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Kentucky pension shortfall balloons under convergence of factors — report

Kentucky’s unfunded pension liabilities totaled $33 billion as of June 30, up $26 billion from roughly a decade ago, said a report from PFM Consulting Group on Monday.

Assumption changes and employer contributions that did not cover the annual interest on the unfunded pension liabilities drove nearly half of the funding decline over the past decade, said PFM, which was hired by Kentucky's finance and administration cabinet last year to provide a performance and best practices analysis of the $17 billion Kentucky Teachers' Retirement System, $11.5 billion Kentucky Retirement Systems and $327 million Kentucky Judicial Form Retirement System, all based in Frankfort.

PFM also attributed one-third of the funding decline to weak market performance and plan-specific performance below actuarial assumptions, and another 15% to employer contributions below actuarially required levels.

Other contributing factors cited by PFM were earlier increases in cost-of-living adjustments and other elements of plan experience such as mortality rates that were different from assumptions.

The PFM report noted that three of the state’s largest pension funds — the Kentucky Employees Retirement System non-hazardous pension plan, County Employees Retirement System non-hazardous plan and Kentucky Teachers — have been operating with negative cash flow for several years, which could threaten the long-term solvency of those plans.

PFM’s report was presented to the Kentucky Legislature’s public pension oversight board on Monday. A final report on PFM’s recommendations for shoring up the pension plans is forthcoming.

Last week, the Kentucky Retirement Systems, Frankfort, lowered its assumed rate of return, inflation and payroll growth assumptions for the Kentucky Employees Retirement System non-hazardous pension plan and the State Police Retirement System pension plan, which will further increase the plans’ unfunded liabilities and employer contributions. At the KERS non-hazardous pension plan alone, the funding ratio falls to 13.8% from roughly 16%, and the unfunded liability increases to $13.2 billion from about $11 billion, under the new assumptions. The state's actuarial required contribution to the pension plan also increases, to 66.5% of payroll from roughly 42%. Assumptions for KRS' other three other pension plans are expected to be lowered at a future date.