>> or: tonight on frontline... >> a pension is a promise! >> ...it was a promise made to all state workers. >> they said if you dedicate your life to publicrv see we would guarantee you a solid retirement. >> narrator: but what happened? >> they have effectively raidedo pefunds. >> the pension was used basically as a piggy bank.ra >> narr: frontline correspondent martin smith investiges. >> how did it go down with the policemen and the firemen? >> i don't think it went down well with anybody. >> my insurance is crap, my pay is cra but i love what i do and i was promised this pension. >> $14 million had been paid to undisclosed individuals for doing little or nothing.

it was happening all over the country. >> this is a crisis of epic proportion. if we are unable to meet thens n obligations this comes at the expense of everything else that we care about. >> narrator: tonight, the real cost of "the pension gamble". >> kentucky might be the first one to go down, but it won't be the last. >> frontline is made possible by contributions to your pbs station from viewers like you. thank you. and by the corporation for public broadcasting. major suppt is provided by the john d. and catherine t. macarthur foundation, committed to building a more just, verdant and peaceful world. more information is available at macfound.org. the ford foundation, working with visionaries on the front lines of social change worldwide. at ford foundation.org. additional support is proved by the abrams foundation, committed to excellence in journalism. the park foundation, dedicated to heightening public awareness of crical issues.

the john and helen glessner family trust. supporting trustworthy journalism that informs and spires. the wyncote foundation. d by the frontline journalism fund, with major support from jon and jo ann hler. and additional support from laura debones and scott nathan. p (bugying "call to the post") >> on the track for the fourth race today... scratch 13, 14, 15, and 16. (horse neighing) onto the turf is f six minutes. >> martin smith: this is a story about gambling and making bad bets. it's about having your retirement, that you thought was secure, go south. we came here to kentucky because kentucky's pension system-- for its police,

firefighters, teachers, and other public workers-- is among the worst-funded in the nation. >> number three is promises fulfilled, owned by robert baron, trained b.. >> smith: with our interest in pensions, we of course noticed a horse called promise fulfilled. i decided to place a bet on it. so this promises fulfilled,bo what do we thiut that horse? it's like a long shot.li >> sounds a disappointment. >> well, today, i think a long shot has a chance with the... >> smith: yeah, yeah, with the mud and all, i know. >> the horses are on their way to thetarting gate, less than a minute. (crowd cheering) >> smith: we're in kentucky, we're doing a show about the pension problems. you know, the teachers, and the firemen, and the cops, people h who wod all their lives and are worried they're not going to get a pension. >> it's crazy, the pthat we depend on most in our community. >> smith: right. >> it got me mad. >> smith: it makes you mad? >> yeah. all right, i'm ready for you.ay >> smith: well, in, uh... in the derby... >> okay. >> smith: number three, promises fulfilled. >> what you want to pu it?

>> smith: a hundred dollars. >> to win? >> smith: yeah. >> the horses have reached the starting gate. (cheering) >> smith: i had no expectation that the horse would do much., at post tie odds board had it at around 50 to 1. on the other hand, if it won, i would win $5,000. >> and they're off in the kentucky derby! and promises fulfilled, great start. flawless... (drowned out)ed flashing spen the outside is noble indy. promises fulfilled off to set the pace... >> smith: well, prom fulfilled led the pack for half race. >> justify seis the lead. promises fulfilled trying to keep up second and inside... >>mith: but in the back stretch, where you couldn't really see what happened, the horse dropped from first to 15th out of 20. >> here comes good magic on the outside for the final quarter- mile.ju ify turns home in front... >> smith: all i knew was that

in just two minutes, i lost my $100. >> justify the one to catch. here comes good magic on the outside. justify turns for home in ont. the keky d never ify! doubt! in>> kentucky is drowning a financial crisis. the state's public pension fund which fund retirement plans for our teachers, esrefighters, state police, and other public emplo experienced a shortfall of more than $36 billion. >> smith: kentucky is not the only state in trouble. nearly half of all ss haven't saved enough money to pay for the benefits they've promised to government workers. in total, it's estimated they'rn short trilof dollars. that's trillions. it's a problem that will affect everyone. >> so, why should you re? because the bigger the problem becomes, the more tax dollars

axll be needed to fix it. that means fewerollars being spent in areas of need, like schools or roadways. talented teachers and other public servants may look for careers elsewhere. >> pension problems sparking some concern for workers in northern kentucky. >> kentucky's pensn system, one of the worst across they. countr >> it matters what happens in intucky because what is kentucky's problnew jersey's problem, is illinois's problem, is connecticut's problem, is california's problems, is... go on d on and on. this is a crisis of epic proportion in the united states of america. w and it's time e up and address it. e >> smith: blic employee in kentucky who wondered if his pension was okay was a history teacher at a local louisvillech highool. >> i understood that i would never earn a great deal of money. you enter teaching because there's a certain warmth you feel for instructing young

