Call to Order and Roll Call
The1st meeting of the Public Pension Oversight Board was held on Monday, January 27, 2014, at 12:00 PM, in Room 154 of the Capitol Annex. Representative Brent Yonts, Chair, called the meeting to order, and the secretary called the roll.
Members:Senator Joe Bowen, Co-Chair; Representative Brent Yonts, Co-Chair; Senators Jimmy Higdon and Gerald A. Neal; Representatives Brian Linder and Tommy Thompson; Robyn Bender, Jane Driskell, and James M. "Mac" Jefferson.
Guests: Bryan Sunderland, Kentucky Chamber of Commerce, among others.
Approval of Minutes
Representative Bowen moved approval of the minutes of the December 17, 2013, board meeting, seconded by Representative Thompson, minutes were approved without objection.
Review of Kentucky Retirement Systems Administration and Benefits
In keeping with the work plan for 2014, Brad Gross provided a basic overview of the administration and benefits of the Kentucky Retirement Systems (KRS) and Bill Thielen, Executive Director of the KRS discussed the funding and actuarial concepts. Mr. Gross stated that he would be covering the state-administered retirement systems, membership, general benefits from retirement to retiree health, disability, and re-employment after retirement and a couple of other benefit provisions. He stated that there are six state-administered retirement plans; that the oversight jurisdiction of the board is the KRS which administers the Kentucky Employees Retirement System, the County Employees Retirement System, and the State Police Retirement System. The other retirement systems are the Kentucky Teachers’ Retirement System and the Judicial Form Retirement System which is the Legislators’ Retirement and Judicial Retirement plans.
As background, Mr. Gross stated that the Kentucky Employees Retirement System was created by state law on July 1, 1956, and at that time the County Employees Retirement and State Police Retirement was included in that system. The membership of the KERS includes employees of state government, certain health agencies, and quasi-state agencies in the both non-hazardous and hazardous contribution and benefits. He stated a question frequently asked is how do agencies get in the system; that within KERS historically agencies were brought into the system by an executive order issued by the Governor however in 2003 the law was amended requiring a two step process with the Governor issuing an executive order and the KERS board of trustees having the ability to approve or deny that membership for an agency.
The County Employees Retirement System was created on July 1, 1958, with its own structure and was separate from KERS but was subsequently merged back under the KERS. The participation in CERS was optional but over the course of time agencies joined CERS by petitioning the KERS board to participate. The membership in CERS is larger than the membership in KERS and includes employees of city and county governments, police and firefighters, non-teaching staff of local boards of education, circuit clerks, local library employees and other local agencies. The largest participating group is the classified employees at the local school districts. The CERS also has non-hazardous and hazardous benefits and contributions.
The State Police Retirement System (SPRS) was established on July 1, 1958. Mr. Gross noted that the statutory structure for KERS, Chapter 61, also contains many of the statutes dealing with the CERS and SPRS which cross-reference into Chapter 61, such as service purchases and benefit payment options as well as hazardous duty benefits are also contained in Chapter 16 which covers the SPRS. The Kentucky Retirement Systems is administered by a thirteen member board of trustees which changed with the passage of Senate Bill 2; that of the thirteen members, six are elected by the membership of the retirement systems, six appointed by the Governor who must have certain qualifications, and the Secretary of the State Personnel Cabinet who sits on the board as an ex officio member. He pointed out that Senate Bill 2 added an additional member to the CERS elected membership. The board serves four-year terms with a maximum of three consecutive terms and are paid a daily per diem plus expenses and has various committees; that the board of trustees appoints an executive director who serves as the Chief Administrative Officer of the systems. As stated previously, he said that CERS has the largest membership followed by KERS nonhazardous with a lesser membership for state police and the hazardous duty employees; that of the total 340,626 members in the retirement plan, 137,368 are contributing members, 90,796 retired members, and 112,462 inactive members who are those members who have not retired and who are not currently contributing but have funds on deposit in the retirement systems.
