With eroding funded status, three large Kentucky retirement systems, KERS-NH, CERS-NH, and TRS, have had negative cash flow for at least seven recent years. Cash flow is defined as inflows (employer contributions, employee contributions, dividends and interest) reduced by outflows (benefit payments, administrative and operating expenses).
KERS-NH has had severe negative cash flow of over $100 million every year since at least FY2002. TRS has had negative cash flow nine of the last ten years, with the only exception being FY2011 when the proceeds of a $465.4 million pension obligation bond boosted system assets on a one-time basis. For CERS-NH, while the magnitude of the negative cash flow is smaller, it is nonetheless consistent and has increased in recent years.
In the near-term, negative cash flow requires the liquidation of assets to meet current obligations. This makes it more difficult to achieve investment goals and forces a more conservative investment strategy that allocates a relatively larger share of assets to marketable investments.
Over the longer-term, negative cash flows can ultimately threaten the solvency of the plans.
Total Kentucky Pension Fund Cash Flows FY2006-FY2016
Inflows + Interest/Dividends – Outflows ($ in 000s)
The at-risk condition of the KERS-NH plan in particular is highlighted by comparing the fund’s current investment assets to the annual benefit payments. As of year-end FY2016, the KERS-NH fund had assets of just under $2.0 billion, which represented barely two years (783 days) of benefit payments on hand. Considering that KERS-NH lost $2.2 billion in plan assets in FY2008-FY2009 economic downturn, it is apparent that the system’s viability is at risk.
Source: PFM Group Consulting report, May 22, 2017. For more information about this topic, click here to see relevant portions of that report.