Lawsuit: KY pension fund cost taxpayers millions

Bad investments made by the Kentucky pension plan have cost taxpayers millions, a class action lawsuit by the City of Fort Wright alleges.

The city wants Kentucky Retirement Systems to restore more than $50 million to the County Employees Retirement System (CERS) lost in management fees from failed investments, the lawsuit filed against KRS this week in Kenton Circuit Court stated.

Some of the investments went to organizations that closed or, in another case, saw its owner indicted for stealing from investors, the city alleged in the lawsuit.

If a judge rules in their favor, it could lower pension costs for all cities and counties in Kentucky, said Ronald Parry, attorney for the city of Fort Wright.

“The cities’ contributions that are required to the retirement plan have been increasing rather substantially over the years,” Parry said. “We say one of the reasons for that(is)the investments have been under performing, paying out the huge management fees to invest in hedge funds and private equity funds.”

Cities and counties in Kentucky have pointed to pension costs as a major factor when cutting budgets and employees. Pensions, along with health care costs, bore the blame for Covington cutting 22 positions, mostly police and firefighters, in 2011.

The city’s pension costs accounted for $6.2 million out of its $47 million budget this year, Covington City Manager Larry Klein said. That’s double what it was 10 years ago, he said. Health care cost the city an additional $6 million.

“Imagine a private business having 25 percent of its revenue spent on pension and health care, not paychecks,” Klein said. “That is a drag on the budget. It means less of everything, less reinvestment, less infrastructure and less services.”

Cities and counties pay 18.9 percent of salary costs toward the pensions of non-hazardous duty employees (i.e. city administrators) and 35.7 percent of salary costs to the pensions of hazardous duty(i.e. police officers and firefighters), according to rates set by the KRS Board.

City officials in Fort Wright (population 5,700) referred all questions to their attorneys who said pensions cost the city $543,000 last year – $95 per person. The attorneys couldn’t say what the total budget for the city was.

Parry said they took the lead in filing the lawsuit on behalf of all Kentucky cities and counties. Fort Wright has asked a judge to separate the investments pools for the state employee pensions from those made for local employee pensions.

Fort Wright wants KRS to not invest CERS money into the same high risk pool as state employee pension money. Kentucky law limits county and city pension funds from investing in high risk investments, he said.

“I think Fort Wright saw it as an opportunity to benefit the citizens by getting the two funds separated for investment purposes,” Parry said.

The lawsuit accused KRS of making risky investments with money from city and county governments. KRS manages both the Kentucky Employee Retirement System (KERS) for state employees and CERS for county and city employees.

The lawsuit specified two investments in particular, a $24 million investment into a private equity fund known as the Camelot Group and a $200 million investment into a start-up fund called Arrowhawk Durable Alpha Fund. The founder and owner of Camelot Group was indicted for stealing millions from investors. Arrowhawk closed three years after the KRS board invested in it in 2009.

Since 2009, the KRS board has paid more than $50 million in management fees in order to invest CERS assets in these higher risk ventures, the lawsuit alleged.

KRS executive director Bill Thielen said he couldn’t comment on the lawsuit until the agency has reviewed it. The KRS Board has a meeting scheduled for June 11 to discuss litigation.

While pension costs for many cities have doubled or tripled in 10 years, they’ve started to reduce by a few percentage points in the past year. The rates for next year are also projected to go down about 1 percent, he said.

That’s because investment returns have improved, he said.

“We’re now eliminating the losses from the 2008-2009 recession plus we’ve earned double digit returns four of the last five years,” Thielen said.

That provides some relief to local governments. While pension costs haven’t forced any layoffs or drastic cuts in Campbell County, it leaves little room for error, said Robert Horine, county administrator. Pensions cost Campbell County $1 million out of a $36 million budget.

“We’ve been able to maintain service levels, but we’re always on the edge of our seats,” Horine said.