He said that of interest over the course of time in the KERS and CERS nonhazardous duty membership since 1998 the ratio of employees to retirees has decreased. In 1998 the KERS nonhazardous ratio was 2.2 employees to one retiree and in 2013 the ratio is 1.1 to one and that in the CERS that ratio has decreased from 3.8 employees to one retiree in 1998 to 1.9 employees to one retiree in 2013. He indicated that some of this decrease could be attributable to the retirement window that ended January 1, 2009, which accelerated some of those retirements. He also noted that that the Kentucky Retirement Systems has changed some of the data reporting; that the Kentucky Retirement Systems has three basic benefits that it provides which are retirement benefits, retiree health benefits, and death and disability benefits which vary based upon the system, type service, and timing of service. He stated that employees who began participating in the KRS prior to January 1, 2014, have a traditional defined benefit plan that provides benefits based upon a statutory formula of an employee’s final compensation, an average salary used to determine benefits usually an average of the three or five high years, times a benefit factor, which is a percentage based upon the system an employee participates, the type of duty in which the employees was employed and the time of the member’s service, times the years of service, which includes earned service, service purchased and in many cases sick leave service, to arrive at the annual benefit an employee will receive at retirement. Mr. Gross stated that in 2008 there was a graded benefit factor instead of a set benefit factor for all years of service credit it was graded so that it moved up over time based on service credit; that the service credit used to calculate benefits under state law is averaged based on 100 hours or more per month over a calendar fiscal year to participate and earn service and one month of service is given for each month worked however there is one exception to this rule is school board employees who participate in CERS where they are required to average 80 hours per month over the months represented by the days worked. These employees earn service credit by an average of the number of hours and the actual service credit is based on days worked. For example, if the employee works 180 days or more during the school year they receive twelve months of service credit and if they work below that number of days they receive a prorated amount of service credit; that seasonal, part-time, temporary, and interim employees do not participate. He said there are approximately thirty one types of purchase service to buy in the KRS the most common type being air time which was removed for new hires in 2002, military service, past service with an agency out-of-state, university and national guard service time; that the cost of purchasing service is the full actuarial cost determined by the system’s consulting actuary; that sick leave service credit is converted at time of retirement to additional months of service; that until 2008 all accumulated sick leave was converted to additional months of service credit but beginning with the passage of House Bill 1 in 2008 for new hires that was limited to twelve months and with the cash balance plan sick leave service credit will no longer apply for participants in that plan. He said an easy way to look at a traditional defined structure is as an income replacement; meaning that for every year worked you receive two percent of the average salary. Members participating in the systems on or after January 1, 2014, will participate in the hybrid cash balance plan. Although it looks similar to a defined contribution plan it is legally a defined benefit plan; there are employee contributions that will go into an individual account along with an employer credit and a minimum investment return of four percent plus 75 percent of the excess above that amount and managed by the retirement systems rather than the employee and it can be annuitized upon retirement to receive a monthly benefit for life. He said that prior o House Bill 1 in 2008 the general standard for most state employees and county employees was getting to twenty-seven years of service credit because at any age with that amount of service credit they could retire with no penalty. House Bill 1 moved away from the twenty-seven years requirement to a rule of eighty seven or age plus years of service must equal eighty seven years with a minimum age fifty seven in the calculation. The hazardous duty change in House Bill 1 was moving from any age with twenty years of service credit to new hires after September 1, 2008, could require at any age with twenty five years of service credit; that members in the hybrid cash balance plan will still follow these unreduced benefits for retirement eligibility, an employee can take the account balance and annuitize it into a monthly benefit however the reduced benefit provision will not apply to the cash balance participant.
