Thefirst meeting of the Interim Joint Committee on State Government was held on Wednesday, August 27, 2008, at 1:00 PM, in Room 154 of the Capitol Annex. Representative Mike Cherry, Co-chair, called the meeting to order, and the secretary called the roll.
Members:Senator Damon Thayer, Co-Chair; Representative Mike Cherry, Co-Chair; Senators Walter Blevins, Jr., Julian Carroll, Ernie Harris, Dan Kelly, Alice Forgy Kerr, Elizabeth Tori, and Johnny Ray Turner; Representatives Eddie Ballard, Sheldon Baugh, Kevin Bratcher, Larry Clark, Tim Couch, Tim Firkins, Joseph Fischer, Danny Ford, Derrick Graham, Mike Harmon, Melvin Henley, Jimmy Higdon, Jimmie Lee, Mary Lou Marzian, Lonnie Napier, Sannie Overly, Darryl Owens, Tanya Pullin, Tom Riner, Carl Rollins II, Sal Santoro, John Will Stacy, Kathy Stein, Greg Stumbo, Tommy Thompson, John Tilley, John Vincent, Jim Wayne, Alecia Webb-Edgington, and Brent Yonts.
Guests: Robert Vance and Ryan Keith, Public Protection Cabinet; Nikki Jackson and Fred Nelson, Personnel Cabinet; Mary Lassiter, Office of State Budget Director; Sally Hamilton, Office of Auditor of Public Accounts; Mike Burnside and Eric Wampler, Kentucky Retirement Systems (KRS); Tom Howard, Steve Jones, and Dwight Price, Finance and Administration Cabinet.
LRC Staff: Joyce Crofts, Brad Gross, Alisha Miller, Karen Powell, Greg Woosley, and Peggy Sciantarelli.
First on the agenda was review of reorganization Executive Order 2008-507, dated June 6, 2008. The reorganization, which was referred to the Committee for review June 9, 2008, abolishes the Environmental and Public Protection Cabinet (EPPC) and in lieu thereof establishes the Public Protection Cabinet, the Energy and Environment Cabinet, and the Labor Cabinet. Present to discuss the reorganization were Robert Vance, Secretary of the Public Protection Cabinet, and Ryan Keith, Executive Director of the Cabinet’s Office of Legal Services.
Mr. Vance gave an overview of the reorganization. He explained that one significant change related to the Public Service Commission (PSC), which was previously attached to the Department of Public Protection within EPPC. After much discussion it was decided that it would be a better fit to associate the PSC with the new Energy and Environment Cabinet rather than the new Public Protection Cabinet.
Mr. Vance said he believes the most significant part of the reorganization was the combining of administrative functions such as budget, information technology (IT), and human resources to collectively serve all three of the new cabinets. These “shared services” are administered by the new Office of General Administration and Program Support, which is attached for administrative purposes to the Labor Cabinet. He added that IT services, however, are still handled separately in the Labor Cabinet, as in the past. Mr. Vance said the shared services approach is working very well and believed to be saving quite a bit of money. He went on to say that the Office of Inspector General, also attached to the Labor Cabinet, serves all three cabinets. The Office of Communications and Public Outreach is shared by all three cabinets but is attached to the Public Protection Cabinet. Each cabinet has its own legal counsel, but, according to a separate memorandum of agreement, some legal services—primarily in the area of personnel—will be provided for all three cabinets by the Office of Legal Services in the Public Protection Cabinet. The Division of Occupations and Professions—previously attached to the Finance and Administration Cabinet—is now housed within the Public Protection Cabinet. However, most of the functions of the State Risk and Insurance Services Division, which oversees state properties, will now be under the Finance and Administration Cabinet instead of the Office of Insurance. Concluding his overview, Mr. Vance noted that the Insurance, Banking and Securities, Alcoholic Beverage Control, Charitable Gaming, and the Housing, Building and Construction offices were elevated to departmental level by the reorganization.
