| 2022 | $\frac{17,034}{261,178}< /td > < /tr > < /table > Lease expense was222,509 for the year ended June 30, 2018.
===== PAGE 32 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 8 – DEFINED BENEFIT PENSION PLANS
Kentucky Employees' Retirement System - Defined Benefit Plan
Plan Description – The University contributes to the Kentucky Employees' Retirement System (KERS), a cost sharing - multiple employer public employee retirement system. KERS is a defined benefit plan providing for retirement, disability, death benefits and health insurance. Participants have a fully vested interest after the completion of 60 months of service, 12 of which are current service. KERS issues a publicly available financial report that includes financial statements, required supplementary information, and detailed information about the pension plan's fiduciary net position. That report may be obtained by writing to Kentucky Retirement Systems, Perimeter Park West, 1260 Louisville Road, Frankfort, Kentucky, 40601-6124 or by calling (502) 696-8800.
## Benefits Provided
## Non-Hazardous
Tier 2
| Tier 1 Participation Prior to September 1, 2008 | Participation September 1, 2008 through December 31, 2013 | Tier 3 Participation January 1, 2014 | | Benefit Formula | Final Compensation × Benefit Factor × Years of Service | Cash Balance Plan | | Final Compensation | Average of the highest 5 fiscal years (must contain at least 48 months).\nIncludes lump-sum compensation payments (before and at retirement). | 5 complete fiscal years immediately preceding retirement; each year must contain 12 months. Lumpsum compensation payments (before and at retirement) are not to be included in creditable compensation. | No Final Compensation | | Benefit Factor | 1.97% or 2.0% for those retiring with service for all months between 1/1998 and 1/1999. | 10 years or less = 1.10%. Greater than 10 years, but no more than 20 years = 1.30%. Greater than 20 years, but no more than 26 years = 1.50%. Greater than 26 years, but no more than 30 years = 1.75%. Additional years above 30 – 2.00% (2.00% benefit factor only applies to service earned in excess of 30 years). | No benefit factor. A life annuity can be calculated in accordance with actuarial assumptions and methods adopted by the board based on member's accumulated account balance. |
Cost of Living Adjustment (COLA)
No COLA unless authorized by the Legislature. If authorized, the COLA is limited to 1.5%. This impacts all retirees regardless of Tier.
Unreduced Retirement
Benefit
Any age with 27 years of
service. Age 65 with 48
months of service. Money
purchase for age 65 with
less than 48 months
based on contributions
and interest.
Rule of 87: Member must be at least age 57 and age plus earned service must equal 87 years at retirement to retire under this provision. Age 65 with 5 years of earned service. No month purchased calculations.
(Continued)
===== PAGE 33 =====
NOTE 8 – DEFINED BENEFIT PENSION PLANS (Continued)
| Tier 1 Participation Prior to September 1, 2008 | Tier 2 Participation September 1, 2008 through December 31, 2013 | Tier 3 Participation January 1, 2014 | | Reduced Retirement Benefit | Any age with 25 years of service. Age 55 with 5 years of service. | Age 60 with 10 years of service. Excludes purchased service (exception: refunds, omitted, free military). | No reduced retirement benefit. | | Hazardous | | Tier 1 Participation Prior to September 1, 2008 | Tier 2 Participation September 1, 2008 through December 31, 2013 | Tier 3 Participation January 1, 2014 | | Benefit Formula | Final Compensation X Benefit | Factor X Years of Service | Cash Balance Plan | | Final Compensation | Highest 3 fiscal years (must contain at least 24 months). Includes lump-sum compensation payments (before and at retirement). | 3 highest salaries; each year must contain 12 months. Lump-sum compensation payments (before and at retirement) are not to be included in creditable compensation. | No Final Compensation | | Benefit Factor | 2.49% | 10 years or less = 1.30%. Greater than 10 years, but no more than 20 years = 1.50%. Greater than 20 years, but no more than 26 years = 2.25%. Greater than 25 years = 2.50%. | No benefit factor. A life annuity can be calculated in accordance with actuarial assumptions and methods adopted by the board based on member's accumulated account balance. | | Cost of Living Adjustment (COLA) | No COLA unless authorized by the Legislature. If authorized, the COLA is limited to 1.5%. This impacts all retirees regardless of Tier. | | Unreduced Benefit | Any age with 20 years of service. Age 55 with 60 months of service. | Any age with 25 years of service. Age 60 with 60 months of service. | Any age with 25 years of service. Age 60 with 60 months of service. | | Reduced Benefit | Age 50 with 15 years of service. | Age 50 with 15 years of service. | No reduced retirement benefit. |
Contributions - Benefit and contribution rates are established by state statute. Per Kentucky Revised Statute 61.565(3) contribution requirements of the active employees and the participating organizations are established and may be amended by the KRS Board. For the fiscal year ended June 30, 2018, University non-hazardous and hazardous employees were required to contribute 5 percent of their annual covered salary for retirement benefits for the year ended June 30, 2018. Non-hazardous and hazardous
===== PAGE 34 =====
## NOTE 8 – DEFINED BENEFIT PENSION PLANS (Continued)
employees with a participation date after September 1, 2008 were required to contribute an additional 1 percent of their covered salary for retiree healthcare benefits. The University was contractually required to contribute 41.06 percent of annual covered payroll for non-hazardous pay and 21.44 percent for hazardous pay to the pension plan for the year ended June 30, 2018. Actuarially determined as an amount that, when combined with employee contributions, is expected to finance the cost of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The University's total contributions to KERS for the year ended June 30, 2018 was $1,531,999, equal to the required contributions for the year.
Pension liabilities, pension expense, and deferred outflows of resources and deferred inflows of resources related to pensions - At June 30, 2018, the University reported a liability of $32,618,138 for its proportionate share of the non-hazardous net pension liability and $237,122 for hazardous. The net pension liability was measured as of June 30, 2017 and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The University's proportion of the net pension liability was based on actual contributions to the pension plan during the measurement period. At June 30, 2018, the University's proportion was 0.24 percent for non-hazardous and 0.05 percent for hazardous, respectively.
For the year ended June 30, 2018, the University's actuarially calculated pension expense was $2,754,949 for non-hazardous and $92,166 for hazardous. At June 30, 2018, the University reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:
| 2018 | Deferred Outflows of Resources | Deferred Inflows of Resources | | Non-hazardous: | | | | Difference between expected and actual experience | $ 5,802 | $ 210,046 | | Net difference between projected and actual earnings on investments | 157,733 | - | | Changes of assumptions | 4,138,399 | - | | Changes in proportion and differences between employer contributions and proportionate share of contributions | - | 2,567,605 | | University contributions subsequent to measurement date | 1,471,207 | - | | $ 5,773,141 | $ 2,777,651 | | Hazardous: | | | | Difference between expected and actual experience | $ 8,966 | $ - | | Net difference between projected and actual earnings on investments | 2,630 | - | | Changes of assumptions | 43,572 | - | | Changes in proportion and differences between employer contributions and proportionate share of contributions | 106,497 | - | | University contributions subsequent to measurement date | 60,792 | - | | $ 222,457 | $ - |
(Continued)
===== PAGE 35 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 8 – DEFINED BENEFIT PENSION PLANS (Continued)
At June 30, 2018, the University reported $1,531,999 as deferred outflows of resources related to pensions resulting from University contributions subsequent to the measurement date that will be recognized as a reduction of the net pension liability in the following fiscal year. Deferred outflows and deferred inflows of resources at June 30, 2018, related to pensions will be recognized in pension expense as follows:
| Non-hazardous | Hazardous | | 2018 | $ 857,284 | $ 76,546 | | 2019 | 667,676 | 78,197 | | 2020 | 44,244 | 9,910 | | 2021 | (44,920) | (2,984) | | $ 1,524,284 | $ 161,665 |
Actuarial assumptions - The total pension liability at the measurement date of June 30, 2017 was determined by actuarial valuations as of June 30, 2017, using the following actuarial assumptions, applied to all periods included in the measurement.
| 2017 | | Inflation | 2.30% | | Salary increases, average including inflation | 3.05 | | Investment rate of return, non-hazardous | 5.25 | | Investment rate of return, hazardous | 6.25 |
The mortality table used for active members is RP-2000 Combined Mortality Table projected with Scale BB to 2013 (multiplied by 50% for males and 30% for females). For healthy retired members and beneficiaries, the mortality table used is the RP-2000 Combined Mortality Table projected with Scale BB to 2013 (set back 1 year for females). For disabled members, the RP-2000 Combined Disabled Mortality Table projected with Scale BB to 2013 (set back 4 years for males) is used for the period after disability retirement.
The actuarial assumptions used in the June 30, 2017 valuation were based on the results of an actuarial experience study for the period July 1, 2008 - June 30, 2013.
The long-term expected return on plan assets is reviewed as part of the regular experience studies prepared every five years for KERS. The most recent analysis is outlined in a report dated December 5, 2015. Several factors are considered in evaluating the long-term rate of return assumption. Including long-term historical data, estimates inherent in current market data, and a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected return, net of investment expense and inflation) were developed by the investment consultant for each major asset class. These ranges were combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and then adding expected Inflation. The assumption is intended to be a long-term assumption and is not expected to change absent a significant change in the asset allocation, a change in the inflation assumption, or a fundamental change in the market that alters expected returns in future years.
