Kentucky Pension Fund: “Like a 3rd World Country with 2 Different Governments Claiming Power”

The Kentucky Retirement System may wind up illustrating William Gibson’s observation: “The future is already here – it’s just not evenly distributed.” It’s rapidly escalating from dysfunction and corruption at the fund level to disregard of the law at the executive level, even if supposedly to deal with the disaster more effectly. Is this sort of “might makes right” theory of political action on its way to becoming the norm in America in response to hopelessly partisan politics? Or to put it another way, are we to expect more and more Detroit-bankruptcy-style abrogations of democracy in the name of the supposed urgency of dealing with financial train wrecks?

By way of background, the Kentucky Retirement System is the worst funded in the US, with assets at only 19% of its projected needs. Former trustee Chris Tobe, author of Kentucky Fried Pensions, which described corruption on both the investment and funding side, has provided us with periodic updates, as well as the quote in the headline.

The current state of play is that the Republican governor and the Democratic attorney general are engaged in a turf war over whether the governor can exert control over the fund. By law, the trustees are supposed to be independent. Yet the new governor used an executive order to remove the board’s chairman in March. From the Financial Times:

Armed police officers are not a usual sight at pension board meetings.

Yet last month a number of state troopers were on standby when the board of Kentucky’s second-largest public pension scheme, which oversees $16bn of assets, convened.

Some of those attending the meeting assumed the law enforcement officers were accompanying the US state’s governor, Matt Bevin, to the session.

Instead, it transpired that Mr Bevin had sent the troopers to stop the chairman of the pension board from taking part in the proceedings. The state’s former governor — a political opponent of Mr Bevin’s — had appointed Thomas Elliott, a banker, to chair the board of the Kentucky Retirement Systems (KRS) in 2011.

Mr Bevin, a Republican, removed Mr Elliott from the board in March, several years before his term as chairman was due to end in 2019. The governor argued that the pension scheme needed a “fresh start”.

The day’s events, which were described by members of the public at the meeting as “shocking”, “terrifying” and “ludicrous”, are the latest example of the role politics has played in Kentucky’s pension woes.

A report at the Kentucky Chamber of Commerce publication that ran weeks earlier included some critical details that the pink paper omitted:

A meeting of the Kentucky Retirement System (KRS) Board of Trustees kicked off Thursday with an a claim by the KRS executive director that the system’s former board chair would be arrested if he participated in the meeting after Gov. Matt Bevin issued an executive order removing him from that position last month.

Board members and attendees of the meeting at KRS headquarters were informed by KRS Executive Director Bill Thielen that members of the governor’s office and the personnel cabinet were in the room, along with Kentucky State Police officers who Thielen claimed had been asked to arrest former KRS Board Chair Tommy Elliott if he participated in the meeting.

Elliott remained in the room during the meeting but not at the table with the board members. Because the board needs someone to preside over the meeting, board member Joseph Hardesty was nominated and served as chair for the meeting.

There was discussion about the board electing a new chair at the Thursday meeting, with Vince Lang being nominated, but those motions were delayed to avoid any more controversy at this point.

KRS is currently without an official board chair after Bevin’s replacement for Elliott, dermatologist Dr. William Smith, turned down the post Tuesday, the same day Attorney General Andy Beshear’s office issued an opinion stating Bevin does not have the authority to remove Elliott and that Dr. Smith did not have the qualifications to serve in the position.

The attorney general’s ruling is the official determination of what is legal. It is not permissible for the governor to remove the executive director. The state troopers are supposed to enforce the law, which means the attorney general’s interpretation. The fact that state troopers instead moves to enforce an illegal order, worse with the threat of arrest, is an banana republic level stunt. As a former trustee of different pension system remarked, “This is government at the barrel of a gun.”

Bevin continued with his illegal staffing measures. From the Lexington Herald-Leader:

Saying he wants to address the state’s $35 billion public pension shortfall, Gov. Matt Bevin on Friday abolished the Kentucky Retirement Systems Board of Trustees by executive order and replaced it with a new board that will have four additional members appointed by him.

“The reorganization will provide a more focused, expert vision and purpose, designed to carry out the objectives honoring the expectations of current retirees and employees,” the governor’s office said in a prepared statement.

The KRS board oversees $16 billion in assets for the retirement benefits of about 350,000 people employed by state or local governments or the Kentucky State Police. It faces billions of dollars in unfunded liabilities, due largely to the failure of state government to contribute recommended sums over most of the last two decades. At Bevin’s urging, an audit of the state pension system is set to begin in coming months.

A state retiree watchdog group immediately blasted Bevin’s order on Friday. It called for the previous trustees to sue the governor.