Representative Cherry thanked Mr. Vance and Mr. Keith. Next on the agenda was a status report from the Public Pension Working Group, created May 29, 2008, by Executive Order 2008-460. The working group formed the following six subcommittees to study Kentucky’s public employee pension plans, particularly aspects of the public pension system not addressed in the 2008 special session: CERS/LGERS [reorganization of the County Employees Retirement System], Defined Contribution Plans, Healthcare, Investments, Securities Litigation, and State Funding. The working group is to complete its work and submit a report to the Governor on or before November 1, 2008.
The first report was from Personnel Cabinet Secretary Nikki Jackson, Chair of the Defined Contribution Subcommittee. She provided a handout listing the Subcommittee’s meeting schedule and agenda topics. In summary, Secretary Jackson said that the purpose of the Subcommittee is to research best practices, encourage thorough and objective dialogue, and explore every opportunity and alternative relating to the prospect of incorporating a defined contribution and/or an annuity plan into the current pension plan offerings for newly hired state employees and teachers. The goal is to determine whether a voluntary defined contribution or annuity plan offering would serve as a viable option in response to current pensions concerns. The Subcommittee has 22 members, representing a broad cross-section of the Commonwealth, and would welcome participation by anyone else who might be interested in joining. At its August meeting the Subcommittee heard a presentation by the Kentucky Public Employees’ Deferred Compensation Authority. Secretary Jackson concluded her report by reviewing plans for future meetings, which she said will include testimony from the states of West Virginia and Florida. Senator Thayer said he believes Florida’s plan is a blend of both defined benefit and defined contribution, while West Virginia moved to a 100 percent defined contribution plan. Secretary Jackson said that is correct. She noted that West Virginia’s plan has been less successful than Florida’s.
Representative Stumbo said that recovery [of losses due to investment/stock market fraud] by the systems has been an area of great concern for him. He said that when he was Attorney General the retirement systems would not allow outside attorneys and consultants to evaluate the systems’ recovery. He theorized that this may have been because the systems did not want the extent of their losses known. He said he is not suggesting that litigation be initiated in every instance to recover losses but believes that this is an area that the working group should examine, since other states have apparently achieved more significant recoveries than Kentucky’s. Secretary Jackson said that is an excellent suggestion for possible discussion at the Subcommittee’s next meeting, which will focus on overall national perspective and include testimony from the National Association of State Retirement Administrators and the National Institute on Retirement Securities. Representative Cherry noted that this issue will be discussed in today’s report from the Securities Litigation Subcommittee. There were no further questions.
Mary Lassiter, State Budget Director, reported for the State Funding Subcommittee. In summary, Ms. Lassiter said that when the Subcommittee was created in May 2008, it was charged with looking at how the state could more adequately fund its retirement systems and related obligations. This issue was then partially addressed in the June special session, in that House Bill 1 included a funding schedule for Kentucky Retirement Systems. While the money is not yet identified, the legislation provided a plan for KRS to move forward. The Subcommittee has spent some time talking about the requirements of the legislation and discussing cost drivers that will affect the unfunded liability. The majority of the Subcommittee’s focus is now on the Teachers’ Retirement System (KTRS), which has been unable to fully fund its health care component. The Subcommittee is doing some analysis and research and revisiting the issue of when it is appropriate to issue debt for those types of liabilities. At the next meeting national experts will testify about what other states have done.
Senator Carroll asked how Kentucky compares with other states with respect to the percentage of the general fund budget that is dedicated to retirement benefits. Ms. Lassiter said she does not have a sense for that but said she can get that information. Senator Carroll asked how much KTRS has borrowed from its pension fund in order to fund health insurance benefits for the past three bienniums. Ms. Lassiter responded, “About $600 million.” She said that the cost has been amortized, and the payments have been budgeted at a 7.5 percent interest rate, which is the actuarially assumed rate. Senator Carroll said that, in effect, this denies KTRS the opportunity of return on the money being used to fund the health insurance. He noted that that the state is presently borrowing money at a substantially lower rate. Ms. Lassiter said it is correct that the state is able to borrow at an interest rate less than 7.5 percent. There were no additional questions.
