How a Gang of Hedge Funders Strip-Mined Kentucky’s Public Pensions

Hedge Fund Dogs

In April 2008, a longtime investment adviser named Chris Tobe was appointed to the board of trustees that oversees the Kentucky Retirement Systems, the pension fund that provides for the state’s firefighters, police, and other government employees. Within a year, his fellow trustees named Tobe to the six-person committee that oversees its investments, becoming the only member of the committee with any actual investment experience. It was an experiment in fiduciary responsibility that ended badly. “I started asking questions when things weren’t sounding right,” Tobe said. “And a secret session was held where they voted to kick me off.”

Several weeks after he was removed, the remaining members of the committee approved a $200 million investment in a hedge fund called Arrowhawk Capital Partners. Tobe, though he remained a trustee, only learned about the deal after the fact, while reading the magazine Pensions & Investments.

In the years since that big Arrowhawk play, Kentucky’s public pensions have descended into financial crisis, a crisis that threatens to have ripple effects across the state. “Poor, rural counties in Kentucky have two major economic drivers,” state Rep. Jim Wayne explained. “One is the school system and the other is the courthouse. Most of them have no other industry.” Of the 120 counties in Kentucky, Wayne said, “government jobs is the No. 1 employer.” By 2016, the credit rating agency Standard & Poor’s declared Kentucky’s the worst-funded state pension system in the country. At that point, the state was meeting only 37.4 percent of its funding obligation — half the national median of 74.6 percent.

Tobe had never heard of Arrowhawk, and he quickly figured out why: Arrowhawk was a new fund whose first investor was the Kentucky Retirement Systems, or KRS. During his tenure as a trustee, KRS staff had proposed moving 5 percent — roughly $650 million — of the pension’s total holdings, then invested almost entirely in a mix of stocks and bonds, into large, established “funds of funds” — vehicles that allow investors to buy a basket of hedge funds, rather than risking everything on a single fund. Instead, the staff had steered the investment committee in 2009 to a startup fund with no track record. Tobe pressed the issue at several public meetings of the KRS board and eventually, in 2010, an internal audit revealed that Arrowhawk paid more than $2 million to a middle man named Glen Sergeon to land Kentucky as a client. KRS’s chief investment officer resigned during the course of the investigation (only to land a private-sector job as a managing director at a giant investment consulting firm). “Bad publicity, along with mediocre performance, sealed the fate of Arrowhawk,” Tobe wrote in his self-published book, “Kentucky Fried Pensions.” Two and a half years after Kentucky selected the firm for its first-ever hedge fund investment, Arrowhawk shut its doors.

More hedge fund investments followed, and Sergeon’s fingerprints were again on more than a few. In all, according to a subsequent probe by the state auditor, seven money management firms paid Sergeon a combined $5.6 million to persuade officials at KRS to entrust them with retirement dollars. That included Crestview Partners, another relatively new hedge fund, which paid Sergeon’s firm $1.1 million. Critics charge that the success of many placement agents, as intermediaries such as Sergeon are called, depends on their willingness to engage in various forms of pay to play, whether that means by contributing to the political campaigns of public officials with influence over a pension or by offering them lucrative jobs, consultancies, or loans. But in Kentucky, as in most states, it’s perfectly legal for hedge funds or private equity firms to employ placement agents — so long as they aren’t caught violating a fairly recent rule that bars them from giving campaign donations or financial benefits directly to public officials while those officials are in a position to send hundreds of millions of dollars to their clients.

Tobe suspected placement agents of bending the rules in Kentucky. In 2010, he filed a formal complaint with the Securities and Exchange Commission about the undue influence of placement agents in the state. The internal audit showed that in this one medium-sized state, in just five years from 2004 to 2009, placement agents were paid nearly $12 million to steer KRS business to clients. One placement firm, the Park Hill Group, until 2015 a subsidiary of Blackstone, a giant of the private equity world, collected $3.8 million in fees from 2005 to 2008. Together, Blackstone and Park Hill employ six lobbyists in Frankfort, the state’s capital. In all, according to the probe by the state auditor, placement agents secured $1.3 billion in investments for its Wall Street clients. And yet, Tobe said, “these early investments didn’t produce anything like the returns people were promising.”

