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PE targeted in Kentucky pension lawsuit

KKR, Blackstone and Carlyle are named as defendants in a class action lawsuit filed by Kentucky public schoolteachers against the Kentucky Teachers’ Retirement System.

A group of public schoolteachers has filed a federal class action lawsuit in the US District Court of Western Kentucky against the Kentucky Teachers’ Retirement System (KTRS), claiming mismanagement of the pension. The plaintiffs charge the system with failing to adequately address its “dire” funded status, illegally raising teachers’ contributions and improperly investing in private equity funds.

The suit names private equity firms KKR, The Blackstone Group, The Carlyle Group and Rockwood Capital as defendants, claiming that the underfunded pension system inappropriately increased its exposure to private equity during the past eight months by making 8 new commitments worth $595 million.

According to the lawsuit, KTRS’ investments in “high-risk alternatives,” such as private equity, violated various Kentucky statutes due to the lack of disclosure of fund terms and the failure to confirm compliance with a mandated code of ethics.

The lawsuit further alleges that KTRS, in “back-room deals” with state officials and school employee associations, forced teachers to contribute nearly 13 percent of their salary to the retirement system, up from 9 percent, without just compensation, thereby violating the US Constitution’s “takings clause,” among other clauses.

The suit borrows from a November complaint filed against KTRS by Randolph Wieck, one of the current plaintiffs. The previous lawsuit, filed in a Jefferson County Circuit Court, was dismissed for improper venue. Wieck filed the first suit alone, while Monday’s suit includes plaintiffs Betsey Bell and Jane Norman and cites “all other Kentucky teachers who are members of [KTRS].”

In a conversation with Private Equity International's sister publication pfm, KTRS general counsel Beau Barnes said he had not yet been served with the latest complaint, but described the November suit as “without merit” and containing “a lot of allegations that were demonstratively false.”

The plaintiffs are demanding that the Court find the contribution increase unconstitutional, and that KTRS amend its investment guidelines to allow “only investments appropriate for fiduciaries” and investment managers “willing to contractually agree to State ethics requirements.”

As of its last audited annual financial report on June 30, 2014, KTRS was only 53.6 percent funded. The standard for a healthy pension is 80 percent or greater, according to the Government Accountability Office. The teachers say KTRS actively covered up the fact that it is one of the worst-funded pension systems in the country.