Fred Nelson, Commissioner of the Department of Employee Insurance, Personnel Cabinet, said he is representing the Healthcare Subcommittee in place of the Subcommittee’s chair, Deputy Personnel Cabinet Secretary Tim Longmeyer, who was unable to attend today. In summary, Mr. Nelson said that the Subcommittee has 30 members, representing a broad cross-section of the Commonwealth. At its first and only meeting so far, the Subcommittee heard a report from Price Waterhouse Coopers regarding Alabama’s approach to funding employee/retiree health insurance. The Subcommittee also received a presentation on the current status of the Commonwealth’s employee and retiree health insurance plans, focusing primarily on wellness initiatives for under-65 retirees. In September, the Subcommittee will hear testimony from KRS and KTRS regarding their efforts to address retiree health care. The goal of the Subcommittee is to work in tandem with the Governor’s ongoing efforts to create a more sustainable health care system through a holistic approach that addresses the state’s employee value proposition, and to serve as the method for identifying and beginning to address major cost drivers to the state’s unfunded liability.
Representative Clark said he hopes the Healthcare Subcommittee will look at preventive medicine. He stressed the need to educate the public about the importance of preventive medicine and wellness. Citing his experience as a Type-2 diabetic, he said he believes health insurance companies should be more consumer-friendly and should be held more accountable in the area of wellness and preventive medicine. Commissioner Nelson noted that the public employee health insurance program covers most preventive care at 100 percent.
Representative Wayne commented on the unhealthy lifestyles of Kentuckians and said that the national health care system is broken, which has, in turn, put a great deal of pressure on the Commonwealth’s pension system. He went on to say he would hope the Subcommittee would issue a statement that the health care system is broken nationally and that some form of universal coverage is the only answer. Otherwise, unless all segments of society start putting pressure on the federal government to develop some type of universal coverage, costs will continue to escalate, and the national system will continue to be broken. Commissioner Nelson said that Representatives Clark and Wayne have made good points and that he would pass their comments along to Deputy Secretary Longmeyer and also to the Department of Insurance.
Representative Riner said he would like to underscore Representative Clark’s comments about preventive medicine. He spoke of someone he knew who had to have toes removed as a result of not being able to afford needed medication.
Senator Carroll said his number one priority is to address the problem of escalating health care costs in Kentucky. He said that, including Medicaid, the state is now paying health benefits for one million people, with a cost approaching $8 billion annually. He said that he personally spent two years studying this issue after he reentered the system in 2004 and that he would send Commissioner Nelson a copy of his report, which found that several institutions in Kentucky—including the University of Louisville, University of Kentucky, Toyota, and others—have adopted wellness programs that have substantially decreased the cost of health care for their employees. He spoke of the importance of Kentucky state government utilizing a similar program in order to reduce health care costs and said he hopes that someday a wellness facility will be built in Frankfort for the use of state employees. Commissioner Nelson said that Kentucky’s employee health plan agrees on the importance of wellness and that it will be a top priority in the 2009 plan. He said the Personnel Cabinet is currently running a comprehensive wellness pilot project internally. It has proved so popular, after only a few months, that the Finance and Administration Cabinet has now adopted it for its 1,800 employees. He added that Governor Brashear is expected to promote a comprehensive wellness program early next year. Also, on January 1 the Commonwealth health plan will be introducing an Internet-based program, Virgin Health Miles, which will offer cash rewards as incentives for becoming physically active and improving lifestyle.
Representative Napier said he likes Senator Carroll’s idea of a wellness facility and suggested the possibility of similar programs being established by city and county governments. Senator Carroll said that ideally he would like to see a wellness facility in every county. He emphasized the need to have a coordinated system that provides for personal interaction and said that programs of this type would eventually save the state millions of dollars. He also suggested that utilizing local health departments as clinics would save millions more and would reduce the practice of using hospital emergency rooms for routine care. Representative Napier suggested looking into recent wellness initiatives undertaken in the state of Alabama. Commissioner Nelson noted that, like Kentucky, Alabama includes a smoking surcharge in its health plan premiums; however, Alabama is adding another surcharge based on “body mass index.”