===== PAGE 36 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 8 – DEFINED BENEFIT PENSION PLANS (Continued)
The target asset allocation and best estimates of arithmetic nominal rates of return for each major asset class are summarized in the following table:
| Non-hazardous | | Target | Long-Term Nominal | | Asset Class | Allocation | Rate of Return | | 2018 | | | | U.S. Equity | 17.50% | 5.75% | | International Equity | 17.50 | 7.38 | | Global Bonds | 10.00 | 2.63 | | Global Credit | 17.00 | 3.63 | | Real Estate | 5.00 | 6.63 | | Absolute Return | 10.00 | 5.63 | | Real Return | 10.00 | 5.13 | | Private Equity | 10.00 | 8.25 | | Cash Equivalents | 3.00 | 1.88 | | Total | 100% | | | Hazardous | | Target | Long-Term Nominal | | Asset Class | Allocation | Rate of Return | | 2018 | | | | U.S. Equity | 17.50% | 5.75% | | International Equity | 17.50 | 7.38 | | Global Bonds | 4.00 | 2.63 | | Global Credit | 2.00 | 3.63 | | High Yield | 7.00 | 5.75 | | Emerging Market Debt | 5.00 | 5.50 | | Private Credit | 10.00 | 8.75 | | Real Estate | 5.00 | 7.63 | | Absolute Return | 10.00 | 5.63 | | Real Return | 10.00 | 6.13 | | Private Equity | 10.00 | 8.25 | | Cash Equivalents | 2.00 | 1.88 | | Total | 100% | |
Changes in Assumptions and Benefit Terms Since Prior Measurement Date - Since the prior measurement date, the demographic and economic assumptions that affect the measurement of the total pension liability have been updated as follows:
The assumed investment rate of return was decreased from 6.75% to 5.25% (Non-hazardous) and 7.50% to 6.25% (Hazardous).
- The assumed rate of inflation was reduced from 3.25% to 2.30%.
• Payroll growth assumption was reduced from 4.00% to 3.05%.
Changes Since Measurement Date - There were no changes between the measurement date of the collective net pension liability and the employer's reporting date.
===== PAGE 37 =====
## NOTE 8 – DEFINED BENEFIT PENSION PLANS (Continued)
Discount rate - The discount rate used to measure the total pension liability was 5.25% (Non-hazardous) and 6.25% (Hazardous), which was reduced from the 6.75% (Non-hazardous) and 7.50% (Hazardous) discount rates used in the prior year. The projection of cash flows used to determine the discount rate assumed that local employers would contribute the actuarially determined contribution rate of projected compensation over the remaining 26-year amortization period of the unfunded actuarial accrued liability. The actuarial determined contribution rate is adjusted to reflect the phase in of anticipated gains on actuarial value of assets over the first four years of the projection period. Projected inflows from investment earnings were calculated using the long-term assumed investment return of 5.25% for Non-Hazardous and 6.75% for Hazardous for the June 30, 2017 actuarial valuation. The long-term assumed investment rate of return was applied to all periods of projected of benefit payments to determine the total pension liability.
Sensitivity of the University's proportionate share of the net pension liability to changes in the discount rate - The University's proportionate share of the net pension liability has been calculated using a discount rate of 5.25% (Non-hazardous) for the June 30, 2017 actuarial valuation. The following presents the University's proportionate share of the net pension liability calculated using a discount rate 1% higher and 1% lower than the current rate as of June 30, 2018:
| 1% Decrease (4.25%) | Current Discount Rate (5.25%) | 1% Increase (6.25%) | | Non-Hazardous Proportionate share of the Collective Net Pension Liability | $ 37,242,518 | $ 32,618,138 | $ 28,773,195 | | 1% Decrease (5.25%) | Current Discount Rate (6.25%) | 1% Increase (7.25%) | | Hazardous Proportionate share of the Collective Net Pension Liability | $ 301,620 | $ 237,122 | $ 183,602 |
Kentucky Teachers' Retirement System - Defined Benefit Plan
Plan Description – The Kentucky Teachers’ Retirement System (KTRS), a cost sharing - multiple employer public employee retirement system. KTRS is a defined benefit plan providing for retirement, disability, death benefits and health insurance. Participants have a fully vested interest after the completion of 60 months of service, 12 of which are current service. KTRS issues a publicly available financial report that includes financial statements, required supplementary information, and detailed information about the pension plan's fiduciary net position. That report may be obtained by writing to Kentucky Teachers’ Retirement System, 479 Versailles Road, Frankfort, Kentucky, 40601 or by calling (502) 573-3266.
===== PAGE 38 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 8 – DEFINED BENEFIT PENSION PLANS (Continued)
Benefits Provided
Tier 1
Participation Prior to
July 1, 2008
Covered Employees:
Tier 2
Participation on or After
July 1, 2008
University faculty and professional staff that do not choose the Optional Retirement Plan (Deferred Contribution)
University faculty and
professional staff that do not
choose the Optional Retirement
Plan (Deferred Contribution)
Benefit Formula:
Final Compensation X Benefit Factor X Years of Service
Final Compensation:
Average of the highest 5 annual
salaries reduced 5% per year from the
earlier of age 60 or the date 27 years
of service would have been
completed. Average of the highest 3
annual salaries if age 55 with 27 or
more years of service. The minimum
annual service allowance for all
members is $440 multiplied by
credited service.
Average of the highest 5 annual salaries reduced 6% per year from the earlier of age 60 or the date 27 years of service would have been completed. Average of the highest 3 annual salaries if age 55 with 27 or more years of service. The minimum annual service allowance for all members is $440 multiplied by credited service.
Tier 1
Participation Prior to
July 1, 2008
## Benefit Factor:
Tier 2
Participation on or After
July 1, 2008
Non-University members: 2.00% for service prior to 7/1/1983; 2.50% for service after 7/1/1983; 2.00% if participation after 7/1/2002 and less than 10 years; 2.50% if participation after 7/1/2002 and more than 10 years; 3.00% if retire after 7/1/2004 with more than 30 years. University members: 2.0% for each year of service.
Non-University members:
1.70% if less than 10 years;
2.00% if greater than 10 years,
but no more than 20 years;
2.30% if greater than 20 years,
but no more than 26 years;
2.50% if greater than 26 years,
but no more than 30 years;
3.00% for service greater than
30 years. University members:
1.50% if less than 10 years;
1.70% if greater than 10 years,
but less than 20 years; 1.85% if
greater than 20 years, but less
than 27 years; 2.00% if greater
than 27 years.
Cost of Living
Adjustment (COLA):
1.5% annually additional ad hoc increases must be authorized by the General Assembly.
(Continued)
===== PAGE 39 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 8 – DEFINED BENEFIT PENSION PLANS (Continued)
| Unreduced Retirement Benefit: | Any age with 27 years of Kentucky service. Age 55 with 5 years of Kentucky service. | Any age with 27 years of Kentucky service. Age 60 with 5 years of Kentucky service. Age 55 with 10 years of Kentucky service. | | Reduced Benefit: | Retirement | Must be retired for service or disability to be eligible. Retired members are given a supplement based upon a contribution supplement table approved by the KTRS Board of Trustees. The retired member pays premiums in excess of the monthly supplement. |
Contributions - Benefit and contribution rates are established by state statute. Per Kentucky Revised Statutes 161.540, 161.550 and 161.565, contribution requirements of the active employees and the participating organizations are established and may be amended by the KTRS Board. For the fiscal year ended June 30, 2018, University employees were required to contribute 7.625 percent of their annual covered salary for retirement benefits. The University was contractually required to contribute 15.865 percent of covered payroll for the year ended June 30, 2018. The actuarially determined amount, when combined with employee contributions, is expected to finance the cost of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The University's total contributions to KTRS for the year ending June 30, 2018 was $1,729,748 and were equal to the required contributions for the year. In addition, the Commonwealth of Kentucky contributes ad hoc annual cost of living adjustments provided by the General Assembly for KTRS retirees at a contribution rate of 3.25% for the year ending June 30, 2018.
Pension liabilities, pension expense, and deferred outflows of resources and deferred inflows of resources related to pensions - At June 30, 2018, the University reported a liability for its proportionate share of the net pension liability that reflected a reduction for pension support provided to the University by the Commonwealth of Kentucky. The amount recognized by the University as its proportionate share of the net pension liability, the related State support, and the total portion of the net pension liability that was associated with the University were as follows:
| 2018 | | University's proportionate share of the net pension liability | $ 40,538,352 | | Commonwealth of Kentucky's proportionate share of the net pension liability associated with the University | 32,308,289 | | $ 72,846,641 |
The net pension liability was measured as of June 30, 2017 and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of June 30, 2016 and update procedures were used to roll forward the total pension liability to the measurement date. The University's proportion of the net pension liability was based on actual contributions to the pension plan during the measurement period. At June 30, 2018, the University's proportion was 0.14 percent.
(Continued)
===== PAGE 40 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 8 – DEFINED BENEFIT PENSION PLANS (Continued)
For the year ended June 30, 2018, the University's actuarially calculated pension expense was $(2,992,100). The University also recognized revenue of $2,061,409 for support provided by the Commonwealth. At June 30, 2018, the University reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:
| Deferred Outflows of Resources | Deferred Inflows of Resources | | 2018 | | | | Net difference between projected and actual earnings on investments | $- - | $ 313,654 | | Change in assumptions | 5,019,090 | 2,814,238 | | Differences between expected an actual experience | 233,734 | 857,357 | | Changes in proportion and differences between employer contributions and proportionate share of contributions | - | 23,826,558 | | Contributions subsequent to the measurement date | 1,729,748 | - | | $ 6,982,572 | $ 27,811,807 |
At June 30, 2018, the University reported $1,729,748 as deferred outflows of resources related to pensions resulting from University contributions subsequent to the measurement date that will be recognized as a reduction of the net pension liability in the following fiscal year. Net deferred outflow (inflows) of resources at June 30, 2018, related to pensions will be recognized in pension expense as follows:
| 2019 | $ (7,369,801) | | 2020 | (6,851,873) | | 2021 | (6,059,024) | | 2022 | (2,278,285) | | $ (22,558,983) |
Actuarial assumptions - The total pension liability was determined by actuarial valuations as of June 30, 2016 and update procedures were used to roll forward the total pension liability to the measurement date, using the following actuarial assumptions, applied to all periods included in the measurement:
Inflation 3.00%
Salary Increases 3.50 – 7.30%, including inflation
Investment Rate of Return 7.50%, net of pension plan investment expense, including inflation
The rates of mortality for the period after service retirement are according to the RP-2000 Combined Mortality Table for Males and Females, as appropriate, with adjustments for mortality improvements based on a projection of Scale BB to 2025 with a set forward of 2 years for males and 1 year for females.
