It’s a safe bet that many people, seeing their work described in print as “among the worst in the country,” might cringe and try to avoid the media.
But David Eager has spent the past five years running the Kentucky Public Pension Authority, with an eye to turning the system around. A big part of his work has been increasing transparency and educating people about the nitty-gritty of public pensions, how Kentucky got into the mess it’s in, and how it’s going to get out.
Eager reached out to MarketWatch to talk more about his work. “There’s a good story to tell here, but it doesn’t get heard that often, and it’s going to take a long time for it to play out,” he said.
Public pensions often are referred to as “deferred compensation:” public-sector employees take lower salaries than they’d receive in the private sector in exchange for some certainty in retirement. It’s up to their employers — states, cities, school districts, transportation agencies, and so on — to provide that certainty. Kentucky has failed at that mandate on its roughly $12.8 billion pension system for more than a decade, as legislators declined to pay even half of what was needed to keep the system whole.
Eager spoke with MarketWatch about some of the policy changes he’s helped nudge the state to implement, what people often get wrong about pensions, and more.
The interview below has been edited with an understanding that pension-speak often includes a fair amount of jargon and policy specifics.
MarketWatch: What did you think when you see Kentucky’s pension systems described as one of the worst-funded in the nation?
David Eager: I thought it was accurate. No question it was accurate. The facts were straight. It’s unfortunate we are where we are, but for the past five years we have been working to change the benefits to get the system going in the right directions.
MarketWatch: What in your background prepared you to take this on?
Eager: I don’t take a whole lot of credit for this. We have a nice relationship with the legislature. It’s improved significantly. There’s just been a lot of mistrust. Some of it may have been deserved and a lot wasn’t. I think we have become so transparent. That has helped. We’ve listened, we’ve had meetings, we’ve explained things. And the legislators have become more knowledgeable.
My background, I spent about ten years at Gerber as the contact with the actuary, so I got an education in actuarial science. I got to really understood the financial dynamics of pension funds.
I spent a number of years as a consultant helping pension funds with asset allocation, picking their managers, I was a consultant to the Washington, D.C. pension system when the federal government set it up. I got to understand the politics of public pension funds. I started a firm that consulted to pension funds and did market research and we spent a lot of time inside firms, over 100 firms from as big as BlackRock to as small as startups.
I was asked to go on the board of the (Kentucky) retirement system in 2016 and then the executive director announced he was retiring earlier than they thought and there was no transition plan. I stepped in and found it extremely rewarding, very interesting, very challenging. I’ve done it permanently since 2018. I have found the political aspect of it, dealing with the governor’s office and legislature, is fascinating. I’ve always been interested in politics and history and to see it in action is interesting to say the least. To see that you can effect positive change.
I tell the story, in September 2016, my first month on the job, I went to a retirees’ meeting, and after I talked, this woman came up to me and said, ‘I’m scared. I have no money, my only source of income is the retirement from the pension fund and I’m reading in the paper where it’s going to go broke,’ and she started to cry.
So I say to our staff, we have 130,000 retirees who once a month go out to their mailbox and get a check for their rent, their groceries, their haircut. They depend on us. It is tremendously rewarding to know that you have an impact like that on people. That’s been a real satisfying element of this job. When I was consulting to money management firms, I spent that 24 years making rich people richer. I’m happy I had a chance to do this.
MarketWatch: Can you take us through your efforts to get the plans back on track?
Eager: Senate Bill 2 of 2013 created a (third tier of employees). Tier 3 is a cash hybrid plan. (MarketWatch note: “hybrid” plans try to meld some characteristics of defined-benefit plans, like pensions, with some characteristics of defined-contribution plans, like 401(k) plans. While they do remove some funding variability for employers, they have drawn some criticism for not being as generous to employees or as certain for employers as proponents say.)
Any new employee in the system goes into the cash hybrid plan. I would describe it as meaningfully better than a 401(k) plan. The cash hybrid guarantees a 4% return each year over a five-year smoothing period. At the end, employees can take the money or an annuity. It doesn’t have the flexibility of people picking their options — the investment options are picked by the system.