Representative Stein commented that an increase in the cigarette tax might be helpful in reducing health care costs and improving wellness of Kentuckians.
Representative Cherry thanked Commissioner Nelson and said that the Committee would like to have Personnel Cabinet representatives come to a future meeting to discuss the 2009 employee health plan. Senator Thayer concurred.
Next on the agenda, Sally Hamilton, Director of the Division of Financial Audit in the State Auditor’s Office, reported for the CERS Reorganization Subcommittee, which is chaired by State Auditor Crit Luallen. She provided a handout describing the mission and meeting activity of the Subcommittee.
In summary, Ms. Hamilton said that the mission of the CERS Subcommittee is to study the creation of a new retirement system, to be known as the Local Government Employees Retirement System; study the potential transfer of classified school board employees and retirees in CERS to another retirement system; and examine the potential impact of such actions, as well as disposition of assets in the event a transfer takes place. The actuarial firm, Cavanaugh Macdonald, is conducting a CERS Reorganization Study to examine the impact of splitting Board of Education participants from CERS, whether they become a separate contributing section of CERS or are transferred to KERS, KTRS, or a new system established solely for them. The Subcommittee has held two meetings and has received testimony from interested parties. At the late September meeting the Cavanaugh Macdonald study will be available for review. There were no questions, and Representative Cherry thanked Ms. Hamilton.
Next on the agenda Eric Wampler, General Counsel for Kentucky Retirement Systems. reported for the Securities Litigation Subcommittee, which is chaired by Attorney General Jack Conway. He provided a handout summarizing the mission and activities of the Subcommittee.
Mr. Wampler said that the mission of the Subcommittee is to identify best practices for public pension plans in the area of securities litigation related to fraud in public securities markets. He went on to explain that KRS and KTRS, as large institutional investors, generally hold stock in companies like Enron, WorldCom, and Tyco, all of which were involved in accounting fraud that led to a dramatic fall in stock price. Recovery of losses associated with stock fraud can be through a federal class action lawsuit mechanism, or investors can opt out of the class actions and pursue cases on their own. To date, KRS and KTRS have limited their collection activities in these securities cases to participation in the federal class actions.
Mr. Wampler said that on July 8, the Subcommittee heard testimony from KRS and KTRS regarding their current policies, procedures, and activities in securities cases. There was also discussion of best practices related to the evaluation of securities litigation cases, as outlined in a publication by the National Association of Public Pension Attorneys. KRS’ chief investment officer also testified about the diversification of KRS’ portfolio and methods employed to limit losses due to securities fraud. He went on to say that at the Subcommittee’s September meeting representatives of the Ohio Attorney General’s office will testify about litigation strategy, managing outside counsel, and how their office works with pension funds relative to securities litigation. Concluding his remarks, Mr. Wampler said that the October meeting will include testimony from the legal counsels of two large institutional investors that have been active in securities litigation. There will also be testimony from an expert regarding opting out of federal securities class action cases.
Representative Stumbo said that in federal class action litigation, the court approves distribution of the monies recovered, and generally those monies are distributed according to the size of the funds involved. He said that Kentucky is at a competitive disadvantage in that process, when comparing the size of its pension funds with those of large states like California and New York. Therefore, Kentucky’s past recoveries may not have been maximized, although that would not be known without an independent outside review. Mr. Wampler said that all parties receive a proportionate recovery in the federal cases, and the recovery amount would depend on the size of the loss. He said it is true that KRS’ and KTRS’ plans are very small compared to California and New York, and their losses are relatively small by comparison.
Representative Stumbo said that the trend is for states to opt out of federal class actions and proceed individually under state law when state action appears to be more viable for recovery. He said he would encourage the Securities Litigation Subcommittee to pursue research into securities litigation policies and procedures of other states. He emphasized that it is a retirement board’s fiduciary duty to investigate which options are viable and to pursue the best avenue of recovery. He added that he appreciates the efforts of the Subcommittee.