A cautionary tale, perhaps. But it failed to give Kentucky pension officials pause. Despite scandals and poor performance, the staff, with the trustees’ blessings, shoveled even more of the state’s pension dollars into alternative investments, including hedge funds and private equity. The planned 5 percent for hedge funds doubled to 10 percent; additional funds were gambled on private equity. Today, 29 percent of KRS’s funds are invested in alternatives — well above the national average.

“The most important thing we do as fiduciaries is diversify our assets,” said Richard Robben, KRS’s interim chief investment officer. To Robben, alternatives add variety to a $17 billion pension fund that otherwise would have all of its money in stocks, bonds, or money market accounts. “It’s like grandma said, ‘Don’t put all your eggs in one basket.’”

Yet Kentucky’s heavy reliance on alternatives has come at a steep cost. Hedge funds and private equity typically charge “2 and 20” – 2 percent of every dollar invested, plus a 20 percent share of any profits. That works out to fees roughly 10 times what a pension fund would pay to invest in a plain vanilla stock fund. In 2009, the year it began investing in hedge funds, KRS paid $13.6 million in annual management fees. Five years later, that figure had ballooned to $126 million, according to a study KRS itself commissioned — more than twice as much as it had publicly disclosed in its 2014 filings. And that higher figure still didn’t capture all the millions of dollars in those 20 percent “performance fees” that hedge funds and private equity collect — sometimes many years into the future, after the sale of a successful venture — before distributing profits to investors. That same study underscored a second cost: Kentucky’s gamble on alternatives has proven a lousy investment. Had KRS simply matched the performance of the median pension fund in the five years ending in December 2014, the pension would have produced an additional $1.75 billion in earnings. If it had invested in a basic index fund matching the Russell 1000 (the country’s 1,000 largest public companies), KRS would have earned another $9 billion. Even investing the entire pension fund in a long-term bond fund — as safe an investment as there is, short of leaving it all in cash — would have meant hundreds of millions of dollars in additional profits during those five years.

Yet, incredibly, KRS kept investing massively in alternatives. It was only in 2017 that the KRS board voted finally to trim its holdings of hedge funds. Yet the fund continues to invest heavily in private equity. “There’s definitely been a ‘Hail Mary’ attitude in Kentucky,” Tobe said, a strategy of taking greater risks in the hope of making up yawning pension deficits. “But to me what it really boils down to is political corruption.” He’s hardly alone in that view. Former Goldman Sachs banker Susan Webber, writing as Yves Smith on the financial website Naked Capitalism, described KRS as “a contender both [for] the title of the most corrupt and the most incompetent public pension fund in the U.S.” Smith argues that Kentucky’s pension fund is so deeply underfunded “in no small measure to its dodgy relationships with placement agents, which in turn appear to have played a role in Kentucky Retirement Systems having invested in private equity and hedge fund dogs.”

A Mark for Wall Street

Chris Tobe was in his mid-30s, 11 years out from earning his MBA, when the state auditor’s office approached him about a job investigating Kentucky’s public pensions. Tobe had been working in Louisville as a portfolio manager at a regional bank, where he advised the very wealthy and large institutional investors. But he had also gotten involved in local Democratic politics and jumped at the chance to work in state government.

The Kentucky Retirement Systems is really three pensions in one. The state police have one pension, city and county employees another, and state employees a third. Teachers belong to a separate plan called the Kentucky Teachers’ Retirement System, or TRS. (Judges and legislators have another separate plan.) “I believe I was the first outsider ever brought in to give an assessment of how both KRS and the TRS were investing their money,” Tobe said, adding with a laugh, “I wrote my first report in 1997. I’m in my 21st year of being told I’ve been exaggerating the pension crisis.”

Tobe concluded that TRS was well run, at least back then, but he uncovered trouble at KRS, including a decision to bail out a large, Kentucky-based real estate firm teetering on default — which left KRS with a range of bad assets on its books from other parts of the country.

“There were a lot of crooked deals going on,” Tobe said. “But, really, it was nothing compared to what I saw happening once the hedge funds and private equity got involved.”