“The governor has granted himself extraordinary new powers over a board that is supposed to be insulated from political interference,” said Jim Carroll of Kentucky Government Retirees. “Moreover, his actions further marginalize the elected representation of Kentucky Retirement Systems members by stacking the KRS board of trustees with more appointees. We urge the legitimate KRS board to litigate this matter. We as stakeholders deserve nothing less.”

And despite the claim that Bevin wants to clean up a badly-run system, some of his picks look to be too close to the financial services industry for comfort:

Bevin’s order replaces the 13-member board with a larger 17-member board. Eleven trustees will be appointed by the governor, including four newly created positions Bevin filled Friday with William S. Cook of Louisville, who retired from investment firm KKR Prisma in 2015; David L. Harris, of Nicholasville, a senior partner and shareholder of financial services firm MCF Advisors LLC; Neil P. Ramsey of Louisville, who founded Ramsey Financial Inc.; and state budget director John E. Chilton of Louisville, a certified public accountant.

Read more here:

Needless to say the attorney general also lodged an objection:

In a statement, Attorney General Andy Beshear questioned Bevin’s “unprecedented actions” Friday, citing the governor’s decisions to remake both the KRS and University of Louisville governing boards.

“Lawmakers mandated that these boards be independent,” said Beshear, who previously has said that Bevin lacked the authority to strike Elliott off the KRS board in the middle of his appointed term. “My office is therefore closely reviewing today’s actions.”

Having said all of that, there is one move that Bevin plans to take that could have national ramifications:

KRS will be required to publish on its website all of its individual investment holdings and the fees and commissions paid on each, with quarterly updates. KRS already releases the total sums that it pays in investment fees and commissions per asset class, but it has carefully guarded the individual payments to each fund manager, saying that public disclosure with interfere with its ability to negotiate competitive terms.

KRS invests heavily in private equity but it is only a moderate-sized fund and many of its investments are in fund of funds. Nevertheless, disclosing fees quarterly by manager, whether gross or net fees, will still crack open the transparency door further, and demonstrate that the private equity industry’s contention that more fee disclosure is somehow competitively harmful is hogwash.

The governor’s press release also stated that:

All individuals associated with the investment and management of retirement system assets, whether contracted investment advisors, board members or staff employees shall adhere to the “The Code of Ethics and Standards of Professional Conduct” the “Asset Manager Code of Professional Conduct” ……promulgated by the CFA Institute.

Chris Tobe pointed out via e-mail:

Over 1300 firms like KRS managers PIMCO, Northern Trust, BlackRock, Loomis Sayles, and Columbia Asset Management have signed on to the Asset Manager Code of Professional Conduct. However many of the private equity and hedge funds owned by KRS do not. These firms include hedge funds like Blackstone,Luxor Capital, Magnetar, Prisma, Pacific Alternative (PAMCO), Tortoise capital, real estate funds like Harrison St. and Walton Street, and private equity firms like GTCR, Harvest Partners, OakHill, Tenaska Power, and Vista.

The wee problem is that KRS has no leverage to get any existing private equity managers to agree to adhere to the CFA standards. The general partners have the state’s money. They will just ignore this demand.

If KRS says it won’t respond to capital calls as a result, the limited partnership agreements have draconian sanctions for failing to meet a capital call, such as seizing the defaulting party’s portion of fund assets and distributing them to the other partners.

So as much as action to deal with the dire state of the Kentucky pension system is long overdue, the governor’s use of police to get his way is an alarming precedent. And the lack of an outcry in the local media means this alarming precedent may be on the way to becoming yet another bad new normal.

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  1. Barry

    KRS infests heavily in private equity

    I think this is a typo. Don’t the private equity firms infest KRS?

  2. oliverks

    Am I reading that right, they have $16 billion for 350,000 current and potential future retirees. Isn’t that just $46K per person? How much are they paying out a year?

  3. inode_buddha

    I recall my Dad resigning from his position as a engineering professor in the 1970’s because the Illinois state system was only funded at something like 15%. This was during the Watergate scandal. He eventually went on to some quite comfortable positions in the private sector and retired quite well off. Makes me wonder what happened to all those who stayed behind in the Illinois system tho. I wonder how other states are — but the fact that it is happening *at all* is not good.

        1. David

          No it isn’t. Illinois has 125 billion in pension debt ad GO bonds not a large number for a state with a 3.5 percent income tax and a 700 billion dollar economy. Illinois has a willingness to pay issue but that now applies to to vendors ……Also your math does not include their 2 which according to the head of TRS will pay off part of the debt. Illinois pension cuts were the anti public worker Alec target and it failed.