Mr. Wampler said that KRS has had a securities litigation policy since 1999 and updated that policy in April 2006 after a two-year review. That review included consulting other public pension plans, reviewing the report of the National Association of Public Pension Attorneys on best practices, and interviews with plaintiff securities litigation law firms. He said that one of the facets of the new policy is that the Board can hire independent evaluation counsel. One of the primary charges for the outside independent counsel is to look at opt-out and other cases and determine whether it might be appropriate to seek “lead plaintiff.” He went on to say that the KRS Board felt it important to hire independent evaluation counsel rather than the typical plaintiff firm in order to avoid the inherent conflict of interest associated with plaintiff firms. The evaluation counsel identifies cases appropriate for litigation or opting out, and that is a separate function from the actual hiring of litigation counsel to pursue the case.
Representative Owens asked on what basis is a decision made to hire evaluation counsel. Mr. Wampler said it depends on the particulars of the individual case. He said that the policy of the Board of Trustees sets a threshold level at which staff is required to do a more in-depth evaluation of damages. Mr. Wampler further explained that deciding whether to opt out of a federal case or to seek lead plaintiff in a federal case is a very complex process. Just because the stock price dropped on a particular security, resulting in a huge loss for the retirement systems, does not necessarily translate into recoverable damages, either in a federal case or in an opt-out case. The evaluation counsel that KRS has hired has expertise in estimating recoverable damages—which might not be exactly the amount that could be recovered in a lawsuit—but the estimate can give a good idea whether pursuing litigation might be successful.
Representative Stacy asked about the dollar amount of losses KRS has been able to recover through litigation. Mr. Wampler said that the largest loss was from WorldCom—about $12 million—and that the retirement systems recovered about $5 million in the federal class action lawsuit. He said that in the last two and one-half years KRS has participated in about 175 securities class action cases. Recoveries have ranged from a high of $5 million to a low of just a few dollars. Representative Stacy questioned how success at recovery can be judged without knowing the actual dollar amount of the losses.
Representative Stumbo said he thinks it is important to know the amount of the losses, as well as amounts recovered, in order to judge whether recovery was adequate. He asked whether KRS would be able to provide that information. Mr. Wampler explained that there may be variations in the way damages are calculated even within individual cases. He said that KRS could estimate losses as opposed to damages, provide the method of calculation set out in the court order in the federal cases, and then evaluate damages and the number of securities and the market price listed on the proofs of claim that were filed. But, he said, to do that on every single case that has been filed would be a dramatic and time-consuming undertaking. Representative Stumbo suggested that they simply total the dollar amounts listed on the 175 proofs of claim. Representative Fischer (later in the meeting) asked that KRS also provide an analysis of how the losses and recoveries have impacted investment return. Mr. Wampler said that they can provide that information. Representative Cherry asked Mr. Wampler to send the information requested by Representatives Stumbo and Fischer to State Government Committee staff so that it can be distributed to all members of the Committee.
Representative Overly asked whether claims are being filed in federal class action lawsuits on behalf of CERS, as well as KRS and KTRS. Mr. Wampler explained that Kentucky Retirement Systems administers the funds for KERS, CERS, and SPRS, and that those monies are pooled for investment purposes. He said that any recovery of losses due to stock fraud would be collected and distributed according to plan ownership. Representative Overly asked whether the Securities and Litigation Subcommittee is analyzing recoveries in the federal class action cases to determine whether the systems’ policies are appropriate or need to be modified. Mr. Wampler said the Subcommittee is working to identify best practices for pursuing recovery in securities cases, both under federal class action and opt-out cases. He noted that appropriate calculation of damages is one component of that evaluation.
When asked by Representative Henley, Mr. Wampler said he does not represent KTRS but that KTRS’ procedures for evaluating cases and filing proofs of claims are similar to the procedures employed by KRS.
Reporting for the Investments Subcommittee were staff of the Finance and Administration Cabinet’s Office of Financial Management: Tom Howard, Executive Director; Steve Jones; and Dwight Price. They presented a brief PowerPoint presentation summarizing the timeline and highlights of subcommittee activity. Paper copies were handed out to the Committee. Mr. Howard explained that the group’s chair, State Treasurer Todd Hollenbach, could not be present today.