When Tobe left government in 1999 to return to the private sector, each of the pension funds had enough money to meet its financial obligations to retirees.

Politics in the state, however, were shifting. In 2000, Republicans gained a majority in the state Senate for the first time since the Great Depression — just as the country was entering a national recession, triggered by a bursting of the dotcom bubble. Revenues fell, demand for government services increased, and the state began to shortchange its pension fund. In 2003, Kentuckians elected their first Republican governor in nearly four decades. Five years later, the globe was hit by its worst financial crisis in 80 years. “Then we really didn’t have the money to fund pensions,” said Rep. Jerry Miller, co-chair of the legislature’s Public Pension Oversight Board.

“We couldn’t raise taxes. The Senate wouldn’t allow it,” explained Miller, a Republican who represents a slice of Louisville and its suburbs. “And we couldn’t cut services. The House, [controlled by the Democrats] wouldn’t let it. Everything became a battle between the two houses and the state pensions became a casualty.” The retirement system for Kentucky’s city and county workers was 59.7 percent funded in 2015; by 2017, that figured had dropped to 51.6 percent. There was a similar drop in recent years in Kentucky’s pension for state workers. A fund that was 21.9 percent funded in 2015 fell to 16.3 percent by 2017. The shortfalls were due primarily to government underfunding, rather than poor investments. But the greater the funding gap, the more the state became a mark for Wall Street’s more aggressive sharks.

Not every public pension in Kentucky is the same. By comparison, the retirement fund established for members of the state legislature is 85 percent funded. “Don’t even say it,” Miller said, holding up a hand during our breakfast at a Panera outside of Louisville. “Trust me, I’ve already heard it — from teachers, from firefighters, from others scared about what’s going on with their pensions.”

A Corrupting Influence

Tobe wasn’t primarily elevated to the KRS pension board for his investment experience. He supported a progressive Democrat for governor in 2007 and developed his pension platform. His candidate dropped out and endorsed fellow Democrat Steve Beshear, the eventual winner. “Part of the deal was my guy got some appointments out of it,” Tobe said. “I was one of them.” Beshear named Tobe a KRS trustee in the spring 2008, just as the stock market was beginning to swoon.

The fund’s investments in mortgage-backed securities lost more than half of their value, the result of recklessness and widespread fraud by bankers; total losses for the year neared $2 billion. Public pensions across the country faced heavy losses. Yet pension managers in Kentucky and elsewhere responded to the hit by piling more money into exotic investments. “Broadly speaking, you saw public pension across the country swiftly move to bail out Wall Street after 2008,” said Ted Siedle, a former SEC lawyer and pension consultant. “Just when they could least afford it, given big losses, they dramatically increased their holdings in the most expensive, highest risk investment products that Wall Street had to offer.”

I met Tobe at a Starbucks near his home in a wealthy suburb of Louisville. He’s a well-fed son of Kentucky with a round face and blue eyes, who rarely finishes one sentence before launching into the next one. “I go in 100 different directions,” he said. He confesses to voting yes when the staff recommended to the investment committee that they move 5 percent of the KRS portfolio into hedge funds. He found them a generally competent and experienced group, if also terribly overworked. (KRS’s chief investment officer has just four staff to help guide the system’s investments.) “They sold it to us as a diversifier to hedge against risk, but it really didn’t matter what they said,” he said. “Everybody was just rubber-stamping what they were told.” After he was stripped of his committee assignment, he used whatever pull he had in Frankfort to push for legislation that would require the committee to include at least one investment expert. In anticipation of that rule change, he was reinstated to the investment committee several months later. (Today, the committee must include at least two people with an investment background.)

In July 2009, the SEC proposed banning placement agents as a corrupting influence, sparking a debate that split pension fund officials across the country. “The selection of investment advisers to manage public plans should be based on merit and the best interests of the plans and their beneficiaries, not the payment of kickbacks or political favors,” then-SEC Chair Mary Schapiro said in proposing the ban.