The actuarial assumptions used in the June 30, 2016 valuation were based on the results of an actuarial experience study for the period July 1, 2010 - June 30, 2015 adopted by the Board on November 19, 2016.
===== PAGE 41 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 8 – DEFINED BENEFIT PENSION PLANS (Continued)
The long-term expected return on plan was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighing the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The June 30, 2018 target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table:
| Asset Class | Target Allocation | Long-Term Nominal Rate of Return | | U.S. Equity | 42.0% | 4.4% | | Non-U.S. Equity | 20.0 | 5.3 | | Fixed Income | 16.0 | 1.5 | | Additional Categories (Incl. Hedge Funds, High Yield And Non-U.S. Developed Bonds) | 9.0 | 3.6 | | Real Estate | 5.0 | 4.4 | | Private Equity | 6.0 | 6.7 | | Cash | 2.0 | 0.8 | | Total | 100% | |
Changes in Assumptions and Benefit Terms Since Prior Measurement Date - The total pension liability as of June 30, 2017 reflects that the assumed municipal bond index rate increased from 3.01% to 3.56%, resulting in a change in the Single Equivalent Interest Rate (SEIR) from 4.20% to 4.49%.
Changes Since Measurement Date - There were no changes between the measurement date of the collective net pension liability and the University reporting date that are expected to have a significant effect on the University's proportionate share of the collective net pension liability.
Discount rate - The discount rate used to measure the total pension liability at June 30, 2017 was 4.49%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rates and the Employer contributions will be made at statutorily required rates, and the additional amount appropriated for fiscal year 2018. Based on those assumptions, the pension plan's fiduciary net position was projected to be available to make all projected future benefit payments of current plan members until the 2038 plan year. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments through 2037 and a municipal bond index rate of 3.56% was applied to all periods of projected benefit payments after 2037. The SEIR that discounts the entire projected benefit stream to the same amount as the sum of the present values of the two separate benefit payments streams was used to determine the total pension liability.
The total pension liability as of June 30, 2017 reflects that the assumed municipal bond index rate increased from 3.01% to 3.56%, resulting in a change in the SEIR from 4.20% to 4.49%. The impact of this change in the discount rate is a change in assumptions that is added to the expected total pension liability to determine the final total pension liability as of June 30, 2017.
===== PAGE 42 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 8 – DEFINED BENEFIT PENSION PLANS (Continued)
Sensitivity of the University's proportionate share of the net pension liability to changes in the discount rate - The following table presents the net pension liability of the University as of June 30, 2018, calculated using the discount rate of 4.49%, as well as what the University's net pension liability (in thousands) would be if it were calculated using a discount rate that is 1-percentage-point lower (3,49%) or 1-percentage-point higher (5.49%) than the current rate:
| 1% Decrease (3.49%) | Current Discount Rate (4.49%) | 1% Increase (5.49%) | | Proportionate share of the Collective Net Pension Liability | $ 50,250,685 | $ 40,538,352 | $ 32,567,126 | | Summary Pension Plan Information: | | KERS Hazardous/Non-hazardous | KTRS | Total | | June 30, 2018 | | | | | Net pension liability | $ 32,855,260 | $ 40,538,352 | $ 73,393,612 | | Deferred outflows of resources | 5,995,598 | 6,982,572 | 12,978,170 | | Deferred inflows of resources | 2,777,651 | 27,811,807 | 30,589,458 | | Actuarially determined pension expense | 2,847,115 | (2,992,100) | (144,985) |
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB)
In addition to the pension plans disclosed in Note 8, the University's employees participate in either the Kentucky Teachers Retirement System (KTRS) OPEB Plan or the Kentucky Employees Retirement System (KERS) OPEB Plan depending on the retirement plan in which they participate. Each OPEB plan is described in detail below.
## Kentucky Employees Retirement System (KERS) OPEB Plan
OPEB Benefits Provided: The information below summarizes the major other postemployment retirement benefit provisions of KERS Non-Hazardous and Hazardous plans. It is not intended to be, nor should it be interpreted as, a complete statement of all benefit provisions:
## Insurance Tier 1: Participation began before 7/1/2003
## Benefit Eligibility: Recipient of a retirement allowance
Benefit: The percentage of member premiums paid by the retirement system are dependent on the number of years of service. Benefits also include duty disability retirements, duty death in service, non-duty death in service and surviving spouse of a retiree.
===== PAGE 43 =====
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
Insurance Tier 2: Participation began on or after 7/1/2003, but before 9/1/2008
Benefit Eligibility: Recipient of a retirement allowance with at least 120 months of service at retirement
## Benefit:
The system provides a monthly contribution subsidy of $10 (Non-hazardous) and $15 (Hazardous) for each year of earned service. The monthly contribution is increased by 1.5% each July 1. Benefits also include duty disability retirements, duty death in service and non-duty death in service.
Insurance Tier 3: Participation began on or after 9/1/2008
Benefit Eligibility: Recipient of a retirement allowance with at least 180 months of service at retirement
Benefit: Tier 3 insurance benefits are identical to Tier 2, except Tier 3 members are required to have at least 180 months of service in order to be eligible.
Contributions: The University was required to contribute at an actuarially determined rate determined by Statute. Per Kentucky Revised Statute Section 78.545(33) normal contribution and past service contribution rates shall be determined by the KRS Board on the basis of an annual valuation last preceding July 1 of a new biennium. The KRS Board may amend contribution rates as of the first day of July of the second year of a biennium, if it is determined on the basis of a subsequent actuarial valuation that amended contribution rates are necessary to satisfy requirements determined in accordance with actuarial bases adopted by the KRS Board.
For the fiscal year ended June 30, 2018, participating employers in the non-hazardous plan contributed 49.47% (41.06% allocated to pension and 8.41% allocated to OPEB) as set by KRS of each non-hazardous employee's creditable compensation. For the fiscal year ended June 30, 2018, participating employers in the Hazardous plan contributed 23.70% (21.44% allocated to pension and 2.26% allocated to OPEB) as set by KRS of each Hazardous employee's creditable compensation. These percentages are inclusive of both pension and insurance payments for employers. Administrative costs of KRS are financed through employer contributions and investment earnings.
The University has met 100% of the contribution funding requirement for the fiscal years ended June 30, 2018. Total current year contributions recognized by the Plan were $1,845,787 ($1,531,999 related to pension and $313,788 related to OPEB) for the year ended June 30, 2018. The OPEB contributions amount does not include the implicit subsidy reported in the amount of $48,179.
Members whose participation began before 9/1/2008:
Nonhazardous contributions equal 5% and Hazardous contributions equal 8% of all creditable compensation. Interest paid on the members' accounts is currently 2.5%; and per statute shall not be less than 2.0%. Member entitled to a full refund of contributions with interest.
Members whose participation began on or after 9/1/2008:
Nonhazardous contributions equal to 6% and Hazardous contributions equal 9% of all creditable compensation, with 5% (Non-hazardous) and 8% (Hazardous) being credited to the member's account and 1% deposited to the KRS 401(h) Account. Interest paid on the members' accounts will be set at 2.5%. Member is entitled to a full refund of contributions and interest in their individual account, however, the 1% contributed to the insurance fund is non-refundable.
(Continued)
===== PAGE 44 =====
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
Members whose participation on or after 1/1/2014:
Nonhazardous contributions equal to 6% and Hazardous contributions equal 9% of all creditable compensation, with 5% (Non-hazardous) and 8% (Hazardous) being credited to the member's account and 1% deposited to the KRS 401(h) Account. Interest paid on the members' accounts will be set at 2.5%. Member is entitled to a full refund of contributions and interest in their individual account, however, the 1% contributed to the insurance fund is non-refundable.
Nonhazardous contributions equal to 6% and Hazardous contributions equal 9% of all creditable compensation, with 5% (Non-hazardous) and 8% (Hazardous) being credited to the member's account and 1% deposited to the KRS 401(h) Account. Interest paid on the members' accounts will be set at 2.5%. Member is entitled to a full refund of contributions and interest in their individual account, however, the 1% contributed to the insurance fund is non-refundable.
Total OPEB Liability: The total other postemployment benefits plan ("OPEB") was determined by an actuarial valuation as of June 30, 2017, using the following actuarial assumptions, applied to all periods included in the measurement:
Price inflation
2.30 percent
Payroll growth rate
Salary increases
0.0 percent for KERS non-hazardous
Investment rate of return
3.05 percent, average
Healthcare trend rates
6.25 percent
Pre-65
Initial trend starting at 7.25 percent at January 1, 2019 and gradually decreasing to an ultimate trend rate of 4.05 percent over a period of 13 years.
Post-65
Initial trend starting at 5.10 percent at January 1, 2019 and gradually decreasing to an ultimate trend rate of 4.05 percent over a period of 11 years.
The mortality table used for active members is RP-2000 Combined Mortality Table projected with Scale BB to 2013 (multiplied by 50% for males and 30% for females). For healthy retired members and beneficiaries, the mortality table used is the RP-2000 Combined Mortality Table projected with Scale BB to 2013 (set back 1 year for females). For disabled members, the RP-2000 Combined Disabled Mortality Table projected with Scale BB to 2013 (set back 4 years for males) is used for the period after disability retirement. There is some margin in the current mortality tables for possible future improvement in mortality rates and that margin will be reviewed again when the next experience investigation is conducted. The actuarial assumptions used in the June 30, 2017 valuation were based on the results of an actuarial experience study for the period July 1, 2008 – June 30, 2013.
