KEEGAN: Kentucky state pension catastrophe a warning to others

By   /   December 16, 2012  /   1 Comment

By Frank Keegan | State Budget Solutions

IN TATTERS: Kentucky Retirement Systems officials recently revealed that officially they have only 27-cents to pay every dollar of promised benefits.

What one whistleblower calls “a culture of cover-up and corruption” in Kentucky caused pension debt that puts government workers’ retirement at risk and citizens on the hook for billions of dollars in tax increases and service cuts.

Kentucky Retirement Systems officials recently revealed that officially they have only 27-cents to pay every dollar of promised benefits.

“That 27 could go down really fast,” according to Chris Tobe of Louisville, an investment consultant appointed to the KRS board in 2008 and not reappointed this year after raising questions about investment policy. In March he filed complaints with the state attorney general, auditor and U.S. Securities and Exchange Commission.

Tobe said the state lied in bond documents about the true size of its pension debt, violated the legally required pension board makeup and broke state disclosure rules on performance and fees with a number of high-risk, high-fee alternative investments, many using politically connected “placement agents.” He said that violated fiduciary duty to workers.

“Unlike Illinois, I think this funding level for the major state plan caught Kentucky taxpayers and even Kentucky Municipal Bond holders by surprise,” he said. “I attribute this to a total lack of transparency starting with laws that make all pension benefits secret to the public.

“The Kentucky Retirement Systems (KRS) runs two major plans, the 27 percent funded KERS, and the 60 percent funded CERS for County and City employees in a large comingled manner, which has helped mask the problems at KERS. There has been talk of counties trying to pull CERS out of the KRS system since it has (two-thirds) of the assets and only one of eight current board members. I fear the legislature will fight any pullout since I believe it would not only expose the underfunding, making the legislature look bad, but expose additional incompetence and corruption with KRS management.”

Tobe commissioned his attorney, Edward Siedle, a former SEC lawyer, to produce a special report for the SEC: “Report of Independent Counsel to SEC: Placement Agent Abuses at Kentucky Retirement System” in response to what he said was a “whitewash” by the State Auditor.

The independent counsel report was primarily on placement agents, Tobe said, but he has expanded his complaint to the SEC.

In an email Thursday he said, “My additional points in my SEC whistleblower complaint are: 1.The statement about slowing of liabilities was a lie; 2. many of the reforms on performance and fee disclosure … were violated by KRS; 3. the governor appointed people who were not investment experts.”

He said, “Kentucky secretly issued over $700 million in Pension Obligation Bonds in 2010 to cover up underfunding in the Teachers Retirement Systems, and I fear they may try to issue more for the state plan (KERS) in a backroom deal as well.”

Moody’s Investment Services issued a report last week, “State and Local Governments Face Risks with Pension Funding Bonds,” that warned against abusing them.

According to report author Marcia Van Wagner, “If bond proceeds substitute for annual contributions to pension plans or are used to pay pensioners, we consider it a deficit borrowing and would view the financing as credit negative, particularly if it is large relative to the budget …, is part of a continuous pattern of reliance on one-time resources, or is used in the absence of a plan to restore budget stability over the medium term.

“In general, we consider it to be positive for credit when management strategies are directed toward sustained improvement in net funded status of the pension plan, but negative for credit when management strategies primarily seek near-term budget savings without improvement in pension funded status.”

That is what Kentucky pension officials did in secret two years ago.

But Kentucky is far from alone. In her comprehensive book, “State and Local Pensions: What now?,” Alicia H. Munnell noted 236 state and local governments have issued 2,931 pension obligation bonds and found that, “… by mid-2009 most POBs had been a net drain on government revenues.”

In a study three years ago, “Pension Obligation Bonds: Financial Crisis Exposes Risks,” Munnell concluded, “Unfortunately, most often POB issuers are fiscally stressed and in a poor position to shoulder the investment risk. As such, most POBs appear to be issued by the wrong governments at the wrong time.”

According to a study this year by the Government Accountability Office, “State and Local Government Pension Plans: Economic Downturn Spurs Efforts to Address Costs and Sustainability,” such bonds “can expose plan sponsors to additional market risk.”

Politicians think they can dump all of that risk on current and future taxpayers.

To one degree or another, similar government pension rip-offs are happening all over America. The system is fundamentally corrupt and infinitely corruptible because of what Boston University law professor Jack Beermann calls pension “pathology.”

Only informed citizens and whistleblowers like Tobe can make sure that risk is shared and the system is reformed by freezing it and putting all the risk where it belongs: On politicians and the government workers they serve.

Frank Keegan is editor of Statebudgetsolutions.org a project of sunshinereview.org. The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability. Contact him at frankkeegan@statebudgetsolutions.org

 

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Frank Keegan

  • Rachel Matteson

    This is absurd. Pensions are very important to people as it is their source of living when they retire. There will be lots of complaint when this problem is not solved. – http://www.lorelawoffice.com/