The Third Party Marketers Association, a trade association for placement agents, sought to cast its members as a vital part of the public pension ecosystem — “marketers” there to help public pensions choose among competing funds. Tobe made his own view clear with an op-ed in the Lexington Herald-Leader: “KRS needs placement agents like a dog needs ticks,” he wrote.

By that point, Tobe had already pressed the KRS staff about its use of placement agents. He first brought up the issue at a public meeting in April 2009. But the staff denied any involvement with them, he recalled, and he took them at their word. “I knew there was pay-to-play going on,” he said — that the big funds were giving money to the right people to ensure that they received a share of pension dollars. “But at that point, I didn’t suspect placement agents because I couldn’t believe KRS would outright lie to me.” Four months later, the board, at Tobe’s urging, passed a placement agent disclosure policy. There were still no disclosures. Tobe later learned that during 2009, starting right around the time he first brought up the issue, the staff cut five deals with Sergeon, who was paid $4.4 million by hedge funds in just seven months to secure Kentucky investments. (What Sergeon might say for himself is a mystery. Sergeon, who died in 2013, told Forbes a couple of years earlier, “I don’t talk to reporters,” and hung up the phone.) When the staff finally acknowledged, in August 2010, that KRS had been working with placement agents for years, the disclosure was “buried” in a 50-plus page document, Tobe said. That same month Tobe filed a whistleblower complaint with the SEC.

The state auditor’s report, released in 2011, found no evidence of a pay-to-play scheme but documented “several troubling aspects regarding the use of placement agents,” including an “unusually close working relationship” between KRS’s chief investment officer and Sergeon, who set up appointments and made travel arrangements on the officer’s behalf. The officer resigned before the report was even out. KRS fired its longtime executive director and replaced its longtime board chair. It appeared to be a moment of reckoning.

Yet two months after the auditor’s report appeared, KRS committed another $1.2 billion to $1.5 billion to hedge funds — a set of investments so disastrous that a group of retirees filed a class-action lawsuit last December accusing the trustees and pension staff of failing in their fiduciary responsibilities.

Among the investments the suit singles out: the roughly $400 million KRS committed to Blackstone that year, over Tobe’s objections, and even though the firm was at the center of the placement agent probe. The investment was in Blackstone Alternative Asset Management, or BAAM, a fund of funds containing a range of hedge funds. That diversity came at a price. Buying into BAAM meant paying the fund-of-fund manager (typically a 5 percent share of profits plus a 1 percent management fee, according to Chicago Booth Review) on top of the already outsized expenses charged by each participating hedge fund. Investing in BAAM also meant owning a piece of SAC Capital, the infamous hedge fund operated by Steven Cohen that would later pay $1.8 billion in fines for insider trading and other crimes. Today there are 21 public pension funds in BAAM (but no longer Kentucky), according to Preqin, a research firm that specializes in alternative investments. “This is what’s happening nationwide,” Tobe said. “Kentucky’s just a little worse than others.”

Yet the SEC backed away from its plan to ban placement agents. Instead, the agency simply barred placement agents and money managers from making political donations to public officials with sway over a pension fund. But the agents could still legally contribute to PACs and Super PACs not associated with any specific elected official. “I’ve always assumed a portion of these fees somehow make it into campaign funds,” said Miller, the state representative. “Democrats and Republicans alike, there’s so many avenues for funneling them money.” The Supreme Court’s Citizens United made such giving even more opaque, Tobe said. “So you’ve created this system with a big, gaping corruption hole in it.”

Kentucky’s House passed a placement agent ban in 2011, as New York, Illinois, and other states had done, but the bill never became law. Instead, the state merely required placement agents to register as lobbyists.

After Tobe served his four-year term as a trustee, he wasn’t reappointed. He was already a former trustee when he learned, in 2013, that his whistleblower complaint had failed: The SEC, despite the millions of dollars placement agents were paid to steer KRS investments to their clients, announced that it would take no action against anyone involved.

In 2016, Tim Longmeyer, who served as a trustee with Tobe, was sentenced to nearly six years in jail after pleading guilty to accepting kickbacks in exchange for government contracts while serving as Governor Beshear’s secretary of personnel. One of his co-conspirators, a former Democratic political consultant named Larry O’Bryan, testified in a separate bribery trial that Longmeyer had once tried unsuccessfully to get him appointed to KRS’s board of trustees because there were “billions of dollars on that board.”

