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Wed June 4, 2014
Kentucky City Sues State Pension System Over Risky Investments
A Kentucky city is suing the state's public pension system over its investment of county employees' retirement money into "risky" hedge funds.
An attorney for Ft. Wright, a northern Kentucky city of 5,700, filed a class-action lawsuit Monday alleging that Kentucky Retirement Systems improperly used money from one of its subsidiary funds to make investments that were illegal under state law.
The civil suit, filed in Kenton Circuit Court, alleges that KRS put an "unreasonably large percentage" of money from a subsidiary fund -- County Employment Retirement System (CERS) -- in "high risk investments which are not appropriate investments for fiduciaries under the common law of Kentucky."
KRS has come under increasing scrutiny over the last couple of years due to poor performance, investments in risky hedge funds and, more recently, the handsome fees those hedge funds reaped from its contracts with the state's beleaguered $15 billion pension system. KRS was recently named among the worst-funded pension system in the nation, at under 24 percent funding.
The lawsuit seeks a court order of damages in total of at least $50 million, which Ft. Wright argues was spent on "management fees" charged by hedge funds and private equity groups per KRS' investment strategy. The lawsuit also seeks to establish a separate investment portfolio for the subsidiary fund, CERS. This would effectively divorce it from the current system whereby CERS' assets are "co-mingled" with KRS.
The city's lead attorney on the case, Ronald Parry, says that in doing so, CERS funds and the local government employees who pay into it wouldn't be financially tethered to the bad investments made by KRS.
"What we would like to achieve by this lawsuit is that they have to be invested in separate portfolios," Parry said.
Parry said that the basis of the lawsuit boils down to a matter of law. Assets held by the CERS cannot be legally invested into hedge funds because KRS is prohibited from doing so under state statute. Specifically, Parry said the law -- KRS 386.020 -- provides a list of "authorized investments for trust funds," and hedge funds aren't included on that list.
The lawsuit would affect about 500 CERS member entities across the state. If successful, the suit could set a precedent for other city and county groups seeking to divorce themselves from KRS.
On Friday, a federal judge in Louisville ruled quasi-governmental agencies that participated in KRS' non-hazardous pension plans are private entities, and can flee the ailing system to escape rising pension costs.
Some parts of the state are already trending in that direction. Republican Louisville Metro Councilman and 33rd House District candidate Jerry Miller sponsored a resolution which advocates that metro government employees under CERS be emancipated from KRS. The resolution recently passed the Council.
That under-funding scenario was created in large part by the Kentucky General Assembly and the governor, whom have funded the KRS at lower-than-recommended rates for the better part of the last two decades.
The under-funding of pensions by lawmakers also prompted legal maneuverings by a group of Jefferson County public school teachers, who are pursuing a lawsuit of their own against the unrelated Kentucky Teachers Retirement System over billions in unfunded pension money.
Todd McMurtry, a city attorney for Ft. Wright, said the city wants out of KRS for two reasons.
"The city believes that it will be able to limit its exposure to the Kentucky Employee Retirement System, and also hopefully stem the ... annual increases that occur in paying for the retirement system overall."
"By co-mingling [the funds], we're paying these huge costs to hedge funds that we shouldn't be paying, and we're being exposed to higher risk that we don't need to take on," he said.
McMurtry also said that it's unfair that city and county governments, whom have to pay higher contributions into the CERS, pinch their pennies when the KRS does not.
"I think, locally here, people are very fiscally conservative," McMurtry said.
The KRS board of trustees has called for a special meeting tomorrow morning at 9:30 a.m. in Frankfort to discuss "pending litigation" in a closed executive session.