FRANKFORT, Ky.-Commonwealth Credit Union, which has been participating in the state of Kentucky's pension program for its employees, may have to account for a pension funding shortfall that could take a multi-million-dollar bite out of its capital, according to several sources.
At least one analyst believes the outstanding amount could be as much as $60 million. The credit union has declined several opportunities to provide comment.
The $925-million Commonwealth CU has been participating in the Kentucky Employees Retirement System (KERS) since 1974. Sources, along with news reports, indicate KERS is in deep trouble, and like many state pension funds is severely under-funded, having about 30% of the money it's expected to need for future pension checks. Currently, CCU has not been required to account for its portion of the KERS' unfunded liability-which was $11.7 billion in total for KERS, as of June 30, 2011-because the liability rests with the pension system, not its employers. However, that is changing under new Governmental Accounting Standards Board (GASB) rules. For fiscal year 2014, KERS will split out and pass down to all program participants their share of the underfunding.
According to Lowell Reese, editor and publisher of Kentucky Roll Call-a public affairs reporting and publishing company-who has been covering the state's pension program troubles, "CCU will then be responsible for, and will thereafter report its own unfunded liability. It may have to set aside a reserve to cover its unpaid amount of the actuarially required contribution (ARC), if not pay for it."
A review by Credit Union Journal of Commonwealth CU's June 5300 Call Report did not show any apparent accounting for the potential liability.
New Accounting Standards
William Thielen, executive director at KRS, Frankfort, Ky., concurred that by fiscal year 2014 all KERS employer participants will have to account for their part of the shortfall, but said how the shortfall will be funded, such as through increased annual employer contributions, has yet to be determined by the KRS board, after which it will have to be approved by the state legislature.
"The new GASB standards require us to determine each participating employer's share of the unfunded liability and they will have to report that on their financial statement."
Thielen said that despite Commonwealth falling under FASB guidelines, not GASB accounting standards, it still has to comply with the new accounting rule since it is a pension program participant. He emphasized that the new GASB rules are accounting requirements and not funding requirements, and that the KRS board will have to determine how the shortfalls will be made up.
"The contribution rate that Commonwealth and all participating members pay will be set by our board, as it always is. However, I am not sure at this juncture the impact on the contribution rate. We will explore that with our actuaries."
But one person, Chris Tobe, a pension program consultant who heads Stable Value Consultants in Louisville, Ky., and who was formerly a KRS board member, has made some estimates on Commonwealth CU's exposure, and said the CU's unfunded, undisclosed liability in pension payments to the state could approach $60 million.
"KERS is a horrible disaster of a pension plan. It's one of the worst, if not the worst-funded state pension plan in the U.S.," said Tobe, who has feuded with KRS over the fund's governance and payments to investment firm middlemen. "Commonwealth is on the hook for all the years they have not paid the full annual pension payment, and it could come out as a lump sum payment or as an increase in future payments."
For all the potential bad news Commonwealth CU's potential liability may represent, there is good news in that CCU is highly capitalized. Whether or not Commonwealth pays now or down the road, simply having to account for the shortfall will put a good-sized dent in its capital position. However, the CU appears to be able to absorb a big drop, with capital ($169.5 million) at 18.18% today.
No Comment Offered
Credit Union Journal and its sister publication, American Banker, reached out several times to Commonwealth for comment but did not receive a response. Credit Union Journal also contacted Kentucky's Department of Financial Institutions, which claimed to need more time to understand the potential impacts of the GASB rules that could affect Commonwealth or any other credit union participating in a state pension program.
"The GASB statements are new guidelines that have not yet been implemented and are extremely complicated," said Kelly May, public information officer for the Kentucky Department of Financial Institutions. "We are assessing the impact to the financial institutions in Kentucky, and we will develop an appropriate regulatory response. The Department of Financial Institutions will work with financial institutions to implement the new requirements."
NCUA declined comment, saying it is a matter for the state regulator. The agency also declined to provide an estimate on the number of CUs that participate in state pension programs.
Regulators Need To Pay Attention
Tobe believes regulators should be paying attention. "If CCU were to go under, then KRS would sue the NCUA to fund the unfunded liability. If I was still on the KRS board, I would approve that."
It's important to note that given its capital position, Commonwealth CU is in no danger of experiencing financial difficulties due to the liability.
The underfunding has resulted from the Kentucky state legislature in recent years not making full annual payments to the pension system. Participating employers are only required to pay the ARC at the same pace as the state legislature. All of the entities in KERS, the credit union and all other participants, have paid less than 50% of the ARC each year for at least the last seven years, explained Tobe.
Tobe said he based his $60-million estimate on a report that indicated the budgeted rate paid by the state, and therefore plan participants, was about half of the recommended contribution rate since 2004. For example, in 2011, the recommended rate was 32.75% and the budgeted rate was16.98%.