people and trying to help them. >> we're going to convert it from chemical to... >> chemica >> chemical! bingo! >> and so it's an idealism that drives a teacher. >> and that's the beauty of english-- we are learning to be effective communicators. >> but one of the reasons that we accept the low salary is that we won't have to despair of our rirement. that there will be some form of a safety net for us when we get too old to trundle into the classroom. >> smith: a guarantee? >> a guarantee. it's a promise, and a good chunk of our salary is taken out fro day one and deposited into a retirement plan. >> if y'all can come up with aod dea for a little project or something you want to do,e can maybe utilize the outdoor... >> smith: christina ckederick-trosper, a teacher in knox county, ken also signed up because of the promise of a guaranteed pension. >> that's what i was kind of explaining to them when you get to this one. i remember my parenting me, "you know, you'll have a pension. you know, you'll have job

security.an those are things you can't get in a lot of other places." have a great day, guys, i'll see you l tomorrow, thank you! i knew i wou never be rich, but i thought i would, you know, be comfortable and have those things that i can, you know, depend on, so that i could make decisions for my family, for my kids in the, like, long term. things that my parents weren't able to do. >> everybody sitting here has b berayed by the state. >> smith: i also met with some police-- some active, some retired. >> it was a major thing for me. i felt if i got hired on this police department, and if i did what i was supposed to do, i got my life planned out. i'm gonna retire. i'm gonna have an income coming in, i'm gonna get health benefits for the rest of my life. health benefits for my spouse. it, it had a major impact on my decision to do this. >> it was kind of the same with me. i didn't get into policing until a little bitater than normal. i was almost 30. so i was very well aware of the pension benefit.fo me, that was a big deal. um, i knew that if i could get 20 years out of the career, that my wife and i would have

health insurance, and that i would have some kind of a pension. >> when you look at publ servants-- your teachers, yourco ps, your firefighters-- the pension represents our promise to them, and also an acknowledgement that we might not be able to pay you what you're worth right now, but we're going to be there for you on the back end. ♪ >> smith: it used to be that nearly half of all american workers had defined-benefit pensions, a guarantee that you would get a good percentage of your salary and benefits upon retirement >> this is the life. what with my retirement plan and a few dollars i'd saved, i didn't hava thing to worry about. >> smith: workers and their employers contributed funds that were then invested on wall street. >> i'm chairman of the pension fund of this corporation. we're looking for a well-diversified list of high-

quality bonds and some common stocks. >> smith: over the years, private corporatns have largely stopped offering defined-benefit pension plans. but most public employees still have them. >> the policy that we'll recoend here gives us a 60% chance of actually achieving thassumed rate of return. >> smith: the decisions about how to invest and grow pension enfund money are made by aon board and its financial advisers. and, for many years, kentucky retirement systems, or krs, was flush with cash. >> krs investment return onth money for that period of time estimated to be about $2 billion. >> smi: 20 years ago, it looked as if it would not ever have a problem. >> it's got to have an interest rate on it that gives us the same earnings as... >> smith: today, betty pendergrass sits on the board of krs. where was the kentucky retirement system sitting in 1999? >> it was sitting at, rly

100% funded. >> smith: but then, in 2000, the dot-com bubble burst. s lost $1.2 billion. >> i've served in the best of times, and now is the worst of times. >> smith: kentucky was suffering, but politicians were reluctant to raise taxes to pay the full cost of their bills, and they began to divert pensiomoney. >> what will kentucky do? that's what you're assembledre n frankfort to decide. >> in kentucky, thpension was used basically as a piggy bank. the problem was, once you started to short your state rdnsions to cover the budget shortfall, it's o just do it the one time. >> smith: one of the few local reporters paying attention was john cheves. >> i've been writing for 20th years now aboustate's pension system and its been, you know, sort of a slow-motion car crash. >> smith: cheves watched as one

governor after another invested in roads, bridges, libraries, and more. pension obligations were not met. >> as governor, i'm thrilled to be able to support this project not only with enthusnd congratulations, but with money. >> i think it emboldened the politicians. >> specifically $2.4 million... >> they realize nobody's paying attention, i think they get ale liolder about it, and they realize, "why, no one's looking! i can do this!" >> they have effectively raided pension funds. and by raiding, it means they just sply have not made the payments that they are morallyre ired to make to fund the retirement promises that they've made... >> smith: david sirota is a reporter and opinion writer. >> so instead of making those payments, they've used tha money for roads, schools-- things that are important, but r that other tenues are not funding. and the thing is, is that thell

ill come due. the bill will come due. >> see you later. >> i had heard kind of rumblings from teachs early on, like, "oh, they're taking money from our pension fund and this and that." i'm, like, "oh they'll fix it." you know and that was... i think that's kind of where we were.ll you know, "theix it." and then i got married and i had some kids. and, you know, that wasn't what was on my radar. and i think a lot of people were like that. >> i had my head in the clouds. i'm a teacher, i'm busy, i got a faly, i got a life. they take a bunch out my paycheck, uh, every two weeks, and so that's going into a little pe that's gonna accrue interest. i figured this is on autopilot. i don't have to worry about the pension. >> smith: by 2008, kentucky's pension funds were in very bad shape.in and gs were about to get much worse >> stunning news on wall street