Mr. Gross stated that the COLA has changed over time and in 1996 it was a consumer price index (CPI) adjustment annually and in 2008 it was changed to 1.5 percent however the current budget suspended the COLA and Senate Bill 2 no longer has the annual automatic COLA. He discussed briefly retiree health benefits stating that the Kentucky Retirement Systems does provide access to group rates on medical insurance coverage and for retirees who are not eligible for Medicare they participate in the Kentucky Employees’ Health Plan as other state and school employees as well as other retirees who are not eligible for Medicare in other state retirement systems; that coverage for Medicare eligible retirees is provided through a plan administered through the systems that then coordinates with Medicare for delivery of health benefits currently with Humana. Members who participated in a plan prior to July 1, 2003, receive a percentage of health insurance premium paid based on years of service with an individual member with twenty or more years receiving 100 percent of their health insurance premium as determined by the KRS as the contribution rate of one of the plans in the state health plan or Medicare eligible plans which becomes the base of how much will be paid; members participating after that time but prior to September 1, 2008 must have ten years of service in order to be eligible for retiree health coverage and benefits; members participating on or after September 1, 2008 must have fifteen years of service to be eligible for retiree health coverage and benefits. The retiree insurance benefit for nonhazardous members is $10 per month for each year of service and $15 for hazardous duty members and contributions are increased annually by 1.5 percent. Mr. Gross noted that in the event a member is disabled in the line of duty or death in the line of duty special benefits occur in those situations. The KRS does provide disability and death benefits with a minimum of five years of service to apply for the benefits with some pre-existing condition provisions in that at least sixteen years of service credit and the benefit received varies based on participating date; KRS also provides death before retirement benefits and after retirement, the benefits remaining to the retiree’s beneficiary various based on the payment option selected at retirement, in addition to a $5,000 lump sum benefit for member who retired with at least four years service. He said that all payment options have to be actuarially equivalent, meaning the payout cannot be more in benefits than the option selected by the member. Upon re-employment of a member after retirement there must be a three months break in employment after September 1, 2008, or one month if retired from KERS, CERS or SPRS hazardous duty and if the break is not observed the retirement is voided and the retiree has to pay back all benefits paid in error and the employer has to certify that there is no pre-arranged agreement with the retiring employee to return to work. If the break is observed, the employee can return to work, draw a pension but does not contribute towards a second pension however the employer has to reimburse or pay for the employer’s contribution to the systems during the time the member is in a full-time position and is required to reimburse the systems for any cost of retiree health care not to exceed the single premium. Some other provisions mentioned is that all service credit earned prior to January 1, 1009, is exempt from state income taxes and service earned on or after that date is subject to state income tax but subject to a pension exclusion of $41,100; there is reciprocity for members who have service in more than one retirement systems which can be combined to determine eligibility for retirement with each system paying a benefit based on the amount of service in that system; all hazardous duty positions are defined by statute and an agency must petition the retirement board for approval of eligible positions as hazardous duty.
In response to a question from Senator Higdon regarding the conversion of sick time to service credit and whether money is set aside to accommodate those additional dollars or whether this is an unfunded liability, Mr. Gross stated that the benefit factor, depending on the participation date, would be added to the value of that accumulated sick leave converted to service credit, in other words in the case of a member in the KERS with an average salary of $60,000 with a 2 percent benefit factor with 30 years of service ($60,000 x 2 percent x 30 = $36,000 annual benefit), and assuming the member has a whole year of accumulated sick leave to be converted to service credit, that amount would be added to the annual benefit amount ($60,000 x 2 percent x 1 = $1200 or $37,200 annual benefit) --- I must be missing something here you all talked about $720 being added to the annual benefit --- how do you come up with this amount? Mr. Gross noted that House Bill 1 in 2008 required the participating employer be billed the full actuarial cost so that when an employee retires the agency will verify the sick leave amount with the retirement systems and a bill will be sent to that participating employer however before the implementation of House Bill 1 the first six months of sick leave in KERS and SPRS was absorbed by the retirement trust fund and ultimately the agencies paid for this converted service credit but it was paid down the road. He said that the average amount of sick leave for a state employee is about six months and a state police officer about eighteen months.
Responding to questions by Representative Thompson, Mr. Thielen said that the inactive members are individuals hired, contributed to the system, gained service credit in one of the systems, terminated for whatever reason but contributions remain in the KRS and that at some point in the future when the member reaches normal retirement age the system will owe a benefit determined by how much service credit is in the system, if vested, if the member is not vested this amount does not lapse back to the system but the member will receive an actuarial refund of the amount left in the system. Mr. Gross noted that most of the “inactive” members are not vested in the retirement system who have funds in the system and are simply due a refund and that the member is eligible for a refund, if they choose, upon termination of employment. Mr. Thielen also pointed out that an employee/member that terminates may take their account plus interest at 2.5 percent at the time of termination. With regard to reduced benefits for nonhazardous duty employee, Mr. Gross stated those individuals participating on or after September 1, 2008, but prior to January 1, 2014, a member must be at least 60 years of age with ten years of service before they are eligible for a reduced benefit.