Discount rate assumptions:
(a) Discount Rate: The discount rate used to measure the total Non-hazardous OPEB liability was 5.83%, which was reduced from the 6.90% discount rate used in the prior year. The discount rate used to measure the total Hazardous OPEB liability was 5.87%, which was reduced from the 7.20% discount rate used in the prior year.
(Continued)
===== PAGE 45 =====
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
(b) Projected Cash Flows: The projection of cash flows used to determine the discount rate assumed the local employers and plan members would contribute the actuarially determined contribution rate of projected compensation over the remaining 26-year amortization period of the unfunded actuarial accrued liability.
(c) Long-Term Rate of Return: The long-term expected return on plan assets is reviewed as part of the regular experience studies prepared every five years for the System. The most recent analysis, performed for the period covering fiscal years 2008 through 2013 is outlined in a report dated April 30, 2014. However, the Board of KRS has the authority to review the assumptions on a more frequent basis and adopt new assumptions prior to the next scheduled experience study. The long-term expected rate of return was determined by using a building-block method in which best-estimate ranges of expected future real rate of returns are developed for each asset class. The ranges are combined by weighting the expected future real rate of return by the target asset allocation percentage.
(d) Municipal Bond Rate: The discount rate determination used a municipal bond rate of 3.56% as reported in Fidelity Index's “20-Year Municipal GO AA Index” as of June 30, 2017.
(e) Period of Projected Benefit Payments: Current assets, future contributions, and investment earnings are projected to be sufficient to pay the projected benefit payments from the retirement system. However, the cost associated with the implicit employer subsidy is not currently being included in the calculation of the system's actuarial determined contributions, and it is the actuary's understanding that any cost associated with the implicit subsidy will not be paid out of the system's trust. Therefore, the municipal bond rate was applied to future expected benefit payments associated with the implicit subsidy.
(f) Assumed Asset Allocations: The target asset allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table:
| Asset Class | Target Allocation | Long-Term Expected Real Rate of Return | | US Equity | 17.50% | 5.97% | | International Equity | 17.50% | 7.85% | | Global Bonds | 4.00% | 2.63% | | Global Credit | 2.00% | 3.63% | | High Yield | 7.00% | 5.75% | | Emerging Market Debt | 5.00% | 5.50% | | Private Credit | 10.00% | 8.75% | | Real Estate | 5.00% | 7.63% | | Absolute Return | 10.00% | 5.63% | | Real Return | 10.00% | 6.13% | | Private Equity | 10.00% | 8.25% | | Cash | 2.00% | 1.88% | | Total | 100.00% | 6.56% |
The long-term expected rate of return on pension plan assets was established by the KRS Board of Trustees at 6.25% based on a blending of the factors described above.
(Continued)
===== PAGE 46 =====
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
(g) Sensitivity Analysis: This paragraph requires disclosure of the sensitivity of the net OPEB liability to changes in the discount rate and changes in the healthcare cost trend rate.
## Non-hazardous
The following presents the University’s allocated portion of the Non-hazardous net OPEB liability of the System, calculated using the discount rate of 5.83% percent, as well as what the University’s allocated portion of the System’s net OPEB liability would be if it were calculated using a discount rate that is 1-percentage-point lower (4.83 percent) or 1-percentage-point higher (6.83 percent) than the current rate for Non-hazardous:
| Current | | 1% Decrease | Discount Rate | 1% Increase | | (4.83%) | (5.83%) | (6.83%) | | The University’s Net OPEB liability – Non-hazardous | $ 7,223,284 | $ 6,178,390 | $ 5,310,018 |
The following presents the University’s allocated portion of the Non-hazardous net OPEB liability of the System, calculated using the healthcare cost trend rate of percent, as well as what the University’s allocated portion of the System’s net OPEB liability would be if it were calculated using a healthcare cost trend rate that is 1-percentage-point lower or 1-percentage-point higher than the current rate for Non-hazardous:
| Current Healthcare | | 1% Decrease | Cost Trend Rate | 1% Increase | | The University’s Net OPEB liability – Non-hazardous | $ 5,249,63 | $ 6,178,390 | $7,344,612 |
## Hazardous
The following presents The University’s allocated portion of the Hazardous net OPEB liability of the System, calculated using the discount rate of 5.87% percent, as well as what the University’s allocated portion of the System’s net OPEB liability would be if it were calculated using a discount rate that is 1-percentage-point lower (4.87 percent) or 1-percentage-point higher (6.87 percent) than the current rate for Hazardous:
| Current | | 1% Decrease\n(4.87%) | Discount Rate\n(5.87%) | 1% Increase\n(6.87%) | | The University’s Net OPEB liability – Hazardous | $ 35,037 | $ 2,877 | $ (23,473) |
The following presents the University’s allocated portion of the Hazardous net OPEB liability of the System, calculated using the healthcare cost trend rate of percent, as well as what the University’s allocated portion of the System’s net OPEB liability would be if it were calculated using a healthcare cost trend rate that is 1-percentage-point lower or 1-percentage-point higher than the current rate for Hazardous:
===== PAGE 47 =====
NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
| Current Healthcare | | 1% Decrease | Cost Trend Rate | 1% Increase | | The University's Net OPEB liability – Hazardous | $ (23,721) | $ 2,877 | $ 35,894 |
Employer's Portion of the Collective OPEB Liability: The University's proportionate share of the Non-hazardous net OPEB liability, as indicated in the prior table, is $6,178,390, or approximately 0.243631%. The University's proportionate share of the Hazardous net OPEB liability, as indicated in the prior table, is $2,877, or approximately 0.047701%. The net pension liabilities were distributed based on 2017 actual employer contributions to the plan.
Measurement Date: June 30, 2017 is the actuarial valuation date and measurement date upon which the total pension liability is based.
Changes in Assumptions and Benefit Terms: Since the prior measurement date, the demographic and economic assumptions that affect the measurement of the total OPEB liability have been updated as follows:
The assumed investment rate of return was decreased from 6.75% to 5.25% (Non-hazardous) and 7.50% to 6.25% (Hazardous).
- The assumed rate of inflation was reduced from 3.25% to 2.30%.
- Payroll growth assumption was reduced from 4.00% to 3.05%.
Changes Since Measurement Date: There were no changes between the measurement date of the collective net OPEB liability and the employer's reporting date.
OPEB Expense: The University was allocated pension expense of $612,902 related to the KERS Non-Hazardous and $5,128 related to the KERS Hazardous for the year ending June 30, 2018.
Deferred Outflows and Deferred Inflows: Since certain expense items are amortized over closed periods each year, the deferred portions of these items must be tracked annually. If the amounts serve to reduce OPEB expense they are labeled as deferred inflows. If they will increase OPEB expense they are labeled deferred outflows. The amortization of these amounts is accomplished on a level dollar basis, with no interest included in the deferred amounts. Experience gains/losses and the impact of changes in actuarial assumptions, if any, are amortized over the average remaining service life of the active and inactive System members at the beginning of the fiscal year. Investment gains and losses are amortized over a fixed five-year period. Deferred inflows and outflows as of the Measurement Date include:
Non-hazardous
| Deferred Outflows of Resources | Deferred Inflows of Resources | | Difference between expected and actual experience | $- | $7,646 | | Change of assumptions | 808,938 | - | | Changes in proportion and differences between employer contributions and proportionate shares of contributions | - | 45,341 | | Differences between expected and actual investment earning on plan investments | - | 79,967 | | 808,938 | 132,954 | | Contributions subsequent to the measurement date | 349,447 | - | | Total | $1,158,385 | $132,954 |
(Continued)
===== PAGE 48 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
Deferred outflows of resources resulting from employer contributions subsequent to the measurement date of $301,336, which include the implicit subsidy reported of $48,111, will be recognized as a reduction of net OPEB liability in the year ending June 30, 2019. The remainder of the deferred outflows and deferred inflows of resources are amortized over three to five years with remaining amortization as follows:
| Year ending June 30: | | | | 2018 | $ | 168,525 | | 2019 | | 168,525 | | 2020 | | 168,525 | | 2021 | | 168,525 | | 2022 | | 1,885 |
## Hazardous
| Deferred Outflows of Resources | Deferred Inflows of Resources | | Difference between expected and actual experience | $- | $ 413 | | Change of assumptions | 35,865 | - | | Changes in proportion and differences between employer contributions and proportionate share of plan contributions | - | 428 | | Differences between expected and actual investment earning on plan investments | - | 10,302 | | 35,865 | 11,143 | | Contributions subsequent to the measurement date | 12,520 | - | | Total | $ 48,385 | $ 11,143 |
Deferred outflows of resources resulting from employer contributions subsequent to the measurement date of $12,452, which include the implicit subsidy reported of $68, will be recognized as a reduction of net OPEB liability in the year ending June 30, 2019. The remainder of the deferred outflows and deferred inflows of resources are amortized over three to five years with remaining amortization as follows:
| Year ending June 30: | | | | 2018 | $ | 4,045 | | 2019 | | 4,045 | | 2020 | | 4,045 | | 2021 | | 4,045 | | 2022 | | 6,621 | | Thereafter | | 1,921 |
OPEB Plan Fiduciary Net Position: Detailed information about the KERS OPEB plans' fiduciary net position is available in the separately issued OPEB plan financial reports.
===== PAGE 49 =====
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
## Kentucky Teachers' Retirement System
Medical Insurance Plan
Plan Description - In addition to the pension benefits previously described, Kentucky Revised Statute 161.675 requires KTRS to provide post-employment healthcare benefits to eligible members and dependents. The KTRS Medical Insurance benefit is a cost-sharing multiple employer defined benefit plan. Changes made to the medical plan may be made by the KTRS Board of Trustees, the Kentucky Department of Employee Insurance and the General Assembly.