tonight.e >> at int the market fell as if down a well, over 700 points. >> the collapse of lehman brothers triggered turmoil in markets around the globe. >> smith: in the 2008 collapse, kentucky was hit hard. >> we travel to kentucky for a firsthand look at how the abcession is hurting just t everyone. when i first got here, things were booming. there, there were a lot orre fas that were open, and businesses. i mean, you can see, businesses are closing all over. >> kentucky is to horse racing what detroit ito the american auto industry. and even the sport of kings feels the sting of a glol recession. >> smith: nearly every sector of kentucky's economy was affected. krs lost $2.8 billion. (siren blaring) >> it punched a hole in the boat. i mean, the boat was taking on water, but now we got a hole. there was a huge downturn in the

funding status becauseat crisis. and you can't pay that back in five years. >> theconomic turmoil of recent years is putting a comfortable retirement at risk for many americans. >> so the investment crews are feeling the pressure to get the returns up so that we're generating more money going into the system. >> smith: now you're swinging for the fences. >> right. >> with less money available, many pension funds are under pressure to take on more risk by investing in... >> smith: starting in the fall of 2009, kentucky's public nsions decided that heto dig out from under, ty would invest a portion of their porfolio into some of wall street's more exotic and risky investment vehicles, like hedge funds. >> one of the reasons they're trying to do this is that they're trying to gamble the way out of the problem. >> smith: and wall street was more than happy to answer kentucky's call. pension money is extremely important here. >> the world of pensions is a world of money. y and really want to dig around the heart of power, of

economic power, in the united states, that's where much of the money on wall street is from. the public doesn't necessarily view pensions as giant pools of money. >> about a hundred offering to buy, right? thank you. >> when you say the word "pensions," people's eyes gloss over. they don't really pay attention.th but ere's one set of people who are paying a lot of attention, and it's the richest and mostowerful people in the world on wall street. >> smith: how much money are we talking about? >> in public pensions today, there's about $3 trillion. part of it's being paiout in benefits, and much of it being invested. >> good morning. >> smith: but here is where it gets tricky-- knowing how to invest is difficult. >> i'd le to go through all the recommended policies and vote en masse, and then if someone... s th: some trustees have financial experience, but others are police and firefighters appointed to the board to represent their co-workers,

often not trained in portfolio management. >> ...correlation matricesnd their risk and return assumptions by asset class... >> it's complicated and somef our trustees don't have that skill set. they're better at fighting fires than i am. ey're better at catching criminals than i am. but they don't have the financial skills. >> 53.5%... >> i would like to see sharpe ..tios for each one of the major asset classe >> smith: today, betty pendergrass is a trustee that has investment experience... >>e we getting paid for the risk we're taking... >> smith: i mean, you know that on wall street, they call pension funds dumb money. >> (laughs) that, that hurts, but it'srue. >> what i would say is, the bounds of reason are 350 above the ten-year treasuries... >> smith: john farris is an investment manager in lexington. until recently, he chaired the krs board. he says that wall street

regularly exploits pension funds. >> i stated as the board chairman that we were... >> smith: in 2008, oo members of the board had any investment management experience. >> they are much healthier... >> i think that the pension board thatas put together between 2008 and 2016 was probably the dumbest of money. >> smith: and thus you're $60 billion in the hole. >> exactly. >> smith: how did they amass hundreds of investments when they have no experience inow to choose? >> well- >> smith: they just take anything that's recommended?t >> it seemed ty. a lot of them that will say, will openly admit they're not even, you know, sure what they're voting on. >> trusted the state to de with my money, okay? i don't know nothing about doing that. >> smith: among those police i spoke to, one had served two terms as a krs trustee.yo >> smith: edwere a trustee. >> yes. >> smith: now, in all due y respec're a police officer. are you in a position, or equipped, to be able to evaluate a complex financial instrument

like a hedge fund? >> one of the first the were told as elected trustees when you went on the board, one of your responsibilities would be to get yourself educated. d the first question i had was how to do it. the retirement system sent me and other trustees to different invement symposiums. it's a complex thing. i did not claim to be an expert in the pension system. i knew a little bit it, and i did to the best of my ability to make the beston deciith the information i had at the time. ♪ >> smith: even with the best information, it's hard to choosr a wi think of that horse race, with only 20 entries. in theorld of high finance, there are 10,000 hedge funds. how do you know where to bet? one of the first ones krs chose was called arrowhawkle alpha. it had no track record and long odds. >> arrowhawk w one of the

first sort of alternative investments, as we call it, where we had these third-party milemen who had come to kentucky retirement systems and introduced krs to these alternative investments. urey came to krs and said, "you should be putting oney in these funds. and we think these are the best places for you to invest the state's money." >> smith: these middlemen are nolled placement agents. >> apparently, unbwnst to us, the placement agents were being paid fees, so they were compensated very generously for us giving our business to these funds. the lead placement agent for arrowhawk was a fellow from new rk named glen sergeon. >> smith: yeah, this is glen sergeon. >> yes. >> sth: so this guy, he was the salesman for arrowhawk? >> correct. >> smith: in 2009, when arrowhawk was being considered, the only person on the krs board with much investment management experience was chris tobe.