Senator Bowen asked for clarification on members who do not withdraw their contributions and the ratio of employee to retiree increasing over the last several years, and the impact of the recent pension reform, Mr. Gross indicated that interest is accrued at 2.5 percent annually in those situations; that as the system has matured, the benefit payment growth has resulted in cash flow issues, particularly with the KERS retirement window, the number of retirees has increased and the number of active employees have shrunk; that the impact of the legislation and the 1.1 to 1 employee/retiree ratio is difficult to address because policies outside the retirement systems affect the retirement contributions.
Chair Yonts also inquired about the ratio of employee to retiree decreasing from 2.2 to 1 in 1998 to the current 1.1 to 1 ratio as of June 30, 2013, and whether other factors influence this ratio and whether historically over time as changes in the pension system policies and directions occur is there a sudden exodus of people because they of these changes and the future benefits and does this affect people wanting to be employed, Mr. Gross stated that the retirement window in which a large number of employees retired and were not replaced has an affect but was unsure whether entities who cease to pay the employer contributions or whether or not how they are included in those numbers or how KRS is categorizing those employees. Mr. Thielen said that the overall number of state employees are down and if the number of employees on the state payroll was increasing each year the ratio would be different and also the economic recession has also impacted the increase in retirement.
With reference to earlier discussion regarding how agencies come into the system, especially quasi participants, Chair Yonts asked what determines a state agency if there is not an entity that allows a quasi agency to be created and then an executive order issued by the Governor directing that the quasi entity be brought into the retirement system, that the argument could be made that they are not a government agency. Mr. Thielen stated that KRS 61.520 sets forth how participation is determined and that Chapter 61 defines departments but there is not a definition of “instrumentality” in the statutes and that historically state and local governments have used nonstock and nonprofit corporations to perform essential functions of government that would otherwise be performed by an agency of the state; that the retirement would have an executive order issued by the Governor and the board would review whether the agency met certain criteria and if there was uncertainty as to whether they qualify the agency is directed to receive a ruling from the Internal Revenue Service that it is an instrumentality under Section 115 of the Internal Revenue Code and therefore eligible to participate in the system but not all quasi agencies have this ruling; that the retirement board has the authority to determine qualifications an eligibility to participate.
Review of Kentucky Retirement Systems Funding
Mr. Thielen provided a copy of the KRS Comprehensive Annual Financial Report to members for the fiscal year ending June 30, 2013.
In discussing the assumptions and the impact of revenue earned on investments, Mr. Thielen indicated that the actuary makes a number of assumptions to determine how much will be earned on investments; that there is an assumed rate of return on investments of 7.75 percent which is mid range for national pension plans and was lowered in 2006 from 8.25 percent; that every ten years KRS is required by statute to conduct an experience study however it is the practice to conduct one every five years. Mr. Thielen said the experience study reviews the experience over the last five years relative to the assumptions the actuary has recommended the KRS board adopt to determine what changes need to be made in those assumptions; that over the twenty-nine year period of data the rate of return since inception is 9.40 percent with the assumed rate of return of 7.75 percent; that over the last five years it is below the 7.75 percent assumption rate because the impact of the 2008-09 recession losses in the insurance program have been factored in which was a loss of 17 percent in 2009 as opposed to gaining 7.75 percent; that the pension plan is accounted for separately from the insurance fund. He said the one year return rate on the pension plan is 12.85 percent; that during fiscal year 2013 10.8 percent was earned on the pension fund and 10.11 percent on the insurance fund; that the five year numbers are 11.71 percent for the pension fund and 12.28 percent for the insurance fund; that in the long run KRS is exceeding the assumed rate of return on investments. He said that the assumption itself does not impact how much earned it is allocation of assets among the various investments. At this time, Mr. Thielen introduced members of his staff in attendance, Brian Thomas, General Counsel and Shawn Sparks, Director of Planning and Constituent Services and tracks legislation during sessions that impact the retirement system.
