>> narrator: tonight on frontline... >> a penon is a promise! >> ...it was a promise made to all state workers. >> they said if you dedicate your li to public service we would guarantee you a solid retirement. >> narrator: but what happened? >> they have effectively raided pension funds. >> the pension was used basically as a piggyank. >> narrator: frontline correspondent martin smith investigates. >> how didt 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 crap, but i love what i do and was promised this pensio $ >>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 the pension obligations this comes at the expense of everythingar else that weabout. >> narrator: tonight, the real cost of "the pension gamble". kentucky might be the first one to go down, bu it won't bthe last. >> fne is made possible by contributions to your pbs station from viewers like you. thank you. and by the corporation for public broadcastin major support is provided by the john d. and catherine t.un macarthur tion, committed to building a more just, verdant and peaceful world. more information at. macfound.o the ford foundation: working with visionaries on thel fres of social change worldwide. at fordfoundation.org. additional support is provided by the abrams foundation,to committexcellence in journalism. the park foundation, dedicated to heightening plic awareness of critical issues. the john and helen glessnerst

family t supporting trustworthy journalism that informs and inspires. and by thesm frontline journaund, with major support from jon and jo ann hagler. (bugle playing "call to the post") >> on the track for thfourth race today... scratch 13, 14, 15, and 16. (horse neighing) six minutes.f is firm. >> martin smith: this is a story about gambling and makingad bets. it's about having your retirent, that you thought was secure, go south. we came here to kentucky because kentucky's pension system-- for its police,gh

firers, teachers, and other public workers-- is among the worst-funded in the naon. >> number three is promises fulfilled, owned by robert baron, trained by... >> smith: with our interest in pensions, we of course noticed p a horse calledromises fulfilled. i decided to place a bet on it. so this promises fulfilled, what do we think about that horse? it's like a long shot. >> sounds like a disappointment >> well, todthink 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 the starting gate, less than a minute. (crowd cheering) >> smith: we'rin kentucky, we're doing a show about the pension problems. you know, the tehers, and the firemen, and the cops, people who work hard all their livesth and are worrie're not going to get a pension. >> it's crazy, the people that we depend on most inur community. >> smith: right. >> it got me mad. >> smith: it makes youad? >> yeah. all right, i'm ready for you. >> smith: okay, well, in, uh... in the derby... >> okay. >> sth: number three, promis fulfilled. >> what you want to put on it? >> smith: a hured dollars. >> to win?

>> smith: yeah. >> the horses have reached the (cheering)ate. at the horse would do much.ion at post time, the odds board had it at around 50 to 1. on the other hand,f it won, i would win $5,000. and they're off in the kentucky derby!ed and promises fulfigreat start. flawless... (drowned out) flashing speed on the outside is noble indy. promises fulfilled off to set the pace... >> smith: well, promises fulfilled d the pack for half the race. >> justify seizes the lead. promises fulfilled ting to keep up second and inside... >> smith: but in the back stretch, where you couldn't horse dropped from fired, the 15th out of 20. >> here comes good magic on the outside for the final quarter- mile. justify 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 the outside.fo justify turns home in front. all rise for justify! the kentucky dby was never in doubt! >> kentucky is drowning in a financial crisis. the state's public pension funds, which fund retirement plans foour teachers, firefighters, state police, and other public employees, experienced a shortfall of more than $36 billion. >> smith: kentucky is t the only state in trouble. nearly half of all states d haven't saveenough money to pay for the benefits they've promised to government workers. in total, it's estimated they're short trillions of dollars. that's trillions. it's a problem that will affect everyone. s >> so, wuld you care? because the bigger the problem becomes, the more tax dollars will be needed to fix it.

that means fewer tax dollars edbeing spent in areas of like schools oroadways. talented teachers and other public servants may look for careers elsewhere. >> pension problems are sparking some conrn for workers in northern kentucky.y' >> kentucks pension system, one of the worst across the country. >> it matters what happens in kentucky because what is kentucky's problem is newis jersey's problemllinois's problem, is connecticut's problem, is california's problems, is... go on and on and on. this is a crisis of epic prsortion in the united sta of america. and it's time we wake up and address it. >> smith: one public employee inentucky who wondered if pension was okay was a history teacher at a local louisville high school. >> 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 emople and trying to help