Benefits Provided - To be eligible for medical benefits, the member must have retired either for service or disability. The KTRS Medical Insurance Fund offers coverage to members under the age of 65 through the Kentucky Employees Health Plan administered by the Kentucky Department of Employee Insurance. KTRS retired members are given a supplement to be used for payment of their health insurance premium. The amount of the member's supplement is based on a contribution supplement table approved by the KTRS Board of Trustees. The retired member pays premiums in excess of the monthly supplement. Once retired members and eligible spouses attain age 65 and are Medicare eligible, coverage is obtained through the KTRS Medicare Eligible Health Plan.
Contributions - In order to fund the post-retirement healthcare benefit, seven and one-half percent (7.50%) of the gross annual payroll of members is contributed. Three percent (3.75%) is paid by member contributions and three quarters percent (0.75%) from state appropriation and three percent (3.00%) from the employer. The state contributes the net cost of health insurance premiums for members who retired on or after July 1, 2010 who are in the non-Medicare eligible group. Also, the premiums collected from retirees as described in the plan description and investment interest help meet the medical expenses of the plan.
## OPEB Liabilities, OPEB Expense, and Deferred Outflows of Resources and Deferred Inflows
of Resources Related to OPEBs - At June 30, 2018, the University reported a liability of $5,799,000 for its proportionate share of the collective net OPEB liability that reflected a reduction for state OPEB support provided to the University. The collective net OPEB liability was measured as of June 30, 2017, and the total OPEB liability used to calculate the collective net OPEB liability was based on a projection of the University's long-term share of contributions to the OPEB plan relative to the projected contributions of all participating employers, actuarially determined. At June 30, 2017, the University's proportion was 0.162629%.
The amount recognized by the University as its proportionate share of the OPEB liability, the related State support, and the total portion of the net OPEB liability that was associated with the University were as follows:
| University's proportionate share of the net OPEB liability | $ 5,799,000 | | State's proportionate share of the net OPEB liability associated with the University | 2,630,000 | | Total | $ 8,429,000 |
(Continued)
===== PAGE 50 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
For the year ended June 30, 2018, the University recognized OPEB expense of $377,000 and revenue of $171,000 for support provided by the State. At June 30, 2018, the University reported deferred outflows of resources and deferred inflows of resources related to OPEBs from the following sources:
| Deferred Outflows of Resources | Deferred Inflows of Resources | | Net difference between projected and actual earnings on OPEB plan investments | $- | $ 60,000 | | University's contributions subsequent to the measurement date | 283,192 | - | | Total | $ 283,192 | $ 60,000 |
Of the total amount reported as deferred outflows of resources related to OPEB, $283,192 resulting from University contributions subsequent to the measurement date and before the end of the fiscal year will be included as a reduction of the collective net OPEB liability in the year ended June 30, 2019. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to OPEB will be recognized in the University's OPEB expense as follows:
| Year ended June 30: | | | | 2019 | $ | (15,000) | | 2020 | | (15,000) | | 2021 | | (15,000) | | 2022 | | (15,000) |
Actuarial Assumptions - The total OPEB liability in the June 30, 2017 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement:
| Investment rate of return | 8.00%, net of OPEB plan investment expense, including inflation. | | Projected salary increases | 3.50 – 7.20%, including inflation | | Inflation rate | 3.00% | | Real Wage Growth | 0.50% | | Wage Inflation | 3.50% | | Healthcare cost trend rates | | | Under 65 | 7.75% for FY 2017 decreasing to an ultimate rate of 5.00% by FY 2023 | | Ages 65 and Older | 5.75% for FY 2017 decreasing to an ultimate rate of 5.00% by FY 2020 | | Medicare Part B Premiums | 1.02% for FY 2017 with an ultimate rate of 5.00% by 2029 | | Municipal Bond Index Rate | 3.56% | | Discount Rate | 8.00% | | Single Equivalent Interest Rate | 8.00%, net of OPEB plan investment expense, including inflation. |
===== PAGE 51 =====
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
Mortality rates were based on the RP-2000 Combined Mortality Table projected to 2025 with projection scale BB and set forward two years for males and one year for females is used for the period after service retirement and for dependent beneficiaries. The RP-2000 Disabled Mortality Table set forward two years for males and seven years for females is used for the period after disability retirement.
The remaining actuarial assumptions (e.g. initial per capita costs, health care cost trends, rate of plan participation, rates of plan election, etc.) used in the June 30, 2017 valuation were based on a review of recent plan experience done concurrently with the June 30, 2017 valuation.
The long-term expected rate of return on OPEB plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of OPEB plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation.
The target allocation and best estimates of arithmetic real rates of return for each major asset class, as provided by TRS's investment consultant, are summarized in the following table:
| Asset Class | Target Allocation | Long-Term Nominal Rate of Return | | Global Equity | 60.0% | 5.1% | | Fixed Income | 9.0 | 1.2 | | Real Estate | 4.5 | 4.0 | | Private Equity | 5.5 | 6.6 | | High Yield | 10.0 | 4.3 | | Other Additional Categories* | 10.0 | 3.3 | | Cash (LIBOR) | 1.0 | 0.4 | | Total | 100% | |
*Modeled as 50% High Yield and 50% Bank Loans.
Discount Rate - The discount rate used to measure the total OPEB liability was 8.00%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rates and the employer contributions will be made at statutorily required rates. Based on those assumptions, the OPEB plan's fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on OPEB plan investments was applied to all periods of projected benefit payments to determine the total OPEB liability.
===== PAGE 52 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
Sensitivity of the University's proportionate share of the net OPEB liability to changes in the discount rate The following table presents the University's proportionate share of the collective net OPEB liability of the System, calculated using the discount rate of 8.00%, as well as what the University's proportionate share of the collective net OPEB liability would be if it were calculated using a discount rate that is 1-percentage-point lower (7.00%) or 1-percentage-point higher (9.00%) than the current rate:
| 1% Decrease (7.00%) | Current Discount Rate (8.00%) | 1% Increase (9.00%) | | University’s net OPEB liability (MI) | $ 6,752,000 | $ 5,799,000 | $ 5,004,000 |
Sensitivity of the University's proportionate share of the collective net OPEB liability to changes in the healthcare cost trend rates – The following presents the University's proportionate share of the collective net OPEB liability, as well as what the University's proportionate share of the collective net OPEB liability would be if it were calculated using healthcare cost trend rates that were 1-percentage-point lower or 1-percentage-point higher than the current healthcare cost trend rates:
| 1% Decrease | Current Trend Rate | 1% Increase | | University's net OPEB liability (MI) | $ 4,856,000 | $ 5,799,000 | $ 6,961,000 |
OPEB Plan Fiduciary Net Position – Detailed information about the OPEB plan's fiduciary net position is available in the separately issued TRS financial report.
Changes of benefit terms – With the passage of House Bill 471, the eligibility for non-single subsidies (NSS) for the KEHP-participating members who retired prior to July 1, 2010 is restored, but the state will only finance, via its KEHP “Shared Responsibility” contributions, the costs of the NSS related to those KEHP-participating members who retired on or after July 1, 2010.
Methods and assumptions used in the actuarially determined contributions – The actuarially determined contribution rates, as a percentage of payroll, used to determine the actuarially determined contribution amounts in the Schedule of Employer Contributions are calculated as the of the indicated valuation date. The following actuarial methods and assumptions (from the indicated actuarial valuations) were used to determine contribution rates reported in that schedule for the year ending June 30, 2018:
| Valuation date | June 30, 2016 | | Actuarial cost method | Entry Age Normal | | Amortization method | Level Percent of Payroll | | Amortization period | 30 years, Open | | Asset valuation method | Five-year smoothed value | | Inflation | 3.00% | | Real wage growth | 0.50% | | Wage inflation | 3.50% | | Salary increases, including wage inflation | 3.50% - 7.20% | | Discount rate | 8.00% | | Health care cost trends | | | Under 65 | 7.75% for FY 2017 decreases of 5.00% by FY 2022 |
7.75% for FY 2017 decreasing to an ultimate rate of 5.00% by FY 2023
(Continued)
===== PAGE 53 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
# NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
| Ages 65 and older | 5.75% for FY 2017 decreasing to an ultimate rate of 5.00% by FY 2020 | | Medicare Part B premiums | 1.02% for FY 2017 with an ultimate rate of 5.00% by 2029 | | Under age 65 claims | the current premium charged by KEHP is used as the base cost and is projected forward using only the health care trend assumption (no implicit rate subsidy is recognized). |
## Life Insurance Plan
Plan Description – Life Insurance Plan – KTRS administers the life insurance plan as provided by Kentucky Revised Statute 161.655 to eligible active and retired members. The KTRS Life Insurance benefit is a cost-sharing multiple employer defined benefit plan. Changes made to the life insurance plan may be made by the KTRS Board of Trustees and the General Assembly.
Benefits Provided – KTRS provides a life insurance benefit of five thousand dollars payable for members who retire based on service or disability. KTRS provides a life insurance benefit of two thousand dollars payable for its active contributing members. The life insurance benefit is payable upon the death of the member to the member's estate or to a party designated by the member.
Contributions – In order to fund the post-retirement life insurance benefit, three hundredths of one percent (0.03%) of the gross annual payroll of members is contributed by the state.
OPEB Liabilities, OPEB Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to OPEBs: At June 30, 2018, the University reported a liability of $81,000 for its proportionate share of the collective net OPEB liability that reflected a reduction for state OPEB support provided to the University. The collective net OPEB liability was measured as of June 30, 2017, and the total OPEB liability used to calculate the collective net OPEB liability was based on a projection of the University's long-term share of contributions to the OPEB plan relative to the projected contributions of all participating employers, actuarially determined. At June 30, 2017, the University's proportion was 0.369048%.
