LOUISVILLE - One of Kentucky's public pension systems lost $69 million because it unknowingly purchased risky mortgage-backed securities in the run-up to the 2008 housing market crash. But Thursday, the system got $23 million of those losses back in an unprecedented settlement with Bank of America and its related companies.
Democratic Attorney General Jack Conway announced the settlement along with the federal Department of Justice and attorneys general from five other states. The $23 million settlement covers $21 million in losses the retirement system suffered specifically from securities purchased from Bank of America and its subsidiaries Countrywide and Merrill Lynch.
"This is a bold step for Kentucky (because) historically the commonwealth of Kentucky and the Office of the Attorney General has not been one of the lead states in one of these financial fraud cases," Conway said. "We're very proud to be able to recoup this money for our beleaguered pension systems."
Kentucky Retirement Systems administers five public pension plans in Kentucky. Those plans are paid for with a mix of public money, state employee contributions and investment returns.
One of those five plans, the Kentucky Employees Retirement System, includes state government workers, non-teaching staff at state universities and workers at 13 community mental health centers that are considered quasi-governmental entities. State officials estimate that system has a $17.1 billion shortfall, making it the worst funded pension system in the country, according to Fitch Ratings.
The $23 million settlement will not solve that system's financial problems, but the retirement system's executive director said it was a "welcome event."
"We always want to receive additional funds that will go toward eliminating or reducing an unfunded liability," William Thielen said. Thielen said the $23 million settlement is by far the system's largest fraud recovery in the 16 years the system has been actively filing lawsuits to recover losses. Since 1998, the system has recovered $25.6 million through various settlement agreements.
Some of the $23 million will go to pay legal fees for the state attorney general's office, which handled the case on behalf of the retirement system. Conway said he did not know how much the fees would be, but said it would be a small amount and almost all of the money would go to the retirement system.
The settlement money will not benefit the Kentucky Teacher's Retirement System, which is separate from Kentucky Retirement Systems. A spokesman said the teacher's retirement system did not invest in mortgage-backed securities. The Kentucky Teacher's Retirement System had an unfunded liability of $13.8 billion as of June 30, 2013.
In addition to the $23 million for the retirement system, Conway said Kentucky is guaranteed a share of $150 million in consumer relief. That money can be loaned in distressed communities of Kentucky or used to help modify troubled mortgages with a lower interest rate.
Consumers can call 877-488-7814 for more information about the settlement and how it could benefit them.