The second part of SB 2 required that the state budget pay the full ARC (MarketWatch note: ARC stands for “actuarially required contribution”). We had had a period 12 years in a row where the state didn’t pay the ARC, and on average only paid about 40%. That’s a major contributor to how we got to be so poorly funded.
The third thing was coming to the realization that the assumptions we were using were not conservative enough. In 2017, the board of trustees of the retirement system reduced the return assumption on all 5 pension plans. That required a much higher ARC. (MarketWatch note: if you assume investments will return less, you must contribute more to come to the same outcome. The Kentucky state plans now assume investment returns of roughly 5-6%.)
(In some cases) the employer contribution rate went from 49% to 73%. If you’re going to get out of a 14% funded position you need to have a substantial contribution. It’s painful. Raising taxes is not popular and there’s a pretty strong commitment not to raise taxes. So if the pension fund, all of a sudden, needs an extra dollar, it’s got to come from someplace else. I give the legislature and two or three governors a lot of credit for making hard decisions. They were dealt a bad hand. Where do you cut? They’ve had to make really hard decisions and I give them a heck of a lot of credit for doing it.
You have to fix a crumbling bridge this year, but you don’t have to fix a crumbling pension immediately, it can be next year. But if you don’t fix it, the day of reckoning comes. I never want to see a time when we have to take a big bite like we did, going from 49% to 73%. Our state police contribution rate is 146%. That means if someone makes $50,000, they’re putting in nearly $75,000 for the benefit. We will be watching more frequently, and if there are changes to be made, they’ll be made in smaller increments.
House Bill 8 was passed in 2021. (MarketWatch note: some state agencies had been trying to avoid paying pension benefits by outsourcing their jobs, which pushed a disproportionate amount of the pension burden onto others. The 2021 legislation allocated a more equitable amount of the entire unfunded liability as of 2019 to every participating agency, to be paid down over 30 years.)
The hole (unfunded liability) is $16.5 billion. You’re going to pay your portion of that for the next 30 years. We’ve effectively assigned you a mortgage.
MarketWatch: I bet people loved that.
Eager: The bad guys (figuratively), that should have been paying more, are going to pay more. And the (departments) that were paying more than their share don’t have to now. Most (departments) went down. The challenge for the legislators who came up with the bill and the budget director and governor was, how do we take care of those people who will have real dramatic increases? They had to be provided with some subsidies almost on a case-by-case basis.
We’re on track. We’ve got the train on the track now. There’s no assurance that trustees of the system won’t decide sometime in the future that the assumptions ought to be more liberal, but I remind them all the time: you are fiduciaries for the members, not the employers. I’m sorry, but they have to pay even if it pains them.
MarketWatch: You and I have talked a bit about how the average American who doesn’t have a public pension doesn’t really understand them, doesn’t really understand the system. What are some of the biggest misconceptions or misunderstandings you encounter? What do you wish people understood?
Eager: I have people say, why didn’t you pay the full ARC? I say that’s not our decision, that’s a legislative decision. There’s a lot of misunderstandings. There’s still distrust. We had an issue many years ago, maybe 10-11 years ago with a placement agent. That’s someone who starts a firm and is the salesperson for maybe three or four firms competing against each other. We had someone who said he would help us find investment firms. Unbeknown to us, he was marketing these firms, he would get a commission for getting them clients. We lost a lot of credibility. Understandably.
MarketWatch: There has been some scholarship in recent years that suggests it’s not necessary to fully fund pension systems — that is, to make sure 100% of the money needed for all current employees and retirees for a 30-year period is on hand, mainly because public pension systems and their sponsors will never go out of business. How do you think about the right level of funding?
Eager: I think the right funded level is 100%. You’ve created a liability. You might not go out of business but you’ve created a liability. I was asked that same question in the legislature and I said 100%.