For the year ended June 30, 2018, the University recognized OPEB expense of $12,000. At June 30, 2018, the University reported deferred outflows of resources and deferred inflows of resources related to OPEB from the following sources:
| Deferred Outflows of Resources | Deferred Inflows of Resources | | Net difference between projected and actual earnings on OPEB plan investments | $ 17,000 | $- | | University's contributions subsequent to the measurement date | 3,832 | - | | Total | $ 20,832 | $- |
(Continued)
===== PAGE 54 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
## NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
Of the total amount reported as deferred outflows of resources related to OPEB, $3,832 resulting from University contributions subsequent to the measurement date and before the end of the fiscal year will be included as a reduction of the collective net OPEB liability in the year ended June 30, 2019. Other amounts reported as deferred outflows of resources and deferred inflows of resources related to OPEB will be recognized in the University's OPEB expense as follows:
| Year ended June 30: | | | | 2019 | $ | 4,000 | | 2020 | | 4,000 | | 2021 | | 4,000 | | 2022 | | 5,000 |
Actuarial Assumptions – The total OPEB liability in the June 30, 2017 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement:
| Investment rate of return | 7.50%, net of OPEB plan investment expense, including inflation. | | Projected salary increases | 3.50 – 7.20%, including inflation | | Inflation rate | 3.00% | | Real Wage Growth | 0.50% | | Wage Inflation | 3.50% | | Municipal Bond Index Rate | 3.56% | | Discount Rate | 7.50% | | Single Equivalent Interest Rate | 7.50%, net of OPEB plan investment expense, including inflation. |
Mortality rates were based on the RP-2000 Combined Mortality Table projected to 2025 with projection scale BB and set forward two years for males and one year for females is used for the period after service retirement and for dependent beneficiaries. The RP-2000 Disabled Mortality Table set forward two years for males and seven years for females is used for the period after disability retirement.
The remaining actuarial assumptions (e.g. initial per capita costs, rate of plan participation, rates of plan election, etc.) used in the June 30, 2017 valuation were based on a review of recent plan experience done concurrently with the June 30, 2017 valuation.
The long-term expected rate of return on OPEB plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of OPEB plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation.
The target allocation and best estimates of arithmetic real rates of return for each major asset class, as provided by TRS's investment consultant, are summarized in the following table:
===== PAGE 55 =====
# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
NOTE 9 - OTHER POSTEMPLOYMENT BENEFITS PLANS (OPEB) (Continued)
| Asset Class | Target Allocation | Long-Term Nominal Rate of Return | | U.S. Large Cap Equity | 38.4% | 4.3% | | U.S. Small Cap Equity | 2.6 | 4.8 | | Developed International Equity | 15.8 | 5.2 | | Emerging Markets Equity | 4.2 | 5.4 | | Fixed Income – Inv. Grade | 16.0 | 1.2 | | Real Estate | 6.0 | 4.0 | | Private Equity | 7.0 | 6.6 | | High Yield | 2.0 | 4.3 | | Other Additional Categories** | 7.0 | 3.3 | | Cash (LIBOR) | 1.0 | 0.5 | | Total | 100% | |
As the LIF investment policy is to change, the above reflects the pension allocation and returns that achieve the target 7.5% long-term rate of return.
** Modeled as 50% High Yield and 50% Bank Loans.
Discount rate - The discount rate used to measure the total OPEB liability for life insurance was 7.50%. The projection of cash flows used to determine the discount rate assumed that the employer contributions will be made at statutorily required rates. Based on those assumptions, the OPEB plan's fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on OPEB plan investments was applied to all periods of projected benefit payments to determine the total OPEB liability.
Sensitivity of the University's proportionate share of the net OPEB liability to changes in the discount rate - The following table presents the University's proportionate share of the collective net OPEB liability of the System, calculated using the discount rate of 7.50%, as well as what the University's proportionate share of the collective net OPEB liability would be if it were calculated using a discount rate that is 1-percentage-point lower (6.50%) or 1-percentage-point higher (8.50%) than the current rate:
| 1% Decrease (6.50%) | Current Discount Rate (7.50%) | 1% Increase (8.50%) | | University’s net OPEB (LI) liability | $ 135,000 | $ 81,000 | $ 37,000 |
OPEB plan fiduciary net position – Detailed information about the KTRS OPEB plans' fiduciary net position is available in the separately issued KTRS financial report.
Summary OPEB Information:
| KERS | KTRS | Total | | June 30, 2018 | | | | | Net OPEB liability | $ 6,181,267 | $ 5,880,000 | $ 12,061,267 | | Deferred outflows of resources | 1,206,770 | 304,024 | 1,510,794 | | Deferred inflows of resources | 144,097 | 60,000 | 204,097 | | Actuarially determined pension expense | 618,030 | 389,000 | 1,007,030 |
===== PAGE 56 =====
## NOTE 10 - COMMITMENTS AND CONTINGENCIES
The University is a party to various lawsuits and other claims in the ordinary course of business. University officials are of the opinion, based upon the advice of legal counsel, that the ultimate resolution of these matters will not have a material effect on the financial statements of the University.
The University receives financial assistance from federal and state agencies in the form of grants and awards. The expenditure of funds received from these programs generally requires compliance with terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audit could become a liability of the applicable fund.
## NOTE 11 - RISK MANAGEMENT
The University is exposed to various risks of loss from torts; theft of, damage to, destruction of assets; business interruption; employee injuries and illnesses; natural disasters; and employee health and accident benefits. Commercial insurance coverage is purchased for claims arising from these risks. Settled claims have not exceeded this commercial coverage in any of the three preceding years. As a sovereign entity of the Commonwealth of Kentucky, the Kentucky Board of Claims handles tort claims on behalf of the University.
## NOTE 12 - SCHEDULE OF EXPENSES BY PROGRAM
In the Statement of Revenues, Expenses and Changes in Net Position, operating expenses are presented by functional expense purpose. Depreciation is allocated below based on functional classification as required by IPEDS for Fiscal Year 2018. Functional expense purpose is classified by natural classification as follows:
| Compensation and Benefits | Supplies and Services | Scholarships and Fellowships | Operations | | | | | Depreciation | Maintenance | Total | | Instruction | $ 8,539,997 | $ 1,081,638 | $ - | $ 838,237 | $ 937,501 | $ 11,397,373 | | Research | 5,269,187 | 2,792,072 | - | 1,151,000 | 825,679 | 10,037,938 | | Public service | 5,582,327 | 3,779,440 | - | 506,494 | 884,476 | 10,752,737 | | Academic support | 1,042,013 | 379,742 | - | 192,626 | 144,694 | 1,759,075 | | Student services | 4,107,648 | 2,223,957 | - | 588,539 | 620,241 | 7,540,385 | | Institutional support | 6,844,384 | 5,050,985 | - | 866,779 | 1,143,850 | 13,905,998 | | Operation & maintenance | | | | | | | | of plant | 1,225,026 | 3,518,443 | - | 849,601 | (5,593,070) | - | | Auxiliary enterprises | 585,940 | 4,707,027 | - | 401,833 | 510,415 | 6,205,215 | | Student financial aid | 253,906 | 11,870 | 5,555,850 | 49,438 | 526,214 | 6,397,278 | | Total operating expense | $ 33,450,428 | $ 23,545,174 | $ 5,555,850 | $ 5,444,547 | $ - | $ 67,995,999 |
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## NOTE 13 – KENTUCKY STATE UNIVERSITY FOUNDATION, INC
## Description of the Organization
Kentucky State University Foundation, Inc. (the Foundation) is a Kentucky not-for-profit corporation formed to receive, invest and expend funds to promote and implement educational and developmental activities at Kentucky State University (the University). The Foundation is managed by a Board of Trustees independent from that of the University. The Foundation is supported primarily through contributions from alumni.
## Summary of Significant Accounting Policies
Use of Estimates: The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) which require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. The following is a summary of the significant accounting policies consistently followed by the Foundation in the preparation of its financial statements.
Basis of Presentation: Net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the Foundation are classified and reported as follows:
Unrestricted net assets - Net assets that are not subject to donor-imposed stipulations.
Temporarily restricted net assets - Net assets subject to donor-imposed stipulations that will be met by actions of the Foundation, pursuant to those stipulations or that expire by the passage of time. Assets released from restrictions during 2018 primarily relate to scholarships and University and student support.
Permanently restricted net assets - Net assets subject to donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or removed by actions of the Foundation pursuant to those stipulations. Permanently restricted net assets consist of assets from which the income can be used toward University scholarships and Foundation operations.
Cash and Cash Equivalents: The Foundation considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Foundation has a concentration of credit risk in that it periodically maintains bank accounts which, at times, may exceed the coverage provided by the Federal Deposit Insurance Corporation (FDIC). The Foundation has not experienced any losses on such amounts. The Foundation believes it is not exposed to any significant credit risk on cash.
Investments: Investments are stated at fair value based on closing market quotations for such securities or similar securities.
Property and Equipment: Property and equipment is recorded at cost if purchased or fair market value at date of contribution if contributed. If the donors stipulate how long the assets must be used, the contributions of property and equipment are recorded as restricted support. In the absence of such stipulations, these contributions are recorded as unrestricted support. Depreciation is computed on a straight-line basis over the estimated useful lives of the respective assets.
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### NOTE 13 – KENTUCKY STATE UNIVERSITY FOUNDATION, INC. (Continued)
## Summary of Significant Accounting Policies (Continued)
Revenue Recognition: Contributions are generally recognized when received. However, pledges are recognized when the donor makes a promise to give to the Foundation that is, in substance, unconditional. Contributions that are restricted by the donor are reported as increases in unrestricted net assets if the restrictions expire in the fiscal year in which the contributions are recognized. All other donor-restricted contributions are reported as increases in temporarily or permanently restricted net assets depending on the nature of the restrictions. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets.
Income Taxes: Kentucky State University Foundation, Inc., a not-for-profit organization operating under Section 501(c)(3) of the Internal Revenue Code, is generally exempt from federal, state and local income taxes. The Foundation's management does not believe the Foundation has any unrelated business income. Accordingly, no provision for income taxes is recorded in the financial statements.