he thoht it was a risky bet. >> ...you hire a hedge fund, you're looking for a fund thattr has k record, experience. >> smith: right, and this one didn't.re >> c. but glen sergeon had a relationship with adam tosh, the chief investmenter of krs at the time. tosh sold us that... >> smith: tobe told me that krs's chief investment officer,c adam tosh, con the board to invest in arrowhawk, which resulted in a lae fee from arrowhawk for tosh's man, glen sergeon. >> smith: and how much money was he paid to bring in arrowhaw >> two million for arrowhawk.ug but he b in some other investments to the total of six million. >> smith: but at the time of the vote, the board didn't know there was a placement agent operating in the background. >> it was never disclosed in financial statements, it was never disclosed anywhere that... even the existce of placement agents. >> i think that one of the keysu is disclosure of placement agent fees. >> smith: tobe then hired ted siedle, a financial crimes investigator. e

thntually filed a 32-page complaint to the s.e.c.t >> so i thou was a good case. >> smith: the s.e.c. and state auditors investigated and found no laws were broken. but the auditors did conclude that tosh violated krs's disclosure rules tosh left kentucky and has not returned our calls. sergeon has since died. what's the headline here? >> well, the headline was that there were these abuses involving placement agents, $14 million had been paid to undisclosed individuals for doing little or nothing. it was happening all over the untry. public funds pay hundreds of millions in placement agent fees. so, it's a significant problem. and it's a real waste of retirement savings. ♪ >> smith: arrowhawk proved to be a loser. after krs invested $100 million, the fund failed and closed down.

krs eventually recouped itsmo y from arrowhawk. but another hedge fund investment involved the camelot group. camelot had a manager who, in a separate case, was charged and pled guilty to personally pocketing over $9 million of investors' money. despite this, krs would continue to invest in more hedge funds. >> it was a great big "put all of the chips on the red seven." that's what we're gonna do with pension money for firefighters and cops and janitors. >> smith: ann oldfather is a louisville attorney who represented firefighters in a pension-relad lawsuit. >>hey decided, "we're not going to go public, we're not going to say we need help.e weing to try to save our rears and this'll work." isn't that what the gambler

always dreams? had so they start the beauty contest, and the perhaps 15 hedge fund managers that they interview and meet with, and talk to, and whittle it down to the final three winners. (car horns honking) >> smith: the winners were pacific ternative asset nagement company, or paamco, prisma capital partners, and blackstone alternative asset magement. each offered krs scalled funds of funds-- umbrella vehicles that contain dozens of underlying hedge funds. with multiple layers of often hidden fee they are sometimes called black boxes >> they're putting thembl together in ack boxes, which they so niftily med the henry clay fund, the daniel boone fund, and the newportnd colonel's all, for your viewers that are ouide of kentucky, famous names or entities here in

keucky. >> smith: today, hedge fundsma are deemed b investment professionals as inappropriate for public pensions because they are expensive and lack transparency. while hedge funds contributed only somof kentucky's pension woes, two class-action litigators from san ego-- bill and michelle lerach-- sensed an opportunity here. >> i can't tell by the title... >> smith: in 2017, they set up office in louiille. >> have you gotten to a jurisdictional argument in... >> smith: they said they were coming to the rescue of kentucky's state workers. >> we are talking about the retirement of 350,00plus individuals. and we're also talking about a tter which, quite frankl could bankrupt the state. there is so muchhat we don't know. i'm trying to find out what happened hoke. , that's fine, we're just going to not look at it until we get a... resubmit, yeah? ro smith: the lerachs had successfully sued for over $7 billion in damages.

but bill lerach had been disbarred and jailed for illegallpaying plaintiffs in dfme class-action lawsuits, so they enlisted ann her as their lead counsel. >> probably is a little biof watching their own backs. our team of lawyers aree blessed to h our consultant bill lerach, who's a disbarred attorney, but indeed an expert in pension f analysis. and so we have somebody ght there at our beck and call who has educated us about the breadth of this problem throughout the united states. kentucky might bfirst one to go down, but it won't be the last. ♪ >> smith: as lead plaintiff, they tapped an old friend of michelle lerach's, jeff mayberry, a retired state trooper. >> from what i underand, the funds were fraught with inflated fees.ge

aly they were exorbitant, they were non-standard, they wereot of the norm. >> smith: tens of millions of dollars. >> that's what i understand. (gunshots echoing) >> smith: in the spring of 2018, we attended a pre-trial hearing in a courtroom in frankfort. >> blackstone asset management... > smith: mayberry faced thirty-one defen attorneys representing krs board members, their financial advisers, and the three hedge fund companies.bv >>usly the number of defense attorneys did make me realize that there's some big money here, and they can afford the best in the country. >> the agreements that these three hedge fund companies entered into with krs were always declared a secret. we have never been able to find them in any public record, we've never been able to find them on krs's webse. all of these defendants, your honor, are seeking to keep