Mr. Thielen discussed the funding sources for the KRS which are employee contributions set by statute, employer contributions which are actuarially recommended on evaluation each year and adopted by the KRS board of trustees and these employer contributions in the case of the state agency employers who participate in KERS and SPRS plans are subject to appropriation by the General Assembly in the budget, and return on investments which a statutory five-member investment committee that has the authority subject to ratification by the full to hire investment managers and make investment decisions; that a large number of external investment managers and investment consultants are employed to advise the board and staff in the investment area. He said that for every benefit dollar paid out employees have contributed 12 percent, the employer contributed about 20 percent, and returns on investment make up about 68 percent of every benefit dollar paid; that on a national level approximately 58 percent of every pension dollar is derived from investments, 28 percent from employers, and 14 percent from employees. Mr. Thielen said that prior to September 1, 2008, employees in all systems contributed 5 percent in a nonhazardous plan and 8 percent in a hazardous duty plan and that beginning September 1, 2008, and thereafter an additional 1 percent was contributed that goes into the insurance fund to fund health benefits. In terms of employer contribution, the rate is set by the board based on an actuarial analysis and the contribution consists of two components, a normal cost or the cost of the benefits earned in the year when the first valuation is performed constitutes the normal cost, there is no unfunded liability, and if there is an unfunded actuarial liability there is a component of the employer’s contribution designed to pay that unfunded liability off over a period not to exceed 30 years; that the insurance contribution component of the employer contribution rate for insurance benefit which was created in 1978 and made a contractual obligation in 1988 but in 2003 the insurance benefit was removed from inviolable contract but every year a part of the employer’s contribution rate is to cover the health benefit.
Mr. Thielen pointed out that for fiscal 2013-14 the actuarially required contribution rate versus the actual contribution rate for the KERS nonhazardous duty plan the actuarially required contribution was 45.28 percent of payroll and the actual contribution for that plan currently being made by the agencies participating is 26.79 percent which is 57 percent of the ARC that was set by House Bill 1 enacted in 2008 and 96.52 percent required contribution for SPRS and an actual contribution rate of 71.15 percent; that CERS contributes 100 percent of the actuarially required contribution. In 2014-15 fiscal year as a percent of payroll for KERS nonhazardous duty the normal pension cost is 3.48 percent of payroll, the administrative expense is .65 percent of payroll, the payment on the unfunded actuarial liability is 26.71 percent of payroll, the insurance fund payment is 7.93 percent and the actuarially required contribution for 2015 is 38.77 percent; that it is the unfunded actuarial liability that is the issue; that the system was be very sustainable if not for the unfunded liability that has developed over the years. Information was provided for each system of the employer contribution rates of the actuarial required contribution rate and the budgeted rates from 1990 through fiscal year 2015-16; that in fifteen out of the last twenty-two years the budgeted rate is less than the actuarially required rate. The contribution rates for fiscal years 2015 and 2016 for the KERS nonhazardous and hazardous duty and the SPRS which was required by Senate Bill 2 to established an actuarially required contribution rate and cannot be changed; that for the KERS nonhazardous the total combined actuarially required rate is 38.77; for KERs hazardous duty a combined rate of 26.34 percent and for SPRS a combined rate of 75.76 percent. As required by Senate Bill 2 provisions, KRS was required to project the contribution rates for the next twenty years and Mr. Thielen discussed those projections that reflected a total contribution rate in 2032 of 40.19 percent of payroll. He said the rate is stable and will not increase drastically according to this twenty year projection if 100 percent of the actuarially contribution is made and if the actuarially assumptions are met.
The funding level is the ratio of the assets in the bank to the liabilities for benefits already earned; that this is a measure of the plan’s financial soundness with funding 80 percent or better as financially sound according to rating agencies. Mr. Thielen indicated that the actuarial funding level is based on a five-year smoothing method which means that the KRS does not recognize all the gains or losses on investments in a year but are recognized over a five year period, recognizing 20 percent each year which dampens the volatility in the employer contribution rate. The actuarial funding level for KERS nonhazardous pension has decreased from 52.5 percent in 2008 to 23.2 percent through June 2013; that the funding for KERS hazardous insurance plan has increased from 53.2 percent in 2008 and 96.2 percent in 2013 due to a dampening of inflation in healthcare costs and the increase in the contribution by employees by the 1 percent which impacted the funding of the health insurance plans; that the decrease in the actuarial funding level for the CERS nonhazardous pension from 78.5 percent in 2008 to 60.1 percent in 2013 is not near as drastically as that of the KERS.