Recent Accounting Pronouncements: In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, that changes how a not-for-profit organization classifies its net assets, as well as the information it presents in the financial statements and notes about its liquidity, financial performance, and cash flows. The ASU includes a reduction in the number of net asset categories from three to two, conforming requirements on releases of capital restrictions, several new requirements related to expense presentation and disclosure (including investment expenses), and new required disclosures communicating information useful in assessing liquidity. This ASU will be effective for the Foundation for fiscal years beginning after December 15, 2017. Early adoption is permitted. The Foundation is currently evaluating the effects adoption of this guidance will have on the financial statements.
Subsequent Events: The Foundation's management has evaluated subsequent events for accounting and disclosure requirements through September 24, 2018, the date the financial statements were available to be issued. There were no events occurring during the evaluation period that required recognition or disclosure in the financial statements.
## Investments
Investments as of June 30, 2018 are summarized as follows:
| Equity securities | $ 6,272,340 | | Debt securities | 2,680,103 | | U.S. government securities | 432,873 | | Total investments | $ 9,385,316 |
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# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
### NOTE 13 – KENTUCKY STATE UNIVERSITY FOUNDATION, INC. (Continued)
## Fair Value Measurements
The Foundation classifies its investments based on a hierarchy consisting of: Level 1 (valued using quoted prices from active markets for identical assets), Level 2 (not traded on an active market but for which observable market inputs are readily available), and Level 3 (valued based on significant unobservable inputs). The investment's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used as of June 30, 2018.
Common stocks, municipal bonds, corporate bonds, U.S. government securities, and equity exchange traded funds: Valued at the closing price reported on the active market on which the individual securities are traded. Some level 2 inputs are used for pricing of municipal and corporate bonds; therefore, they are all classified as level 2.
Mutual funds: Valued at the daily closing price as reported by the fund. Mutual funds held by the Foundation are open-end mutual funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value (NAV) and to transact at that price. The mutual funds held by the Foundation are deemed to be actively traded.
Real estate investment trust: Valued at the NAV of shares held by the Foundation at year end.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Foundation believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Fair value measurements as of June 30, 2018 are as follows:
| Level 1 | Level 2 | Level 3 | Total | | Common stocks | $ 3,792,259 | $ - | $ - | $ 3,792,259 | | Mutual funds | 2,276,686 | - | - | 2,276,686 | | Municipal bonds | - | 259,760 | - | 259,760 | | Corporate bonds | - | 2,420,343 | - | 2,420,343 | | U.S government securities | 432,873 | - | - | 432,873 | | Equity exchange traded funds | 203,395 | - | - | 203,395 | | Total | $ 6,705,213 | $ 2,680,103 | $ - | $ 9,385,316 |
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# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
### NOTE 13 – KENTUCKY STATE UNIVERSITY FOUNDATION, INC. (Continued)
## Temporarily Restricted Net Assets
For the year ended June 30, 2018, net assets were released from donor restrictions by incurring expenses satisfying the purpose of the restrictions specified by donors as follows:
| Endowment spending allocation | $ 676,590 | | University support | 116,122 | | Scholarships | 120,107 | | Operating and other expenses | 57,265 | | Student support | 127,275 | | Personal services | 18,864 | | Travel and other expenses | 55,936 | | Total release from restrictions | $ 1,172,159 |
## Retirement Plan
The Foundation has a defined contribution profit sharing plan which covers all employees who meet certain requirements. Foundation contributions are discretionary. No contributions were made for the year ended June 30, 2018.
## Endowment Composition
On July 15, 2010, The Commonwealth of Kentucky adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA). The Foundation follows UPMIFA and its own governing documents. The Foundation has interpreted UPMIFA as requiring the preservation of the corpus of the donor-restricted endowment funds absent explicit donor stipulations to the contrary, and other amounts as deemed necessary by the board. As a result of this interpretation, the Foundation classifies as permanently restricted net assets (1) the original value of gifts donated to the permanent endowment, (2) the original value of subsequent gifts to the permanent endowment, and (3) accumulations to permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The Foundation has determined that the balance of its endowments includes funds that require that the income and net appreciation be restricted to certain uses for the benefit of participants.
Upon review, the Foundation has determined that appropriate expenditures have been made to meet all donor restrictions regarding balances recorded in the endowment fund.
Spending Policy: The Foundation spending policy is to distribute an amount at least equal to 3-5% of a moving sixteen quarter average of the fair value of the endowment funds. Accordingly, over the long term, the Foundation expects its spending policy to allow its endowment assets to grow at an average rate of 3% annually. This is consistent with the Foundation's objective to maintain the purchasing power of endowment assets as well as to provide additional real growth through investment return.
From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the level the donor requires the Foundation to retain as a fund of perpetual duration. There were no such deficiencies as of June 30, 2018.
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# KENTUCKY STATE UNIVERSITY NOTES TO FINANCIAL STATEMENTS June 30, 2018
### NOTE 13 – KENTUCKY STATE UNIVERSITY FOUNDATION, INC. (Continued)
Endowment Composition (Continued)
Endowment net asset composition by type of fund as of June 30, 2018 is as follows:
| Unrestricted | Temporarily Restricted | Permanently Restricted | Total Net Endowment Assets | | Donor-restricted endowment funds | $ - | $ 3,788,318 | $ 3,794,106 | $ 7,582,424 | | Changes in endowment net assets as of June 30, 2018 are as follows: | | Unrestricted | Temporarily Restricted | Permanently Restricted | Total Net Endowment Assets | | Endowment net assets, beginning of year | $ - | $ 3,981,609 | $ 3,711,724 | $ 7,693,333 | | Contributions | - | - | 78,882 | 78,882 | | Interest and dividends | - | 186,272 | - | 186,272 | | Realized and unrealized gains | - | 297,027 | - | 297,027 | | Amounts appropriated for expenditure | - | (676,590) | - | (676,590) | | Reclassifications | - | - | 3,500 | 3,500 | | Endowment net assets, end of year | $ - | $ 3,788,318 | $ 3,794,106 | $ 7,582,424 |
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REQUIRED SUPPLEMENTARY INFORMATION
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KENTUCKY STATE UNIVERSITY
SCHEDULE OF THE UNIVERSITY'S (KSU)
PROPORTIONATE SHARE OF THE NET PENSION LIABILITY
KENTUCKY EMPLOYEES' RETIREMENT SYSTEM
June 30, 2018
(Amounts in thousands)
| Non-hazardous | | 2018 | 2017 | 2016 | 2015 | | | KSU's proportion of the net pension liability | $ 32,618 | $ 29,146 | $ 29,408 | $ 28,555 | | | KSU's proportionate share of the net pension liability | 0.24% | 0.26% | 0.29% | 0.32% | | | KSU's covered payroll | $ 3,888 | $ 4,321 | $ 5,390 | $ 5,453 | | | KSU's proportionate share of the net pension liability as a share of its covered payroll | 838.94% | 674.52% | 545.60% | 523.66% | | | Plan fiduciary net position as a percentage of total pension liability | 13.30% | 14.80% | 18.83% | 22.32% | | | Hazardous | | 2018 | | | | | | KSU's proportion of the net pension liability | $ 237 | | | | | | KSU's proportionate share of the net pension liability | 0.05% | | | | | | KSU's covered payroll | $ 79 | | | | | | KSU's proportionate share of the net pension liability as a share of its covered payroll | 300.00% | | | | | | Plan fiduciary net position as a percentage of total pension liability | 54.80% | | | | |
Changes in Assumptions: For fiscal year 2017, the demographic and economic assumptions that affect the measurement of the total pension liability have been updated as follows:
The assumed investment rate of return was decreased from 6.75% to 5.25% (Non-hazardous) and 7.50% to 6.25% (Hazardous).
- The assumed rate of inflation was reduced from 3.25% to 2.30%.
- Payroll growth assumption was reduced from 4.00% to 3.05%.
Note: This table represents data that is one year in arrears.
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# KENTUCKY STATE UNIVERSITY SCHEDULE OF THE UNIVERSITY'S CONTRIBUTION KENTUCKY EMPLOYEES' RETIREMENT SYSTEM June 30, 2018 (Amounts in thousands)
| Non-hazardous | | 2018 | 2017 | 2016 | 2015 | | | Contractually required contribution | $ 1,471 | $ 1,516 | $ 1,312 | $ | 1,515 | | Contributions in relation to the contractually required contribution | $ 1,471 | $ 1,516 | $ 1,312 | $ | 1,515 | | Contribution deficiency (excess) | $ - | $ - | $ - | $ - | - | | KSU covered payroll | $ 3,583 | $ 3,888 | $ 4,321 | $ 5,390 | | | Contributions as a percentage of covered payroll | 41.05% | 38.99% | 30.36% | 28.11% | | | Hazardous | | 2018 | | 2018 | | Contractually required contribution | $ 61 | | Contributions in relation to the contractually required contribution | $ 61 | | Contribution deficiency (excess) | $ - | | KSU covered payroll | $ 309 | | Contributions as a percentage of covered payroll | 19.74% |
Note: These are 10-year schedules. However, the information in this schedule is not required to be presented retroactively. Years will be added to this schedule in future fiscal years until 10-years of information is available.
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# KENTUCKY STATE UNIVERSITY SCHEDULE OF THE UNIVERSITY'S (KSU) PROPORTIONATE SHARE OF THE NET PENSION LIABILITY KENTUCKY TEACHERS' RETIREMENT SYSTEM June 30, 2018 (Amounts in thousands)
| 2018 | 2017 | 2016 | 2015 | | KSU's proportion of the net pension liability | $ 40,538 | $ 68,926 | $ 63,956 | $ 64,987 | | KSU's proportionate share of the net pension liability | 0.14% | 0.22% | 0.23% | 0.30% | | State's proportionate share of the collective net pension liability | $ 32,308 | $ 6,496 | $ 6,503 | $ 7,374 | | KSU's covered payroll | $ 17,779 | $ 16,961 | $ 19,076 | $ 21,451 | | KSU's proportionate share of the net pension liability as a share of its covered payroll | 228.01% | 406.38% | 335.27% | 302.96% | | Plan fiduciary net position as a percentage of total pension liability | 39.83% | 35.22% | 42.49% | 45.59% |
Note: This table represents data that is one year in arrears.
