By John R. Farris
In June of 2016, Governor Bevin appointed individuals to the Board of Kentucky Retirement Systems (KRS) with significant investment experience. However, Attorney General Andy Beshear immediately filed a lawsuit to block these appointments and keep his father’s political appointees in place. There is no doubt that Kentucky taxpayers and pension beneficiaries won by AG Beshear losing the case.
Since mid-2016, the new appointees to the KRS Board (comprised of volunteers) are in the process of redeeming approximately 80 percent or $1.3 billion of hedge fund exposure invested in by former Governor Beshear’s political appointees to KRS between 2008-2015. This move alone will save over $12 million annually in exorbitant hedge fund “management fees.” The new KRS Board is also pursuing litigation against funds and investment banks that overcharged KRS during that time to recoup exorbitant and incorrect fees.
According to an independent review of 112 state pension system’s investment performance conducted by one of the nation’s leading pension consultants, Wilshire Associates, the actions of the new KRS Board have moved KRS from the 70th percentile in investment performance (averaging 5.02 percent annually) from 2008-2015 to the 21st percentile nationally in the last two years (averaging 12.05 percent). These numbers need to be celebrated as a glimmer of light in a road that has long been dark.
Consider this, if KRS would have continued to perform in the 70th percentile in the nation over the last two years, the investment return would have been 10.23 percent for the two-year period of 2016 and 2017 compared to the 12.05 percent KRS actually returned for that same period. While the almost 2 percent difference may not sound significant, it is. KRS now has $600 million more in its plans than would have existed if AG Beshear had succeeded in keeping the prior KRS leadership in place.
Now, AG Beshear is trying to invalidate a new pension law that makes small but meaningful steps towards providing stability for our state’s biggest financial challenge. If he is looking to sue somebody to help the pension systems, Beshear should look no further than the prior actuarial firm formerly used by KRS. The new leadership of the KRS Board terminated the Cavanaugh McDonald actuarial firm after discovering that it was using forecasts that were 50 percent to 60 percent higher than the actual historical averages between 2006-2016. The firm’s actions helped hide the true pension costs and liabilities from Kentucky taxpayers.
Remarkably, the Kentucky Teachers Retirement System (KTRS) is still using the Cavanaugh McDonald firm, and not surprisingly, Cavanaugh McDonald is still using grossly inflated assumptions.
Consider this, for KTRS plans, the actual 10-year historical average from 2007-2016 for payroll growth was 1.86 percent, but Cavanaugh McDonald and KTRS are still assuming 3.5 percent payroll growth for the next 30 years. Why? Because if the assumed future payroll growth number is corrected to the historic average of 1.86 percent, it would add several billion to the unfunded liability of KTRS and require the General Assembly to pay an even larger amount into the system each year.
So, Attorney General Beshear, there are plenty of bad actors and people to sue for getting Kentucky in this mess and putting our pension system at risk. Please stop suing the people trying to solve Kentucky’s pension problem.
John R. Farris was Chairman of the Kentucky Retirement Systems from May 2016-May 2018. He is Senior Investment Advisor at Centre College, Founder & President of Commonwealth Economics and LandFund Partners. Mr. Farris received a full-tuition fellowship to study economics and finance at the Woodrow Wilson School at Princeton University, where he was awarded a Master’s Degree. Before attending Princeton, Mr. Farris studied economics and philosophy at Centre College from which he graduated, Phi Beta Kappa, attaining a Bachelor of Science degree in Economics and Philosophy.