Mr. Howard said that the 12-member Subcommittee has met three times. It is charged with reviewing the investment process, benchmarks, and best practices. He went on to say that the meetings included presentations on KRS’ and KTRS’ investment process; introduction of the group’s investment consultant, Hammond Associates, of St. Louis, Missouri; and a presentation by Hammond Associates regarding performance and governance issues at KRS and KTRS. The September meeting will include further fact finding by the consultant, and the October meeting will be devoted to preparation of the Subcommittee’s recommendations.
Mr. Howard briefly reviewed initial findings by Hammond. In summary, he said the consultant reported that asset allocation is critical to investment performance. Compared to their peers, both KRS and KTRS have historically had lower exposure to international equities and alternatives such as private equity, natural resources, and hedge funds. Asset allocation has contributed to underperformance by the two systems. Over 10 years, KRS underperformed its peers by $1.2 billion, and KTRS underperformed by $2.6 billion (numbers not compounded over the 10 year period). Governance barriers have affected system flexibility and performance. KTRS investment policies are required by statute to be set out in administrative regulation. Both systems have limited investment sophistication on their respective boards. Concluding his opening remarks, Mr. Howard said that he would be happy to supply additional findings when they become available in September.
Representative Cherry said the underperformance by the systems seems quite large, and he asked Mr. Howard to put those amounts into some kind of context. Mr. Howard said that in a broader context investment return accounts for about 60-70 percent of total funding on an annual basis for a pension plan. Investment performance is an important component of the overall funding package, and asset allocation is a predominant driver of that. He said that Mr. Jones or Mr. Price could speak to the magnitude of the underperformance in relation to peer group medians.
Representative Cherry asked about the interest rate for investment return. Mr. Price said that Hammond looked at the interest, earned versus the median, over the past 10 years. He went on to explain that it is ranked according to four quartiles, with the top quartile being the first quartile. The KRS pension fund over the last 10 years has underperformed by one percent, which would place it in the third quartile. Over the last five years it has underperformed by 2.2 percent (fourth quartile); over the last three years, approximately 1.8 percent (third quartile); and in the last year performed better than the median by .1 percent (second quartile). KTRS has underperformed over the last 10 years by 2.1 percent (fourth quartile); over the last five years by 4.5 percent (fourth quartile), compared to the median of 10.7 percent; over the last three years, by 3.8 percent (fourth quartile); and over the last year underperformed by 1.5 percent (fourth quartile). The money the systems manage today is approximately $16 billion for KRS and $15 billion for KTRS. Representative Cherry asked whether any reasons have been identified for the underperformance. Mr. Howard said that asset allocation is a contributing factor. He said that additional information should be available from Hammond at the Subcommittee’s September meeting.
Representative Cherry asked about the two systems’ exposure to hedge funds, which have been a favorite of some retirement systems but apparently have not performed well in the recent past. Mr. Howard noted that there are many different types of hedge funds, some of which are very risky and some very conservative. Mr. Jones said that, to put the risk in context, over the six months ended June 30, the hedge-fund universe lost about one-half percent, while the S&P 500 lost about 18 percent.
Representative Owens asked how performance of the systems compares to their peers. Mr. Jones said that they are being compared to the Russell/Mellon universe of public plans, which consists of approximately 58 plans. Over the 10 year period, KTRS would be in the bottom 25 percent, and KRS would be in the second-from-the-lowest 25 percent. Representative Owens said this suggests to him that the systems have not done a good job of investing. Mr. Jones spoke of risk/return tradeoff, saying that more risk usually earns a higher return. He explained that the information presented looks at only the return side of the equation. The average volatility and risk that the two retirement systems have experienced over that time period have been lower than the average of their peers.