Mr. Thielen stated that the unfunded actuarial liability is amortized over a period not to exceed 30 years which is standard however the KERS board adopted a closed 30 year period which means that each year the amortization period lessens by one year until the unfunded liability is paid; that Senate Bill 2 changed the amortization period back to 30 years which at the time the amortization time had been reduced to 25 years which had an impact of lessening the impact on the employer contribution rate therefore in 2014 a new 30 year amortization period begins which will then decrease each year but once the amortization period begins decreasing the contribution rate will go up because there is a shorter period of time to amortize the unfunded liability. For the KERS nonhazardous plan in 2012 the combined unfunded liability of the pension and insurance plans was $10.94 billion and decreased to $10.38 in 2013 due to a decrease in the insurance plan of the unfunded liability rather than the pension plan which increased; that the overall combined unfunded liability of the three state systems is $11.2 billion; that in the CERS system the pension unfunded liability has increased because this was the last year that losses from 2009 (20 percent smoothing) , the combined unfunded liability for this system is $6.42 billion as of June 30, 2013. The six components for the increased in unfunded liabilities are: 1) reductions to employer contributions rates in the KERS and SPRS; 2) retiree COLA increases not pre-funded; 3) 2008-09 market losses; 4) cost of inflation for retiree insurance; 5) compliance with the Governmental Accounting Standards Board (GASB) 43/45 standards of 2006 for health liability which caused a funding increase and increase in the employer contribution rate to fund the liabilities; and 6) demographic losses.
In response to a request from Senator Bowen to explain the GASB compliance, Mr. Thielen stated that GASB sets standards for government entities for accounting and reporting; that in 2006 two new standards were issued that required pension plans and employers participating in pension plans to account for the full liability for health benefits which had not been reflected previously to that time; that when these liabilities are reported on the financial statements and there is not funding to meet those liabilities the rating agencies can then downgrade the credit rating; that in addition to complying with the accounting and reporting standards funding was increased to show that KRS was funding to meet those liabilities over a period of time.
Responding to a question by Chair Yonts concerning a percentage of increase for the six components that contributed to the unfunded liability, Mr. Thielen stated that at the beginning of the fiscal year 2007 the unfunded actuarial liability for the KERS nonhazardous plan was $3.6 billion and the unfunded actuarial liability at the end of fiscal year 2012 it was $8.26 billion or an increase of $4.66 billion dollars; that the total increase in the unfunded liability attributable to investment gains and losses for the period 2007 through 2012 was $1.2 billion or 24.5 percent of the total increase; that the unfunded cost of living adjustment was approximately $1 billion increase or 21.1 percent; that the benefit changes made in 2008 resulted in a slight gain in benefits and actuarial assumptions because the healthcare costs inflation assumption was changed which resulted in the gain; that employer contribution shortfall or underfunding in the KERS nonhazardous pension plan, the difference between the ARC and what was enacted in the budget bill which caused a $1.15 billion or 24.4 percent increase; and the demographic and salary experience assumptions amounted to a $123 million in the unfunded liability; “other” attributable factors mainly is the reduction in the amortization period; that as you amortize each year the unfunded liability over a shorter period there is an increase and also includes financial transaction timing differences, data corrections, software changes, etc.
In response to a questions by Senator Higdon concerning “other” attributes that contribute to the unfunded liability, Mr. Thielen stated that “spiking” does cause an increase in the unfunded liability but the actuaries have not looked at this situation and there is no data however “spiking” is paid for because the contribution rate increases as the liability for benefits is calculated and compared to the assets of the system, the contribution rate increases to pay the additional liabilities at a cost to the employers. Mr. Thielen indicated this may be topic for discussion with the actuary in the future to answer the board’s questions regarding this issue.
For clarification, Representative Linder asked whether the amounts in the chart reflecting the attributable factors for the unfunded liability was his understanding that a negative number would reflect a gain and a loss would be a positive number and the investment as of June 30, 2012, was a $325 million loss, Mr. Thielen indicated that was correct.