>> we're going to convert it from chemical to... c mical. >> chemical! bingo! >> and so it's an idealism that drives a teacher. >> and that's the beauty ofh- englwe are learning to be effective communicators. >> but one of the reasonthat we accept the low salary is that we won't have to despair of our retirement.il that therebe some form of a safety net for us when we get too old to trundle into the classroom. >> smith: a guarantee? 's a promise, and a good chunk of our salary is taken out from day one and deposited into a rerement plan. >> if y'all can come up with a good idea for a little project w or something yout to do, we can maybe utilize the outdoor... >> smith: christina frederick-trosper, a teacher in knox county, kentucky, alsogn up because of the promise of a guaranteed pension. >> that's what i w kind of explaining to them when you get to this one. i remember my parents telling me, "you know, you'll iove a pe you know, you'll have job security. and those are things you can't

get in a lot of other places." have a great day, guys, i'll see you all tomorrow, thank you!i ew i would never be rich, but i thought i would, you know, be comfortable and have those nothings that i can, you k 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 been betrayed 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 policingtt until a bit later than normal. i was almost 30. so i was very well aware of the pensn benefit. for me, that was a big deal. um, i knew that if i coulde get 20 years out of reer, that my wife and i would have

health insurance, and that i would haveome kind of a pension. >> when you look at public servts-- your teachers, your cops, your firefighters-- the pension presents our promise to them, and also an acknowledgement that we might not be able to pay you what you're worth rht 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-nefit pensions, a guarantee that you would get a good percentage of your salary and benefits upon retirement. >> this is the life. at with my retirement pl and a few dollars i'd saved, idi 't have a thing to worry about. r>> smith: workers and th employers contributed funds that street.en invested on wall >> i'm chairman of the pension fund of this corporation. wee looking for a well-diversified list of high- quality bonds and some common

stocks. >> smith: over the years,e privrporations have largely stopped offering defined-benefit pension plans. but most public employees still have them. >> the policy that we'll recommend here gives us a 60% chance of actually achieving the assumed rate of return. >> smith: the decisions about how to invest and grow pension fund money are made by a pension board and its financial advisers. and, for many years, kentucky retirement systems, or krs, was flush with cash. >> k investment return on that money for that period of time estimated to be about $2 billion. >> smith: 20 years ago, it looked as if it would not ever have a problem. >> it's got to he 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 1999? >> it was sitting at, at nearly 100% funded.

>> smith: but then, in000, the dot-com bubble burst. krs lost $1.2 billion. >> i've served in the best of times, and now is the worst of times. >> smith: kentucky was p suffering, biticians were reluctant to raise taxes to pay the full cost of their bills, and they began to divert pension money. >> what ll kentucky do? that's what you're assembled here in frankfort to decide. >> in kentucky, the pension was used basically as piggy bank. the problem was, once you started to short your state pensions to cover the budget shortfall, it's hard to just do it the one time. >> smith: one of the few local reporters paying attention was john cheves. >> i've been writing for 20 years now about the state's pensn system and its been, you know, sort of a slow-motion car crash. >> smith: cheves watched as one governor after another investeda

in roads, bridges, les, and more. pension obligations were not met. >> as governor, i'm thrilled to be able to support this project not only with enthusiasm and congratulations, but with money. >> i think iemboldened the politicians. >> specifically $2.4 million... >> talize nobody's paying attention, i think they get a little bolder about it, and ey realize, "why, no one looking! i can do this!" >> they have effectively raided pension funds. and by raiding, it means they just simply have not made the payments that they are morally required 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 that money for roads, schools-- things that are important, but that other tax revenues are not fundin and the thing is, is that the bill will come due.il

the billcome due. >> see you later. >> i had heard kind of rumblings from teachers early on, like, "oh, they're taking money from our pension fund and" this and tha i'm, like, "oh they'll fix it." you know? and that was... i think that's kind of where we were. you know, "they'll fix it." and then i got married and i had some kids. and, you know, that wasn what was on my radar. e d i think a lot of peoplre like that. >> i had my head in the clouds. i'm a teacher, i'm busy, i got a family, i got a life.bu they take h out of my paycheck, uh, every two weeks, and so that's going into a little pile that's gonna accrue interest. i figured this is on autopilot. i don't have to worry about the pensio >> smith: 2008, kentucky's pension funds weren very bad shape. much worse.were about to get >> stunning news on wall street tonight.

