assembly should evaluate the KTRS Funding Work Group findings and recommendations and adopt a financially sound approach to address the funding issues facing the KTRS pension fund. Senator Bowen made a motion to approve the recommendation, seconded by Ms. Stemler. The motion passed by voice vote.
The twenty-third and final recommendation was made by Chairman Yonts that the Public Pension Oversight Board supports the measures that would provide additional funding to improve the financial health of the state-administered retirement systems and in particular measures that would improve the cash flow issues facing the KERS Non-Hazardous pension fund or that would improve overall funding of the KTRS pension fund and the SPRS pension fund. Mr. Jefferson made a motion to approve, seconded by Senator Bowen. The motion passed by voice vote.
Senator Bowen then made a motion that the approved recommendations be included in the committee’s 2015 report to LRC and that staff include a summary of KRS, KTRS, and JFRS benefits and investment data as well as summary of testimony given to the Public Pension Oversight Board. Members of the board should be given opportunity to review the report prior to its publication. Ms. Mattingly seconded the motion. Ms. Stemler recommended the final three recommendations be listed first to give added emphasis. The motion passed by voice vote.
Representative Simpson spoke to express his appreciation for the emphasis the Public Pension Oversight Board places on the issues facing the state-administered pension systems. He said he would like to see expanded legislative membership on the board to provide greater breadth of knowledge to the entire General Assembly. Chairman Yonts and Senator Bowen both concurred with that sentiment and said they would look into that further in the coming year.
There being no further business to come before the board the meeting adjourned at 2:30 p.m. The next meeting of the Public Pension Oversight Board will be January 25, 2016 at 12:00 p.m. in Annex Room 169.