What’s Even in These Deals?

Randy Wieck, a high school social studies teacher in Louisville, had already been feeling nervous about the systematic underfunding of his pension when he discovered Tobe’s book. His future is in the hands of the state’s Teachers’ Retirement System, not KRS, but “Kentucky Fried Pensions” alarmed him. “You can’t bet your way out of the problem,” Wieck said. “But that’s exactly what Kentucky is trying to do.” Teachers, like any other public employees who don’t have Social Security withheld, are not eligible for Social Security benefits; even if they earn Social Security by working a side job, those benefits are adjusted downward based on their pension income. In Wieck’s case, his pension would be his main source of government support once he retired.

Wieck was the building rep for the local teachers union, yet he says union leaders brushed off his worries about the great risks the trustees were taking with teachers’ pensions and how little information the trustees seemed to be sharing with those relying on it for their retirement. “They tell me, ‘Yeah, we’re on top of it, we’re OK, don’t worry about it,’” Wieck said. “I was pretty much out there on my own,” said Wieck, a Louisville native with a graduate degree from the London School of Economics. “So I call Chris Tobe. I tell him, ‘You don’t know me from Adam, but I can use your help.’” The two met at a café outside of Louisville and had a conversation that inspired Wieck to press for more answers.

Wieck filed his first lawsuit against the TRS board of trustees in state court in November 2014. Lacking money to hire a lawyer, he typed up the complaint on his own and listed himself as the sole plaintiff in a class action charging the TRS trustees with failing to protect the pension from habitual underfunding — and making bad investments. When that suit was dismissed over jurisdictional issues, he refiled in federal court. A “corrupted system” and “KTRS’s mismanagement,” he wrote, had resulted in the “worst-funded teacher pension in the country.” Where once they contributed 9 percent of their salary to the retirement fund, teachers were now contributing nearly 13 percent. The local school districts were putting up their share each year. The state, however, was typically meeting only a half to three-quarters of its annual obligation, depending on the year. This time Wieck named two other plaintiffs and added four large money managers, including the Blackstone Group and KKR, as defendants. An underfunded retirement system, he charged, had inappropriately risked nearly $600 million with those firms during the previous eight months. That suit was dismissed on grounds that governments are generally immune from civil liabilities. (TRS has declined comment in reports on the suit, citing Wieck’s history of suing the agency.)

Wieck tried other avenues to expose what he saw as TRS abuses. He sent open records requests to TRS, which sent them along to several money managers, who claimed that the information was proprietary. One was KKR, which wrote requesting TRS to remind staff that their contract with the firm exempted them from sharing that information with anyone else, even beneficiaries of the fund. KKR, its representative wrote, considered all contracts, offering documents, and side deals with placement agents to be proprietary information. Hedge funds and private equity firms typically require investors to sign such confidentiality agreements even though, as Bloomberg Business Week reported in 2015, “much of what the industry wants to keep hidden has as much to do with high fees, weak oversight, and conflicts of interest as it does with business strategies or other trade secrets.”

“It’s so hard to know what’s even in these deals,” Tobe said of alternative investments. “A lot of this stuff’s offshore. You don’t even know what country your assets are in. You don’t know if they are even real.” The potential for corruption, given this lack of transparency, is extreme, Tobe argues. A case in point: In 2015, the manager of Camelot, a New York-based private equity fund holding $24 million of KRS’s money, confessed to falsifying financial records in order to embezzle $9.3 million. Tobe estimates that between them, KRS and TRS have 150 or more contracts with hedge funds and private equity firms —all of them operating without normal monitoring safeguards in place. “I have to pay into this fund from the first day I started working,” said Wieck, “and then they turn around and say we have no right to know what they’re doing with my money.”

“I think hedge funds are fine for individuals, but when it comes to public dollars, I’m leery,” state Sen. Joe Bowen, a Republican representing a district in western Kentucky, said. “When dealing with public money, we need to put those in the safest harbor you can find.” He has a similar view of private equity. Investing 10 percent of the state’s pension in dollars in alternative maybe made sense, Bowen said, “but certainly nothing near 25 percent.”

