Commonwealth of Kentucky Pension Performance and Best Practices Analysis Report #3: Recommended Options August 28, 2017

In conjunction with:

PRM Consulting Group Stites & Harbison PLLC

I.

Executive Summary ............................................................................................................. 3

II.

Overview .............................................................................................................................. 3 A. Actuarial Method and Assumptions .................................................................................. 6 B. Benefit Levels and Risk Exposure .................................................................................. 11 C. Funding ......................................................................................................................... 25 D. Investment Practices and Governance Approach .......................................................... 30 E. Fiscal Impact: Developing a Balanced Approach toward Sustainable Benefits............... 33 Recommendations: Actuarial Assumptions ........................................................................ 41

III.

Recommendations for Actuarial Method ............................................................................. 42 Recommendations for Actuarial Period .............................................................................. 42 Recommendations for Earnings Assumption/Discount Rate ............................................... 43 Benefit Levels and Risk Exposure ...................................................................................... 47

IV.

Plan Alternatives ................................................................................................................ 47 Recommended Options for Future Hires ............................................................................ 54 Recommended Options for Current Employees and Retirees ............................................ 55 Replacement of Income at Retirement ............................................................................... 58 Retiree Healthcare ............................................................................................................. 71 Funding .............................................................................................................................. 76

V.

Recommendations for Funding Method .............................................................................. 77 Recommendations for Funding Alternatives ....................................................................... 79 Investment Practices and Approach ................................................................................... 83

VI.

Fiscal Impact of Recommendations.................................................................................... 89

Scenario Estimates ............................................................................................................ 89 Cash Flow ........................................................................................................................ 106 Voluntary Buyouts ............................................................................................................ 110 Appendix A: Glossary .................................................................................................................. 112

Pension Report #3 Recommended Options

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I. Executive Summary Overview In the aggregate, the Commonwealth of Kentucky’s pension plans are among the worst funded in the nation. Without corrective action, the large and growing unfunded liabilities associated with these pension benefits not only threaten the retirement security of plan participants, but they are also eroding the fiscal stability of the state – recently ranked among the bottom five in the nation. 1 As