The lawsuit notes the difficult position the retirement system was in, saying that “there was no prudent investment strategy that would allow KRS to invest its way to significantly improved funded status,” and that “the trustees were trapped in a demographic/financial vise.” However, while acknowledging there was no prudent investment strategy for KRS to get out of the hole it was in, the plaintiffs are simultaneously critical of Carlson and the other defendants for taking what they consider to be “longshot imprudent risks.”
The lawsuit also criticizes the hedge funds of funds for not providing high enough returns for the entire KRS portfolio to meet or exceed its 7.75% assumed rate of return. However, the same could be said for fixed income and many other assets in the KRS portfolio. Broad hedge fund portfolios are generally created to reduce risk, not beat equity markets.
“The Black Boxes did not provide the investment returns trustees needed for KRS to return to or exceed on the average its AARIR [assumed annual rate of investment return] of 7.75%,” says the lawsuit, which is targeting approximately 3% of KRS’ overall investments, while saying they should carry the entire portfolio to meet or outperform a rate of return the state acknowledged as “unrealistic and unachievable.”
The lawsuit also claims the investments “lost millions of dollars in 2015 to 2016,” which was more than two years after Carlson left, and which was a particularly bad time period for the entire hedge fund industry. The lawsuit criticized one of the investments, known as the Henry Clay Fund, for providing “exceptionally large fees for Blackstone”; however, the suit also states that “the amount of the fees could not be calculated and were not disclosed.”
Kentucky has taken action to shore up its pension system, but it?s going to take time to reverse the adverse effects of past funding shortfalls, according to S&P Global Ratings.
Kentucky has one of the poorest funded pension systems among all U.S. states, with an aggregate funded ratio of 44% as of fiscal 2019, S&P said. The state?s general obligations are rated A by S&P with a stable outlook.
The state?s Public Pensions Authority is responsible for the Kentucky Employees Retirement System (KERS) and State Police Retirement System (SPRS) while counties and cities are responsible for the County Employees Retirement System (CERS). The Teachers Retirement System is a seperate system with its own board.
The funded ratios for the systems are 14.01% for the KERS non-hazardous and 55.18% for the KERS hazardous, 58.27% for the TRS, 28.02% for the SPRS and 47.81% for CERS non-hazardous and 44.11% for the CERS hazardous.
You can find all the major filings at Kentucky Pension Case. The two below are over the most heated current issue: whether the Tier 3 Plaintiffs can move forward. Judge Shepherd said effectively that he needed to see what the attorney general planned to do before he decided that.
Given that the justification for the attorney general repeated extension requests was to wrap his mind around the case, and the Calcaterra report looked like Kentucky Retirement Systems hiring an outside firm to brief the attorney general, the new filing is entirely old hat. It has not only has no new arguments, it is even more openly cribbed from older plaintiff filings that the original attorney general intervention, where his office at least re-wrote a fair bit of the material into white shoe tall building lawyer style. Here, nearly all of the filing is a cut and paste, including the charts.
The Kentucky Retirement Systems (KRS) Board of Trustees held a special meeting Thursday morning to approve more than $170 million in investments. The move comes just one week before a new County Employees Retirement System (CERS) Board of Trustees takes control of the local pension system and its investments; the timing was not lost on several board members who questioned why they needed to act before the April 1 separation. CERS elected representative Betty Pendergrass pointed out that a majority of the money being allocated was CERS funds, which account for 76% of KRS pension assets.