Sylvia Moore, who worked as food services director for the public schools in Mercer County, a rural county in central Kentucky, retired from the job in 2013. Moore, now 55, receives around $2,700 a month from the state, which includes her TRS pension and a small payment from KRS, the plan formerly associated with her position. Like Wieck, she lives in fear of any minor reduction to her modest retirement. “You pay into the pension all these years and just assume they know what they’re doing,” Moore said. She’s come to fear that actually there’s “a big pot of money sitting there and nobody watching it.”

Wieck is no diplomat. He has harangued union officials for failing to join his fight and they pushed back. It turned personal with at least one fellow teacher and led to a failed attempt to have his teaching license revoked by the Kentucky Education Professional Standards Board. “I’m very much a pariah,” Wieck said. “I’m blocked on many websites. On Facebook, on Twitter. As far I’m concerned, I think we need to be in the street with pitchforks and torches. But a lot of my colleagues want to believe what they’re told.”

“You Write Your Checks to My Guys”

Kentucky elected a new governor, Matt Bevin, in 2015. A tea party favorite, Bevin had bested two establishment Republicans in the gubernatorial primary to become only the second Republican in 40 years to be elected governor. Bevin stood out in a second way: He had been a partner in Waycross Partners, a Louisville-based hedge fund. “The country has three private equity governors,” Tobe said, referring to Bruce Rauner in Illinois, Charlie Baker in Massachusetts, and Gina Raimondo in Rhode Island. “But only Kentucky has a hedge fund governor.”

Bevin signed an executive order requiring staff and trustees of KRS to use money managers who agreed to comply with a code of conduct created by the CFA Institute, a global association of investment professionals. The order also required KRS to post all its contracts and offer documents online. They were important strides toward ethics and transparency — except both new rules have been routinely ignored, Tobe said. Many investment manager contracts are not yet publicly available, and KRS staff continues to invest in “all these private equity guys and hedge funds not on the list.” (The Bevin administration declined repeated requests for comment.)

Other reforms were troubling on their face. Calling for a “fresh start and more transparency,” Bevin disbanded the 13-member KRS board of trustees and replaced it with a new 17-person board of directors. By statute, the old board included six trustees who represented stakeholders independently elected by plan members — just shy of half the votes. Now the board would have four additional members appointed by Bevin. His picks included William Cook, who had recently retired from a job at KKR, and Neil Ramsey, a co-founder of the hedge fund BHR Capital, who now chairs the pension’s powerful investment committee. The Louisville Courier-Journal later reported that Ramsey had invested $300,000 in a business part-owned by the governor and had recently sold him a house in the Louisville suburbs for $1.6 million, hundreds of thousands of dollars below its assessed value. Bevin also fired the chair of the board of trustees, Louisville banker Thomas Elliott, a decision he enforced with armed state troopers to the next KRS meeting. “To me, that was a signal to Wall Street,” Tobe said, “that you don’t write your checks to Tommy anymore, you write your checks to my guys.”

But a new board also represented a shift inside KRS, said David Eager, who took over as the fund’s executive director in 2016.  KRS pulled back on its hedge fund investments and has become more selective about the private equity funds in which it put its money. “The new board hates paying fees,” Eager said. He also said in his two years as executive director, he’s yet to hear from a single official about a potential investment. “I can’t speak to political influence in the past, but it sure as hell is not happening now.”

Reform efforts in the legislature have proved equally frustrating to Tobe. In 2016, Bowen introduced legislation that required pensions to use an open process — complete with requests for proposals — when selecting money managers. “Competitive bidding is one of the basic principles of government,” Tobe said. “Except private equity and the hedge fund industry have taught every state and city government in the country that they’re above RFPs, that they should feel lucky that we’re willing to take your money.” In the end, private equity and the hedge funds got their way. The final bill Bevin signed into law last year included transparency rules and a code of conduct that both Tobe and Jim Wayne, a liberal Democrat from Louisville who has been pushing for pension reform for years, both described as watered down. And the RFP provision was dropped entirely. That’s just how the “sausage making” works, Bowen told me. “The point was driven home to me that we weren’t going to get into the best deals if we adopted an open process.” Even with the weaker disclosure rules, two financial firms have announced that they will no longer do business with KRS, including a New York-based hedge fund that in June cited the state’s transparency laws as its primary motivator.