h private their dealings ws. >> smith: the defense has called for the case to be dismissed. but oldfather argues that the hedge funds need to fully verify that krs got all the money it should have received, that the funds didn't cheat krs by charging hidden fees. >> there are abundt examples, your honor, where these three fund managers told krs, "oh, this sub-fund manager refuses to disclose their fee," charged to the public and the taxpayers of kentucky. and then your honor... >> smith: they say you're on ag big fishpedition, looking for damaging inside information, that you don't really know if it's there. >> the united states supreme court has said that the point of discovery is to be on a fishing expedition. and it is the beauty of civil litigaon that we don't have to know 100% of what everybody did when we file the lawsuit. when we survive those motions

to dismiss, it's gna be time for discovery. and i am going to snag a lot of fish. >> there is a belief on their part that if you file a lawsuit and you get your hands on something, the public then getso now about it, and i've never seen a case... >> smith: paamco and prisma said in a letter to frontline that they did what they t were hirdo. but declined to be interviewed. blackstone's attorney spoke to us about the fees.no we don'twhat the fees were exactly. >> i, i can tell you what blackstone's fees were.>> mith: right. we know what blackstone's fees were. that was disclosed. but then there's a whole set of sub-fees. and if you read the contract, there's no specificity it's vague. >> the, the fees were disclosed. the nature of the fees were disclose the contract laid out the fee structure for the underlng portfolio funds. >> smith: in vague terms. >> you're characterizing it a certain way. it laid out the fee structures.r >> smith: is no

transparency issue, in your view. >> there is no transparency issue. they know exactly what they received. there were target benchmarks that werestablished. they received nearly three times what was expected in the target benchmarks. >> we're still entitled at this point for no one to have pre-judged anything that my clients have done. we don't know yet. >> smith: the lawsuit is likely to drag on for years. but the defendants insist the bulk of kentucky's pensionbl tr are due to underfunding and two market crashes. . to defend our reputation. just because a complaint shreds us, it doesn't mean it's true. >> smith: people in indust and on wall street think that what you're looking to do is to wear them down, get them to a settlement, and take the money. how do you respond to that? >> i was thinking about something that came the last hearing, when their lawyers, you know, sort of accused us of grabbing things

frommiscovery and sending the to the media somehow, you know. look, if they're proud of whatr they do and thsiness model and how they do it, well, then, stand up and tell the world about it. (car engine starts) (machine whirring) >> smith: every month, kentucky retirement systems makes over 100,000 pension paymen, with the average retiree receiving around1,500. the total outflow is nearly $2 billion a year.t 2013, the krs board and kentucky legislators worried that in the future, they wouldno not haugh money to meet their obligations.20 >> i, pensions had moved to the forefront. i think people started to etrealize we let this debt out of control. >> smith: lawmakers decided it

was time to make some drastic changes. >> we changed the system so that you no longer get a defined-benefit plan if you're a state employee. and you got this hybrid cash balance plan. >> smith: basically, a 401(k)-type plan. >> bically, a 401(k)-type plan. better than a 401(k), but not as good as a defined-benefit plan. (police siren wailing, people talking on radio) >> smith: the first to be affected were police, firefighters, and thousands of other public servants. public school teachers were spared. existing workers would keep their defined-benefit pension, but all new hires would be moved to a 401(k)-style plan. >> evening.re thon why i stopped you tonight, you're swerving. >> the move into 401(k)-style plans, this was widely seen as a compromise, but it's difference. and it's a lot more uncertain with a 401(k) plan.

>> smith: tom loftus is a local wporter who covers pensions. how did it go doh the policemen and the firemen? >> i don't think it went down well with anybody. >> there is no way that we can continue because of demographics to offer the same plan to people who are not currently state employees. >> smith: one year later, after reforms went into effect, the pension cris resurfaced as an issue in the gubernatorial race, this time for state teachers and school workers. >> the most important thin do is stop digging. >> smith: the long-shot candidate was matt bevin, a former hedge fund manager and tea party favorite. >> we have a legal and a moral obligation... >> his campaign promise was, if the pension system is bankrupt, the inviolable contract is moot, because if you don't have those dollars to pay those benefits, the, okay, you don't pay th benefits. >> the reality is, if the money's not there, then we have to think about, "how do we tighten r budget?"

>> his big issue is to shrink government in kentucky. to make it smaller. uh, he believes in private sector, he does not believe in government. his endgame is to shrink the pensions. w >> ... we indeed will be the next governor and lieutenant governor of this commonwealth of kentucky. th had at that time, and continue to have worst-funded pension system in the united states. we need a fresh start.o. we truly we need a fresh start. this tells us that we as state are in dire risk of becoming financiallynsolvent. and that if we are unable to meethe pension obligations that we have to people, this comes at the expense ofyt evng else that we care about, everything else that we would fund. (crowd cheerg, drums rolling) our state workers who have been promised a pension should be given that pension. >> smith: once in office, bevin decided to stop shorting the pension system and to make what are called actuarially required contributions, or annual arc

payments. >> we have an $82 billion pension problem. there are going to be decisions made by this body... >> governor bevin is doing what no governor has done for at least 15, 16 years, which is fully fund the arc again. and that's no small achievement, and it really is starving much of the rest of the state budget. >> and we had beer clean it up. >> that isn't what's controversial. what's controversial is, he's saying we cat really afford to keep pensions going, so teachers from this point forward, teachers won't get pensions in kentucky anyre. >> we have exhaustively gone through everything we can ensure that we do in fact deliver on the promise. >> smith: bevin concluded that the teachers' pension stem was unsustainable. >> "keeping the promise" will save kentucky's pension systems. >> smi: under a proposal called "keeping the promise," all newly hired teachers would40 be moved to k). >> so on a going-forward easis...