Representative Thompson asked about the difference in the actuarially accrued liability for KERS nonhazardous members at the end of the 2013 fiscal year of $15.4 billion and the KERS nonhazardous and hazardous plans and the SPRS plan that reflects a combined unfunded liability of $11.18 billion, Mr. Thielen noted that the $15.4 billion amount is the actuarial accrued liability, not the unfunded portion of the liability; that the $11.18 billion is the unfunded liability; that part of the actuarial accrued liability is funded. Mr. Thielen stated that the total approximate current unfunded liability for the KRS is about $17.6 billion however if the combined (pension and insurance) KERS nonhazardous unfunded liability of $10.38 billion and including the assets on deposit the total accrued liability is approximately $15.46 billion; that in one instance there is an unfunded liability and the other situation is a total actuarial accrued liability which has some funds on deposit.
In response to a question by Mr. Jefferson regarding the COLAs, Mr. Thielen indicated that the COLA is contained in the statutes and that prior to 2008 it was tied to the consumer price index subject to a five percent maximum; that in most years the COLA granted was 3.2 percent, etc. and that in 2008 as part of House Bill 1 reform it was changed to a 1.5 percent each year unless reduced or eliminated or increased the amount, in other words it was automatic; that the current budget cycle the budget bills suspended the COLA for the 2013-14 year and under Senate Bill 2 there are circumstances under which a COLA can be granted but is evident there will be no COLA under that criteria for a number of years. Mr. Thielen indicated that any gain which would result in the elimination of future COLAs has been incorporated in the twenty year projection of contribution rates were determined on Senate Bill 2 changes which include the COLA change which is one of the main reasons the KERS nonhazardous projected rate will remain flat over the next twenty years. Mr. Thielen indicated that the cost of inflation for retiree insurance has increased for non-Medicare individuals; that the costs for the Medicare group has decreased as a result of the board of trustees decision to move from a self-insured plan to a Medicare advantage plan offered by Humana which resulted in a reduction in the rate. He said that the basic funding equation is contributions plus investments equals benefits paid plus expenses.
Mr. Thielen indicated that the KERS nonhazardous plan is the issue; that the SPRS plan is only 43.3 percent funding but that plan is a small plan, approximately $500 million in total assets; that the CERS plan ranges from 59 percent to 75 percent funded but while they are below the funding level it is not in any serious trouble. Mr. Thielen stated that the total normal cost for the KERS pension for nonhazardous duty is 8.48 percent of payroll of which the employees pay 5 percent but the employer’s normal cost is 3.48 percent of payroll and .65 percent for administrative expenses; that the rate to amortize the unfunded actuarial liability is 26.7 percent with the total employer contribution rate of 30.8 percent. He said assumptions are based n a number of items such as investment income;, pay increases, service retirement and disability retirement, the mortality rate, withdrawals from the system and new members.
In response to a question by Mr. Jefferson regarding the pay out of approximately 30 percent of the market value in the plan, Mr. Thielen indicated that in 2013 KRS paid approximately $875 million on an asset base of approximately $2.8 billion. Mr. Jefferson indicated this was an extreme figure which the argument can be made for the serious need for funding; that from a statute standpoint and the need for ARC funding in the form of employee compensation and that 38 percent to 40 percent of compensation is what is required by the employer to fund the ARC or about $630 million. According to Mr. Thielen’s calculations there is about $191 million need to fully the fund the ARC. Mr. Jefferson asked, if given the liquidity needs, it appears that a greater and greater percentage of the asset base is leading to less liquid funds; that given the trending in the funding ratios what is the game plan if the fund ratios continue to deteriorate or what steps from a liquidity standpoint is being taken, Mr. Thielen said this would be discussed in the investment program; that every five recommendations are made for each plan; that if the full ARC is made and the assumptions are met the KERs nonhazardous plan will bottom out in 2018-19 fiscal year.
Representative Thompson asked for clarification on the ARC contributions, Mr. Thielen indicated that if 100 percent of the of the ARC contributions and if they assumptions that the unfunded liability will peak in 2018 and then start to decrease.
Representative Yonts indicated that a retirement housekeeping bill is being drafted as well as a bill to bring the Judicial and Legislative pensions and the Kentucky Teachers Retirement System under the purview of the Public Pension Oversight Board.
There being no further business, the meeting adjourned at about 2:00 p.m.