>> at one point the market fell as if down a well, over 700 points. >> the collapse of lehman brothers triggered turmoil in markets around the globe. kentucky was hit hard.collapse, >> we travel to kentucky for a firsthand look at how the recession is hurting just about everyone. >> when i first got here, things were booming. there, there were a lot more factories that were open, and businesses i mean, you can see, businesses are closing all over. >> kentucky is to horse racing what detroit is to the american auto industry. and even the sport of kings feels the sting of a global 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. w i mean, the boat taking on water, but now we got a hole. hu there was downturn in the funding status because of that

crisis. and you can't pay that back in five years. >> the economic turmoil of recent years is putting a comfortable retirement at risk for many americans >> so the investment crews are feeling the pressureo 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... fa smith: starting in the of 2009, kentucky's public pensions decided that to dig out from under, they would invest a portion of their porfolio into some of wall street's more exotic andisky investment vehicles, like hedge funds. >> one of the reasons they're trying to do this is thatga they're trying tle their way out of the problem. >> smith: and wall street was more than happy to answer kentucky's cal pension money is extremely important here. >> the world of pensions is a world of money. and if you really want to dig economic power, in theder, of

states, that's where much of the money on wall street is from. the public doesn't necrily view pensis as giant pools of money. >> about a hundred offering to thank you.? >> when you say the word" "pensionople's eyes gloss over. they don't really pay much attention. but there's one set of peopleng who are pa lot of attention, and it's the richest and most powerful people in the world on walstreet. >> smith: how much money are we talking about? >> in public pensions today, there's about $3 trillion.'s part of eing paid out in benefits, and much of it being invested. >> smith: but here is it gets tricky-- knowing how to invest is difficult. i'd like to go through all the recommended policies and vote en masse, and then if meone... >> smith: some trustees have financial experience, but others are policend firefighters appointed to the board to ten not trained in portfolio

management.ma >> ...correlatioices and their risk and return assumptions by asset class...d >> it's complicad some of our trustees don't have that skill set. they're better at fighting fires than i am. they're better at catching criminals than i am. nancial skills.have the >> 53.5%... >> i would like to see sharpe ratios for each one of the major asset classes... >> smith: today, betty pendergrass is a trust that has investment experience. >> ...are we getting paid for the risk we're taking... >> smith: i mean, you know that onall street, they call pension funds dumb money. >> (laughs) that, that hurts, but it's true. >> what i would y is, the bounds of reason are 350 above the ten-year treasuries... >> smith: john farris is an investment manager in lexington. until recentlyhe chaired the krs board. regularly exploits penet

funds. >> i stated as the board chairman that we were... >> smith: in 2008, only two members of theoard had any investment management experience. >> they are much healthier... >> i think that the pension board that was put togethern betw08 and 2016 was probably the dumbest of money. >> smithand thus you're $60 billion in the hole. >> exactly. >> smith: how did they ass hundreds of investments when they have no experience in how to choose? >> well- >> smith: they just take anything that's recommended? >> it seemed that way. a lot of them that will say, will openly admit they're not even, you kn, sure what they're voting on. >> i trusted the state to deal with my money, okay? i don't kn nothing about doing that. >> smith: among those police i rms as a krs trustee.ved two >> smith: ed, you were a trustee.>> es. >> smith: now, in all due respect, you're a police e you in a position, or equipped, to be able to evaluate ntcomplex financial instru like a hedge fund?