Representative Thompson asked whether KRS’s fund managers are contrasted against benchmarks for other managers. Mr. Jones said that information should be available at the Subcommittee’s next meeting. Responding to additional questions from Representative Thompson, Mr. Jones said that KRS and KTRS use different fund managers. Mr. Howard and Mr. Jones indicated they are not familiar enough with specific investments to know whether either system has invested in REIT’s [Real Estate Investment Trust].
Representative Lee asked why the requirement that KTRS investment policies be in administrative regulation would be considered a governance barrier. Mr. Howard explained that KTRS testified that they must go through the regulation change process in order to change their asset allocation to increase exposure to equities or alternative investments such as private equities. That process takes several months to complete and can delay entry into investment markets.
Representative Lee asked whether the Subcommittee would be looking at alternatives to the regulation requirement that would continue to provide for transparency yet permit flexibility to change investments as the market demands. Mr. Howard said the Subcommittee has expressed interest in that but would not be able to develop a recommendation until they have the final information package from Hammond. Representative Lee spoke about the importance of maintaining oversight over public moneys, whether or not it is through the administrative regulation process. Mr. Jones said they would bring up that issue to the chair of the Subcommittee.
Representative Fischer asked what is the median return of investment within the Russell/Mellon group over the 10-year period and how the KRS and KTRS funds compare to that median. Mr. Jones said that the median is 6.6 percent; KRS is at 5.5 percent, and KTRS is at 4.5 percent. Representative Fischer said he understands that the poor performance has been partially attributed to the lack of exposure to international equities. He asked what is the reason for not being involved in international investments in general. Mr. Howard said he and Mr. Jones and Mr. Price are not in a position to answer that question. He went on to say that the two systems have different models and employ different consultants. KRS, which is not restricted by administrative regulation, does have exposure to international equities and has been rebalancing its portfolios. Also, KTRS has begun to wade into the international equity market.
Representative Stacy asked Mr. Price if he would again go over the performance statistics for the last three years. Mr. Price said that KRS was in the third quartile, earned 6.6 percent, and the median return was 8.4 percent. KTRS was in the fourth quartile, earned 4.6 percent, and the median return was 8.4 percent. For the past one year, KRS was in the second quartile, the return was -4.2 percent, and the median return was -4.3 percent. KTRS was in the fourth quartile for the past one year, the return was -5.8 percent, and the median return was -4.3 percent. Discussion followed regarding the WorldCom loss and the various factors affecting performance in the stock market.
Representative Cherry thanked the speakers and said the Committee looks forward to another report in the future. The final item on the agenda was a briefing by Kentucky Retirement Systems Executive Director Mike Burnside regarding implementation of House Bill 1, the pension reform legislation enacted in the June 2008 special session.
Mr. Burnside provided four handouts to the Committee: August 27, 2008, memorandum from him to the State Government Committee; talking points explaining steps taken to implement House Bill 1; and two brochures (newsletters) distributed to members and employers in the system relating to the changes enacted in the legislation. As noted in those materials, the majority of the changes impact only new hires on or after September 1, 2008. Some changes, however, affect all members and retirees.
Mr. Burnside said that KRS is ready for September 1. He briefly reviewed the talking points. In summary, he said that KRS has drafted four administrative regulations that required updating. Drafting of a fifth regulation relating to training for the Board of Trustees is in process. The legacy computer system has been reprogrammed to accommodate the changes, because the $20 million capital project to upgrade the system’s computers will not be completed by September 1. The 316,000 members and more than 1,700 employer agencies are being educated about the changes via newsletters and Internet postings. The employee handbook and the Summary Plan Description are in the process of being updated and will be posted on the Internet as soon as ready. Thirty-eight training seminars have been conducted across the state.
Mr. Burnside explained that a question had arisen about interpretation of language in House Bill 1 governing actions required by employers desiring to provide hazardous coverage for employees hired into CERS after September 1. He said that KRS has requested clarification of the language from the Office of the Attorney General and will not be reviewing hazardous duty applications prior to the November 2008 board meeting. It is hoped that there will be clear direction from the Attorney General by that time regarding interpretation of the language.
Representative Cherry thanked Mr. Burnside. Business concluded, and the meeting was adjourned at 3:10 p.m.