>> smith: existingers would also contribute a greater percentage of their salary to shore up the old system. you were eradicating the pension for new teachers. >> correct. i mean, this is... in other words, for new people who are not currently employed by the stat they would not be poven a defined-benefit plan because it is noible to promise that to them with any confidence that can deliver it-- we can't. >> i think this is a very morally sound plan. >> smith: state senator robert stivers endorsed the plan. >> ...something that the people of kentucky will understand and accept as the direction we need to go in future years. >> keep your hands off ourns ns! >> a passionate crowd of state workers, educators, andre re took to the steps of the state capitol with one message-- they want their pensions. >> a pension is a promise! >> a pension is a promise! >> the proposebill calls for new employees to move to a 401(k)-style plan and current

employees kick in three percent of their salaries to shore up retiree healthcare funds. >> you're going to be looking at specific countries and we're going to look at each one. >> smith: christina frederick-trosper, the teacher from knox county, was alarmed. her salary was already a challenge to live on. kentucky's teachers have seen their wages, adjusted for inflation, increase by less than half percentage point in the last two decades. >> so i'm going to give you serbia first. >> smith: w trosper feared that lawmakers would come after her pension. >> in about august, septber, i really started paying attentionn to what was hag. and just, everything just kind of snowballed for me. oflike, all of it just kin came together. you dug the hole. i didn't dig the hole. >> smith: one day, trosper attended a town meeting and confronted senator stivers about his plan. >> you all made a conscious decision to not fund your obligation. and i don't care when you gotte elor whatever, but you've

been there during the years that it has not been funded properly. i want to know, how are you going to raise the revenue to fund it properly, because i promise you your days in the senate will be no longer. they will be no longer if you f do n this. (applause) that's all i care about. >> smith: it seemed like something snapped in you. >> yeah, it did. and i told everybody i had an out-of-body experience. i can go through a 300-page bill... i mean, i'm a loud person and i'm not the type of person who, you know, sits back a lot of times, but i shocked myself. i want what you told me i was going to get. my insurance is crap, my pay is crap, but i love what i do and i was promised this pensio and what you're proposing is going to kill us. you will kill us. you will kill public education. >> i understand that lady perfectly. she is having certain ar of an unknown system where she'sab very comfo with a known system. >> smith: and she's worried

there will be less incentive for achers to sign up, knowing that they won't have a defined-benefit pension plan, and that she has young children and the quality of the teachers for them will be less. >> well, that's an opinion. there are many tchers that are teaching in the parochial systems that don't have those types of systems. and they have very good outcomes and results. uh, universities. i don't think many teachers have defined-benefit pensions in universities. now, they're paid differently, and more. >> smith: and more. d and that'sference. >> and west virginia, we're standing beside you! >> smith: teachers in kentucky were not alone. in february 2018, teachers in west virginia rallied to protest low pay and benefits. >> five percent... now! >> 36,000 teachers walked out of class today. >> smith: west virginia teacher in tarked similar demonstrations in oklahoma and arizona.

>> this is what democracy looks like! >> it's the latest in a wave of protes sweeping across the country, led by teachers who say the future of public education is at stake. >> i think west virginia inspired us, because it happened next door in a mountain stateug that ses with the same types of things that we do. and that they were able to achieve their goals, think, really ignited us. m >>y funding first! my funding first! my funding first! we vote!s >> smith: bevintroversial "keeping the promise" reforms were crafted into senate bill one. >> senate bill one shall pass. (shouting) >> smith: leading the charge was senator joe bowen, who five years earlier had pushed through that pension bill affecting cops and firefighters. >> vote them out! >> ladies and gentlemen, please!to i'm going sk you to please... >> smith: they'd like to have your hide. >> some. >> smith: well, the teacherswe out there chanting. >> yeah. look, at the end of the day,

we're trying to save the system for them. that's, that's the irony of all of this, in my mind, anyway, is that here are trying to save the systems, and we're getting all this pushback. >> vote them out! vote them out! vote them out! >> smith: angry and fearful teachers became a gular presence in the state capital. >> i'm the only governor in the fetime of any of these teachers that has fully funded the plan, and yet they seemingly hate what we're doing and they say... >> smith: on a local radiove show, or bevin shot back. >> i mean, the reality is, this is a group of people that are throwing a tper tantrum, and i'm surprised... >> bevin has made a number of controversial statements about teachers over the last few months. most politicians do not want to be seen as critical of teachers. i mean, matt bevin obviously has decided he's comfortable crossi that line. (chanting) >> i'm just flabbergasted at how remarkably uninformed folks are. there's an old saying that you can't win an argument with an ignorant person. and so if a person isin