Changes in assumptions: For fiscal year 2018, the KTRS plan discount rate increased from 4.20 percent to 4.49 percent. For fiscal year 2017, the KTRS plan discount rate decreased from 4.88 percent to 4.20 percent. For fiscal year 2016, there was a decrease in the assumed investment rate of return from 7.75 percent to 7.50 percent; a decrease in the assumed rate of inflation from 3.50 percent to 3.25 percent; a decrease in the assumed rate of wage inflation from 1.00 percent to 0.75 percent and a decrease in the payroll growth assumption from 4.50 percent to 4.00 percent.
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# KENTUCKY STATE UNIVERSITY SCHEDULE OF THE UNIVERSITY'S CONTRIBUTION KENTUCKY TEACHERS' RETIREMENT SYSTEM June 30, 2018 (Amounts in thousands)
| 2018 | 2017 | 2016 | 2015 | | Contractually required contribution | $ 1,730 | $ 1,879 | $ 1,773 | $ 2,059 | | Contributions in relation to the contractually required contribution | $ 1,730 | $ 1,879 | $ 1,773 | $ 2,059 | | Contribution deficiency (excess) | - | - | - | - | | KSU covered payroll | $ 19,083 | $ 17,779 | $ 16,961 | $ 19,076 | | Contributions as a percentage of covered payroll | 9.07% | 10.57% | 10.45% | 10.79% |
Note: These are 10-year schedules. However, the information in this schedule is not required to be presented retroactively. Years will be added to this schedule in future fiscal years until 10-years of information is available.
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## KENTUCKY STATE UNIVERSITY SCHEDULE OF THE UNIVERSITY'S (KSU) PROPORTIONATE SHARE OF THE NET OPEB LIABILITY KENTUCKY EMPLOYEES RETIREMENT SYSTEM June 30, 2018 (Amounts in thousands)
| Non-hazardous | 2018 | | KSU's proportion of the net OPEB liability | $ | 6,178 | | KSU's proportionate share of the net OPEB liability | | 0.24% | | KSU's covered payroll | $ | 3,888 | | KSU's proportionate share of the net OPEB liability as a share of its covered payroll | | 158.90% | | Plan fiduciary net position as a percentage of total pension liability | | 24.40% | | Hazardous | 2018 | | KSU's proportion of the net OPEB liability | $ | 3 | | KSU's proportionate share of the net OPEB liability | | 0.05% | | KSU's covered payroll | $ | 79 | | KSU's proportionate share of the net OPEB liability as a share of its covered payroll | | 3.80% | | Plan fiduciary net position as a percentage of total pension liability | | 98.80% |
Note: This table represents data that is one year in arrears.
SCHEDULE OF THE UNIVERSITY'S OPEB CONTRIBUTIONS KENTUCKY EMPLOYEES RETIREMENT SYSTEM June 30, 2018 (Amounts in thousands)
| Non-hazardous | 2018 | | Contractually required contribution | $ 301 | | Contributions in relation to the contractually required contribution | $ 301 | | Contribution deficiency (excess) | $ - | | KSU covered payroll | $ 3,583 | | Contributions as a percentage of covered payroll | 8.40% |
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# KENTUCKY STATE UNIVERSITY SCHEDULE OF THE UNIVERSITY'S OPEB CONTRIBUTIONS KENTUCKY EMPLOYEES RETIREMENT SYSTEM June 30, 2018 (Amounts in thousands)
## Hazardous
2018
Contractually required contribution $12
Contributions in relation to the
contractually required contribution $12
Contribution deficiency (excess) KSU covered payroll309
Contributions as a percentage of
covered payroll 3.88%
Note: These are 10-year schedules. However, the information in this schedule is not required to be presented retroactively. Years will be added to this schedule in future fiscal years until 10-years of information is available.
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KENTUCKY STATE UNIVERSITY SCHEDULE OF THE UNIVERSITY'S (KSU) PROPORTIONATE SHARE OF THE NET OPEB LIABILITY KENTUCKY TEACHERS' RETIREMENT SYSTEM June 30, 2018 (Amounts in thousands)
| 2018 | | KSU's proportion of the net OPEB liability | $ 5,880 | | KSU's proportionate share of the net OPEB liability | 0.24% | | KSU's covered payroll | $ 17,779 | | KSU's proportionate share of the net OPEB liability as a share of its covered employee payroll | 33.07% | | Plan fiduciary net position as a percentage of total pension liability | 21.18% |
Note: This table represents data that is one year in arrears.
SCHEDULE OF THE UNIVERSITY'S OPEB CONTRIBUTIONS KENTUCKY TEACHERS' RETIREMENT SYSTEM June 30, 2018 (Amounts in thousands)
| 2018 | | Contractually required contribution | $ | 287 | | Contributions in relation to the contractually required contribution | $ | 287 | | Contribution deficiency (excess) | $ | - | | KSU covered payroll | $ | 19,083 | | Contributions as a percentage of covered payroll | | 1.50% |
Note: These are 10-year schedules. However, the information in this schedule is not required to be presented retroactively. Years will be added to this schedule in future fiscal years until 10-years of information is available.
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# INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
Members of the Board of Regents
Kentucky State University
Frankfort, Kentucky
We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Kentucky State University (the University), a component unit of the Commonwealth of Kentucky, as of and for the year ended June 30, 2018, and the related notes to the financial statements, which collectively comprise the University's basic financial statements and have issued our report thereon dated October 31, 2018. Our report includes a reference to other auditors who audited the financial statements of Kentucky State University Foundation, Inc. (Foundation) as described in our report on the University's financial statements. The financial statements of the Foundation were not audited in accordance with Government Auditing Standards.
## Internal Control over Financial Reporting
In planning and performing our audit of the financial statements, we considered the University's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the University's internal control. Accordingly, we do not express an opinion on the effectiveness of the University's internal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be a material weakness and a significant deficiency.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiency described in the accompanying schedule of findings and questioned costs to be a material weakness (Finding 2018-002).
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiency described in the accompanying schedule of findings and questioned costs to be a significant deficiency (Finding 2018-001).
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## Compliance and Other Matters
As part of obtaining reasonable assurance about whether the University's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
## The University's Response to Findings
The University's responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The University's responses were not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them.
## Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity's internal control and compliance. Accordingly, this communication is not suitable for any other purpose.
Crowe LLP
Crowe LLP
Lexington, Kentucky
October 31, 2018
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# KENTUCKY STATE UNIVERSITY SCHEDULE OF FINDINGS AND RESPONSES June 30, 2018
## Finding 2018-001 – Controls Over Financial Reporting
Criteria: Applicable standards state that management is responsible for having internal controls in place to provide appropriate and reliable financial reports, and to select and apply appropriate accounting principles. Management is not required to prepare their financial reports, but management needs to demonstrate the level of qualifications and controls to prepare their financial reports without significant deficiencies in these controls.
Condition: During the current year audit, the University did not have adequate controls in place over financial reporting to allow for timely, accurate financial reporting. We noted that not all general ledger accounts had been reconciled to subsidiary ledgers or other supporting detail on at least a quarterly basis.
Context: The University experienced turnover in key accounting positions resulting in a lack of timely reconciliations and production of timely financial reports. Management also identified errors in the system-generated calculation of depreciation expense of certain capital assets resulting in an adjusting entry during the audit.
Effect: The existence of inaccurate transaction postings, as well as unreconciled accounts can affect the financial statement information that is available for making informed business decisions and supervision of operations. This weakness in the financial reporting controls infrastructure increases the risk of errors in the financial records and is less likely to detect irregularities, including fraud, on a timely basis. A periodic reconciliation process allows for the preparation of accurate and timely financial statements.
Cause: The above condition appears to be the result of the inability to fully implement a timely review and reconciliation process.
Recommendation: We recommend the University implement internal control procedures, which require general ledger accounts to be reconciled at least quarterly.
Views of responsible officials and planned corrective action: Management agrees with the finding. See corrective action plan.
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## Finding 2018-002 – Controls Over Payroll Procedures
Criteria: Management is responsible for maintaining an adequate internal control structure surrounding key processes and cycles, in order to facilitate accurate and timely financial reporting.
Condition: During the current year audit, the University did not have adequate internal controls in place over payroll procedures.
Context: During the current year audit, the following issues relating to payroll were identified:
Certain employees who are required to submit time sheets are not completing them
• Completed time sheets are not properly approved by a supervisor
- Vacation leave is not being properly reported to payroll via time sheets
- Leave time not being taken in accordance with University policy
- Withholdings not tracked and remitted to appropriate agencies in a timely manner resulting in inaccuracies and additional payments for penalties
- Improper classification of employees related to retirement plans
• Former employees being paid benefits after termination
Current employees not having appropriate withholding from payroll for benefits
No documentation of required levels of approval of new hires, promotions or pay rate changes
- No payroll change reports processed or reviewed by someone independent of payroll
Effect: The absence of effective internal controls in relation to the payroll process could affect the accuracy of financial statement information. This weakness in accounting infrastructure increases the risk of errors in the financial records and is less likely to detect irregularities, including fraud on a timely basis.
Cause: The above condition appears to be the result of a lack of internal controls and segregation of duties within payroll procedures.
Recommendation: We recommend the University review internal controls surrounding payroll procedures to ensure adequate segregation of duties and approvals are put in place. Further, all supporting documentation including pay rate approvals and timesheets should be maintained.
Views of responsible officials and planned corrective action: Management agrees with the finding. See corrective action plan. |
