Yesterday, Government Affairs Director Sarah Durand testified against a policy that would establish a new pension board for the County Employees Retirement System (CERS) separate from the current Kentucky Retirement Systems (KRS) board. While still keeping all the pension risk with taxpayers, it removes taxpayer representation in CERS pension policy and is expected to cost up to an extra $6.7 million annually.
Government Affairs Director Sarah Durand testified against a policy that would establish a new pension board for the County Employees Retirement System (CERS) separate from the current Kentucky Retirement Systems (KRS) board. While still keeping all the pension risk with taxpayers, it removes taxpayer representation in CERS pension policy and is expected to cost up to an extra $6.7 million annually.
Posted by The Bluegrass Institute on Tuesday, 10 March 2020
Below are the written comments by Durand:
The Bluegrass Institute respects the intent of the sponsors of this bill, and we fully agree that there are issues facing CERS that must be addressed. Having listened to those issues as this bill was first being proposed, it is our view that the need for policy changes stems primarily from inadequate representation for CERS on the current KRS board, and from the inability of CERS to choose their own actuaries and investment advisors.
We believe these concerns could be much more easily solved – and without the substantial increase in administrative costs of up to $6.7 million per year. A better approach is a policy requiring CERS employees to have representation on the board similar in proportion to their membership percentage in KRS. We also believe that CERS should have the ability to choose their own actuaries and investment advisors, prioritizing the actuarial needs and investment strategy of CERS to allow them to operate with much more autonomy, despite sharing administrative staff and facilities with the state agencies in KRS.
And while we believe CERS deserves fair representation on any board managing the retirement assets of their members, we also believe that any such board must have representation for the taxpayers first and foremost, since all of the risk incurred for pension obligations is placed on the hardworking citizenry. Beyond its large price tag and sledge-hammer approach, 100% of the proposed board members will be working on behalf of CERS members as fiduciaries with essentially no representation for the state, despite the fact that the inviolable contract holds the state, which is ultimately the taxpayers, responsible for the payment of all public pension benefits.
This scenario creates an unacceptable “moral hazard” by allowing the new CERS board members to take substantial risks to benefit their own members that are borne entirely by the state, including the use of overly optimistic actuarial assumptions or taking risks with investments seeking higher returns, as we have seen repeatedly in the past. If the proposed CERS board is fully aligned with the CERS members, who is going to stand up for the taxpayers who are assuming 100% of the risk?
As long as we are placing all of the risk on the taxpayers, they must at the very least have equal representation on any CERS board, since oversight by the PPOB is not a suitable replacement for equal representation on the pension board.
The actuarial analysis of this bill performed by KRS confirms our concerns that the Commonwealth will be responsible for the liabilities incurred by CERS employers who are unable to meet their pension obligations. According to the analysis, CERS plans will have no “backstop” funding, and legally the Commonwealth will be required to cover the unfunded liabilities for any and all bankrupted employers who default on their pension payments.
We appreciate the legislature’s desire to improve the retirement system for our city and county employees, but the current proposal is unnecessarily complex and expensive and creates an unacceptable moral hazard by keeping all of the risk for public pension obligations with the taxpayers who will no longer have representation on the newly created CERS pension board.