As a candidate, Bevin had vowed to end public pensions altogether. Under his proposal, new employees would be enrolled in a “defined contribution plan,” like a 401(k), where the employee shoulders all of the risk — a substantial downgrade from the existing pension system, where KRS is responsible for paying out set benefits regardless of returns. In late 2017, he tried to mobilize a special session of the legislature focused on pension reform, but the GOP leadership couldn’t agree even on the outlines of a plan. Months later, and with no opportunity for debate, language was attached to a sewer bill, passed late one evening in March 2018, that ended pensions for teachers who are new hires in 2019, replacing them with defined contribution plans.

Randy Wieck got his teachers in the streets, carrying placards, if not pitchforks — finally angry in large numbers about their pensions, part of a national wave of teacher protests from Arizona to West Virginia. Thousands showed up at the Capitol, where Bevin’s counterattack made national news: “I guarantee you somewhere in Kentucky today,” he told reporters, “a child was sexually assaulted that was left at home because there was nobody there to watch them.”

The state’s attorney general, Andy Beshear — the son of Bevin’s predecessor and an announced challenger in 2019 — sued, arguing that the law that the governor had just signed violated the “inviolable contract” that the state has with its workers. A judge struck down the law on procedural grounds, as the bill, passed six hours after it had been introduced, failed to receive the required three readings any new bill needs under Kentucky law. The dispute is now in the hands of the Kentucky Supreme Court, which heard oral arguments in September.

Other pensioners in the state have also finally risen up, filing a class-action suit last December against a long list of plaintiffs, including KRS officials, the consultants they hired, and a veritable who’s who of Wall Street. The suit named the firm KKR and also its top two executives, Henry Kravis and George Roberts, along with Blackstone and its CEO, Stephen Schwarzman. The lawsuit charges that in 2011, KKR, Blackstone, and a third firm, PAAMCO or Pacific Alternative Asset Management, another deep-pocketed giant of the hedge fund world, sold KRS “extremely high-risk, secretive, opaque, high-fee and illiquid vehicles” that produced “poor returns and ultimately losses,” despite “excessive fees.” The hedge funds had sold the investments as an “absolute return strategy” that would help KRS meet or exceed its then stated goal of a 7.75 percent annual return on investment. Instead the investments had cost KRS millions of dollars in lost returns. Instead, the suit charges, there were steep losses due to “breaches of fiduciary and other duties” by those in charge who allowed themselves to be “to be taken advantage of by sophisticated Hedge Fund Sellers.” Though nominally a defendant in the suit, the KRS board voted unanimously to “commend” the plaintiffs for their suit, adding in a public statement, “a recovery in this litigation could go a long way in supporting the significantly underfunded retirement system.”

Don Coomer, a retired Louisville firefighter living in a modest suburb of Louisville, is one of the eight named plaintiffs. He first became a firefighter at age 19 and says he can’t remember a time when he wasn’t working a second job. The 67-year-old Coomer, whose shaved head, glasses, and gray goatee give him a Walter White look, says he was earning a salary of $50,000 when he left the department just short of his 30th anniversary. “I stayed for the pension,” he said, which works out to around $43,000 a year. Coomer qualifies for Social Security for those side jobs he worked all those years, but because of his pension, that benefit is only $387 a month, rather than closer to $1,000 he would otherwise receive. “It scares me to death that I’ll basically be making the same money I’m making today 20 years from now,” he said. “That’s a big concern.”

Asked why he got involved in the suit, Coomer said he wanted to do his part to help fix a system so broken that a practically bankrupt fund still wastes tens of millions of dollars on fees. “I don’t want just cash,” he said. “I want safeguards, to make sure people are doing a better job of watching over the money. We have to stop paying these crazy fees into the hedge funds.”

This article was reported in partnership with The Investigative Fund at The Nation Institute, where Gary Rivlin is a reporting fellow.