rmed about a topic, they're not even able to make their own case for what they believe. these are educated people with the ability to listen and to understand. so if they truly still believe that this is bad for them, it is due to being misinformed. and theye, like, "how dare you say we don't understand." >> smith: well, the choice of language is such... >> agreed. >> smith: you're seen as arrogant, dismissive, talking down to teachers, firemen, policemen.op >> if want to be offended, they can be offended by anything. you can parse things, take things out of context, even take them in context. >> smith: do you think you've been appropriately careful in c yoice of language, and really served this debate... >> yes, i do, and i think if people really..... >> smithn a constructive way? >> yes. >> smith: you do. >> whether... does everybody agrewith that? no. >> smith: no regrets? >> no. .. here's the thing, i'm trying to save a system that needs to be saved. >> smith: by march 2018, the pension bill had stalled, and time was running out. so with just a few days left in

the legislative session, statere blicans tried a last-minute maneuver. ke >> if we do not ction on this pension bill, there will be massive layoffs across the commonwealth of kentucky. >> they were called into a crowded capitol committee room, handed a bill, and told they were going to vote on it. >> this is a good mpromise plan. >> but it turns out that they were handed a sewage bill, that they were swapping out anything that had to do with sewers, and putting in languages thatch ged the pension system in kentucky forever going forward. >> well, firstf all, this is very unfair to vote on a bill that, i didn't even checkf the numberges that are on this bill, and then ask us to make this, this decision today, d.d then limit discussion >> no one had a chance to read it, outside of the republican members of the senate. i mean, the democrats hadn't had a chance to read it, the teachers' association, the public, the press-- nobody else knew it was in thereand this thing is about to become law. >> this is a committee meeting, sir.

>> yes, sir, it is. >> and we're allowed to ask questions or anything pertaining to this bill, which none of has seen except a couple of you guys. i've never seen such garbage thrownut here in my years in service. we've had three or four...: >> smiere was a lot of anger in the room. >> extreme anger. it was an unpleasant tk i was asked to do. no one wants to make other people unhappy. and i will say i've voted on plenty bills i didn't get read, unfortunately. i had no choice. but you have to consider all of the factors-- we couldn't pass a budget if we didn't have a pension bill, and that is why i agreed, we've got to get this bill back to the floor so weeb can have ae, a full debate on it, knowing that the optics were terrible. >> i'm concerned, first of all, that what weing is illegal. i'm hoping that we can have a presentative of the teacher organization to testify here today on this bill. would that be permitted, mr. chairman?

>> uh, that's not on the... in the order, no. >> is there... could you explain why we're not having a reesentative of the teache to testify on this bill, since they are the main people who are going to be affected by it? >> we have heard loud and cleare how thhers feel about sb 1, and this plan has made changes responsive to those questions. lles anyone have a question on the >> well, that's why i'm, i'm asking these questions about the bill...ep >>sentative richards. >> can i finish my, my time, mr. chairman? >> i've called on representative richards. representative richards? >> smith: it became clear to everyone in the room that the republican majority was not i interesthearing the democrats' objections to the bill. >> seeing no other questions, madam secretary, please call the roll. >> mr. chairman! mr. chairman! >> it was absolutely just gut-en ing to watch them vote. >> you're out of order, sir. >> no, you're out of order, toot by this e, you're out of order. >> it was, "well, this is what we're going to do and this isgo

how we'rg to do it. and we're going to over-vote you because we have a supermajority." >> all in favor in the title amendment, signify by saying aye. >> aye. >> all opp (ed? lling): no! >> this committee is adjourned. >> how can you guys shave in the morning without cuttin your throat? >> everyone's upset. tensions are high. and that's when we had 5,000 teachers show up in frankfort. >> many teachers and state employees are upset about being caught off-guard and not having a chance to see thbill before it passed. >> in 20 years at the state capitol, i've never seen protests like that. the teachers kept coming and coming. they were there every day. >> a pension is a promise! >> a pension is a promise! >> a pension is a promise! >> a pension is a promise! (cheering)th >> decades ago general assembly made you a promise. >> yup!he >>said that if you dedicate your life to public

service, that while we wouldn't pay you enough, we wld guarantee you a solid retirement.in (che but they broke their promise. and they broke theaw! >> yes, they did!in >> put theail! >> because the law doesn't allow you to change a sewage bill into a pension bill and pass it on the same day-- that's government at its worst! (cheering) we deserve better. >> that just felt like another ap in the face. to take our pension bill and put it onto a sewer bill, we c.ought, "oh, that's symbo >> ♪ because we deserve better than that! ♪ in our schools we deserve better than that. ♪ in our country, we deserve better than that! ♪ in kentucky, we deserve better than that! ♪ >> it was perfect. i mean, they couldn't have r.chosen a, a better metap here's your, here's your, here's your sewage.