          1. apber

            So it’s immaterial that the current tax burden is far too onerous for the working stiffs, and businesses? Those who can leave are leaving in droves. What happens when the total tax revenue is required for pension expenses? No amount of new bond issuance will cure this problem; it will only exacerbate it.

            1. David

              What high taxes in Illinois. Illinois is only high on property. Income is a flat 3.5 percent and no one is leaving in droves…at least not until Bruce Rauner started looting the state like Bevin. Illinois is the least taxes state of you are a billionaie

  4. mle detroit

    Bevin auditioning to be Trump’s VP? Qualified by management experience – Putin style!

  5. Lambert Strether

    Noting that the size of the new board is 17, see Parkinson’s Law:

    But that the coefficient of inefficiency must lie between 19 and 22 is now very generally agreed.

    What tentative explanation can we offer for this hypothesis? Here we must distinguish sharply between fact and theory, between the symptom and the disease. About the most obvious symptom there is little disagreement. It is known that with over 20 members present a meeting begins to change character. Conversations develop separately at either end of the table. To make himself heard, the member has therefore to rise. Once on his feet, he cannot help making a speech, if only from force of habit. “Mr. Chairman,” he will begin, “I think I may assert without fear of contradiction– and I am speaking now from twenty-five (I might almost say twenty-seven) years of experience– that we must view this matter in the gravest light. A heavy responsibility rests upon us, sir, and I for one…” Amid all this drivel the useful men present, if there are any, exchange little notes that read, “Lunch with me tomorrow– we’ll fix it then.”

    17 is very close to 19…

  6. Paul Hirschmann

    Why are Americans, in-your-face types for most purposes, so enthralled by hedge-funders, and bankers? Is it some kind of creeping, and creepy, slave mentality? Look at the meat-and-potato issues that get hundreds of thousands of Frenchmen into the streets to shut down government. Where I work well-paid, highly educated, people are deeply afraid to say anything the least bit controversial about anything. And these people have job protection and guaranteed pensions behind them, not to mention statewide political organizations. Their personal cowardice is stunning. I used to think they’d fight if they saw their own ox being gored, but I wonder these days whether I was a bit too optimistic. Will anything get them worked up?

  7. Winston


    Since you will be coming across more state interventions in local finance train wrecks, I think you need to understand the options. The best system, because it is proactive and avoids this is the North Carolina system.

    See links to related info here:
    The State Role in Local Government Financial Distress
    Fiscal Indicators:
    A Proactive Approach to Local Government Financial Assistance
    Policy Initiative Spotlight: North Carolina’s Local Government Commission state/local-governments-in- north-carolina-better-off.html
    Local Governments in North Carolina Better Off Because of Unique State Agency


  8. TheCatSaid

    Amazing story. The use of law enforcement is alarming–are there ways that citizens can fight back when an executive oversteps their legal authority? Can an AG have a Governor arrested?

  9. Chris Tobe

    It is important to point out how abusive and corrupt the current regime at KRS is. As a trustee I was threatened, bullied, in secret closed meetings by former policemen. So I am not opposed to regime change, and find these methods small in proportion to the current regimes more subtle and less publicized uses of power. I am very supportive of the Governor’s transparency initiative which include competitive bidding or RFP’s for the first time for Private Equity and Hedge Funds and the CFA codes of conduct.

  10. Dave

    “The attorney general’s ruling is the official determination of what is legal.”

    That’s a dubious claim. It indicates the official view of the AG’s office and the position that the AG’s office would argue in court, but AG opinions aren’t binding in the same sense that court rulings are. As a matter of typical practice I agree that government officials should follow an AG opinion, but there’s also a reason that they’re called “opinions” and not “rulings”. Seems like the correct answer here is for the issues in this opinion to end up in court ASAP.

    As for the issue of trustees being “too close to the financial services industry”, that’s a common conundrum in getting people with relevant experience. Indeed, the AG opinion said that the governor’s appointed board chairman didn’t meet a statutory requirement of at least 10 years of “investment experience”. Working in the industry isn’t the only background that qualifies, but such people are a big part of the pool. See

    1. Yves Smith Post author

      Attorney general opinions are authoritative for state agencies. State troopers are part of the administration. See North Carolina as an example:

      The Attorney General may issue legal opinions to state agencies and officials…

      While these opinions do not have the full effect of law or court order, they provide the State’s interpretation of the legal question presented and should be complied with by State agencies and officials…

      The Attorney General is not authorized to provide legal advice or give legal opinions to the public.

  11. Roland Petit

    Today in this country “anything goes” to screw the average “Joe.” That’s the “American Way.”

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