- House leader calls lawmakers to meet as motives questioned
- Governor Bevin fighting own reform battles as fees mount
Kentucky is the home of thoroughbred horse racing, well-regarded bourbon and politicians fighting over some of the most vexing problems facing U.S. public pensions.
Democratic House Speaker Greg Stumbo called 100 adjourned members of the state House of Representatives back to Frankfort on Tuesday to discuss pension investment losses, more than $171 million of fees paid to money managers and potentially budget-decimating shortfalls. With $35 billion owed to retirees, the state’s pension system is one of the most underfunded and the worst in addressing funding deficits, according to an Aug. 24 report from the Pew Charitable Trust.
While Illinois and New Jersey have captured headlines recently as their funding gaps grow, Kentucky is falling behind at a faster pace than any other state when it comes to paying for promises to public employees. More than half the states aren’t providing funding or earning enough returns, according to Pew. State and local pension across the U.S. have slightly over two thirds the $5.3 trillion needed for retirees, according Federal Reserve data.
“This year we provided the biggest increase in funding ever,” said Jerry Miller, Republican state representative from Louisville, who boycotted Stumbo’s meeting. “It’s going to take us decades to dig out from this mess.”
Kentucky’s unfolding drama is one of many to play out with new Republican Governor Matt Bevin seeking to take control over pensions and change investment policy. At on point he sent a state trooper to make sure certain board members didn’t participate in a meeting. Lawmakers, after failing to adequately fund pensions for 15 of the last 22 years, allocated $1.28 billion, including money beyond what was required.
S&P Global Ratings said in a report in April that the state may not be able to sustain increased spending on pensions provided this year. It tapped into one-time sources such public employee health insurance trust funds that may not be available in the future.
The $1.9 billion Kentucky Employee Retirement System pension for state workers who don’t have hazardous jobs saw its assets decline by $347 million. With just 19 percent of the what’s needed to pay benefits, it’s the worst-funded state pension in the U.S. Only $21 million of its loss was tied to the 0.5 percent investment decline in the past fiscal year. The other $326 million was driven by the amount of benefits paid. The fund paid $123 million in fees for investments. Another pension for teachers lost 1 percent and paid $48 million in fees.
Stumbo called the meeting in reaction to reports the funds paid $171 million to managers while losing money on investments in the year ended June 30. Stumbo said on Twitter this week that the returns were “far below what was needed” as the systems paid “exorbitant fees.” On Facebook he called it “a whole lot of money to be spent only to lose more money.”
“The state has invested $1.2 billion in pension funds hoping to solve liquidity problems,” said Brian Wilkerson, Stumbo’s spokesman, in an interview. “With the influx of new money were hoping they can focus less on liquidity and more on investment performance.”
Republicans critical of the meeting said the information about losses and fees had been out for weeks and discussed in committees, and that if Stumbo was so concerned about fees he should have let lawmakers consider a law this year that would have required disclosure of fee information.
Alternatives such as private equity and hedge funds have become controversial across the country because firms offering the investments prohibit the release of details, calling them “trade secrets.” The requirements make it difficult for fund board members, lawmakers and taxpayers to know what they’re paying and why. Lawmakers in seven states including Kentucky introduced bills requiring more disclosure but only California passed one last week. That was amended to reduce what was released.
“The House Democratic leadership has been ignoring this issue for years, so suddenly they realize it has become a crisis,” said Miller.
Jeff Hoover, Republican leader of the House, who called on his members to boycott the meeting, said Stumbo had several opportunities for the House to take up the Senate bill, which passed 38-0.
“We could have delved in and looked at who was being paid,” said Hoover, from Jamestown. “He turned his back on it.”
Hoover said Stumbo was more interested in getting Democratic members to the Capitol in Frankfort at state expense for a fund raiser in Lexington. With only a six-seat majority, Kentucky faces losing the last Democratically-controlled legislative chamber left in the South in November.
Stumbo’s spokesman, Wilkerson, dismissed Republicans’ allegations and said the speaker “has always been supportive of transparency” and that the bill wasn’t brought to a vote because “there were other issues coming up and we were able to do what we could do.”
Yet during Stumbo’s meeting, Chris Harris, Democrat from Forest Hills, questioned the investment strategy, according to Bluegrass Politics, which Tweeted the meeting.
“If we don’t understand how the fees are calculated, then why would we invest in something?” asked Harris.