>> get the new york money managers out of my pension! (cheering) i say sue them! sue them blue! sue them blue! sue them blue! >> smith: many, like randy wieck, blame wall street for creati the mess. >> vote them out! vote them out! vote them out! >> smith: others blame the governors and lawmakers who neglected the pension fund over decades. >> i want to submit to you that this budget does not take us to that next level.: >> smiside the capitol, with teachers filling the gallery, lawmakers debated howge to cut the bto shore up the pension fund. >> i do love public education. >> smith: many of the cuts proposed were to public education. >> we can do better, we must do better. if we want to have that world-class education system that all of us want to have, i can submit to you this budget does not do it.

>> vote them out! vote them out! vote them out! >> i think teachers are r beginning lize that the whole system is under assault. what is going to happen to that generation of children? rnwill they be able to leaf they come into school, because the social safety net that's very thin as it is has been shredded? >> lies and gentlemen, the teachers know that the textbooks and learning materials in this budget are sliced by $16.7 million. no new textbooks... >> all of those that are up for t re-election right now, tre not friends of public education, we're hoping that they won't be there. >> it is sad that we are where we are, but unfortunately, we had to take action. >> everybody's going to be shocked to see how many of usut comen force to put in pro-public education candidates. >> the power is in the vote! the power is in the vote! the power is in the vote!

(cheering) >> smith: for now, kencky's attorney general has successfully blocked bevin's sewer bill in court. wt teachers are afraid oft the future holds. tee pensions of some other kentucky s workers are facing insolvency ie around tears. teachers worry that when the time comes for theto retire the state won't have the money to pay the pensions. >> we will remember in november! we will remember in november! >> state lawmakers don't want to raise taxes. voters don't want to accept tax increases. retirees, i think rightfully, don't want to accept cuts to benefits that they were promised. so in kentucky, the bill is coming due now. we are going to see situions

where pension funds literally do not have the money to pay out benefits to people whoave been promised those benefits. >> and yet i'm being fought, in some instances by the very people that we're trying to save-- it's like saving a drowning victim. it's like somebody-- they' fighting you, fighting you, pulling you under. you just need to knock them out and dr them to shore. >> yeah. >> it's for their own good and we have to save the system. >> governor matt bevin,'t coulut it any more succinctly than that. i appreciate the wake-up call. >> i won't be the governor when this thing falls apart. , it's tough medicine but... >> the next governgardless of who they are, or what ideology they represent, it won't matter what lie they give, reality will come crashing home. (people talking in background) >> here we go, d! >> let's go, d! (cheering) >> the endgame is pretty clear. pensions are on their way out. >> go, go, go, go!

(applause and cheering) >> so what we're goi to have within the next generation or two is americans who are going to have terribly insecure retirements. they're going to have to live on whatever they've managed to squirrel away to their own savings. teachers, the one benefit you got for sure was a pension to retire on with some security and dignity at the end of your career. but in kentucky, after this summer, that might to be gone. >> parents, real quick, we've got pictures at 5:00, right here. >> smith: what happens if you have no pension?'t >> i dant to think about that. i don't know. i don't... i don't know. >> tt's excellent! what is the difference between the first 16 problems and the last four? >> many of us teachers are working paycheck to paycheck, trying to make ends meet. that's, like, a pivotal point, right? like, it's, like, a make or a break time. i have no savings.

so, my pension is everything. without that, i won't survive. take your papers with you. you have a great day.i' ll see your beautiful faces tomorrow. that's all right. >> we stand for connecting every person. for a global community. >> facebook systematically went from interconnecting people to essentially having a surveillance system ofir whole lives. >> facebook has come under fire for its role... >> i mean everybody was pretty upset that we hadn't caught it during the election. and it was a very intense time. >> ...mark zuckeiferg will test.. >> i still have questions. if we're going to make sure that in 2018 d 2020 this doesn't happen again. >> narrator: next time, on frontline. >> go pbs.org/frontline... >> this is what democracy looks li! >> ...for a look at how states nationwide are dealing with the pension problem. >> what is kencky's problem is new jersey's problem, is illinois's problem, is nnecticut's problem

>> state lawmakers don't want to raise taxes. voters don't want to accept tax increases. in and read more from the hedge funds that kentucksted with. then conct to the frontline community on facebook, twitter or pbs.org/frontline. >> frontline is made possible by contributions to your pbs station from viewers like you. thank you. and by the corporation for public broadcasting. major support is provided by the john d. and catherine t. macarthur foundation, committed to building a more just, verdant and peaceful world. more information is available at macfound.org. the ford foundation, worng with visionaries on the front lines of social change worldwide. at ford foundation.org. additional support is provided by the abrams foundation, committed to excellencjoin nalism. the park foundation, dedicated to heightening publiawareness of critical issues. the john and helen glessner family trust. supporting trustworthy journalism that informs and

inspires. the wyncote foundation. and by the frontline journalism fund, with major support from jon and jo ann hagler. s and additionport from laura debones and scott nathan. captioned by media access group at wgbh access.wgbh.org >> for more on this and other frontline programs, visit our website at pbs.org/frontline. ♪ to order frontline's "the pension gamble" on dvd visit shop pbs, or call 1-80play-pbs. this program is also available on amazon prime video. ♪

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