>> one of the first things we e were told cted trustees when you went on the board, one of your responsibilities would be to get yourself educated. and the first question i had was how to do it. the retirement system sent me and other trustees to different investment symposiums. it's a complex thing. i did not claim to be an expert in the pension system. i knew a little bit about it,es and i did to theof my ability to make the best decision with the information i haat the time. ♪ ev >> smith with the best information, it's hard to choose a winner. think of that horse race, with in the world of high finance,ge there are 10,000 hedunds. how do you know where to bet? one of the first ones krs chose was called arrowhawk durable alpha. it had no track record and long odds. >> arrowhawk was one of the first sortf alternative

investments, as we call it, middlemen who had come toparty kentucky retirement systems and introduced krs to these alternativinvestments. they came to krs and said, "you should be putting your money in these funds. and we think these are the best places for you to invest the state's money." >> smith: these middlemen are called placement agents. >> apparently, unbeknownst to us, thplacement agents were being pa fees, so they were giving our business to theseor funds. e lead placement agent f arrowhawk was a fellow from ne york named glen sergeon. >> smith: yeah, this is glen sergeon. >> yes. >> smith: 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 wi much investment management experience was chris tobe. he thought it was a risky bet.

>> ...you hire a hedge fund, you're looking for a fund that has a track record, experience. >> smith: right, and this one didn't. >> correct. s but glgeon had a relationship with adam tosh, the chief investment officer of krs at theime. tosh sold us that... >> smith: tobe told me thatkr s chief investment officer, adam tosh, convinced the board to invest in arrowhawk, whichlt re in a large fee from arrowhawk for tosh's man, glen sergeon. >> smith: and how much money was he paid to bring in arrowhawk? >> two million for arrowhawk. but he brought in some other invements to the total of si million. >> smith: but at the time of the vote, the board didn't know there was a placement operating in the background. >> it was never disclosed in, financial statemen was never disclosed anywhere that... even the existence of placement agents. >> i think that one of the key issues is disclosure of placement agent fees. >> smith: tobe then hired ted siedle, a financial crimes investigator. they eventually filed a 32-page

complaint to the s.e.c. >> so i thought it was a good case. >> smith: the s.e.c. and stateti auditors invted 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 werthese abuses involving placement agents, $14n million had beaid to undisclosed individus for doing little or thing. it was happening all over the country. public funds pay hundreds of millions in placement agent fees. so, it's a significant problem. and it's a real wa retirement savings. ♪ >> smith: arrowhawk proved toos be a. after krs invested $100 million, the fund failed and closed down.

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

and so they start the beauty contest, and they have perhaps 15 hedge fund managers that they interview and meet with, and talk to, and whittle it down to the nal three winners. (car horns honking) >> smithfithe winners were paalternative asset management company, or paamco, prismad capital partners, ackstone alternative asset management.er each o krs so-called funds of funds-- umbrella vehicles that contain dozens of underlying hedge funds. with multiple layers of often dden fees, they are sometimes b calledck boxes. >> they're putting the together in these black boxes,o which theyniftily named the henry clay fund, the daniel boone fund, and the wport colonel's fund. outside of kentucky, famousare names or entities here in kentucky.

>> smith: today, hedge funds are deemed by many investmenton profess as inappropriate for public pensions because they are expensive and lack transparency. while hedge funds contributed only some of kentucky's pension woes, two class-action f litigatom san diego-- bill and michelle lerach-- sensed an oprtunity here. >> i can't tell by the title... >> smith: in 2017, they set upce ofn louisville. >> 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 o retireme350,000-plus individuals. and we're also talking about a matter which, quite frankly, could bankrupt the state.is thero much that we don't know. i'm trying to find out whatha ened here. okay, that's fine, we're just going to not look at it until we get a... resubmit, yeah? >> smith: the lerachs had successfully sued enron for over $7 billion in damages.

but bill lerach had been legally paying plaintiffs in some class-action lawsuits, so they enlisted ann oldfather as their lead counsel. l >> probably istle bit of watching their own backs. our team of lawyers are blessed to have as our consultant bill lerach, who's an disbarred at, but indeed an expert in pension fund analysis.ve and so we omebody right there at oureck and call who has educat us about the breadth of this problem throughout the united states. kentucky might be the first one to go down, but it won't be the. la ♪ >> smith: as lead plaintiff, they tapped an old friend of michelle lerach's, jeff mayberry, a retired state trooper. i >> from wh understand, the funds were fraught wh inflated fees.

allegedly they were exorbitant, they were non-standard, they were not 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: yberry faced thirty-one defense attorneys representing krs board members, their financial advisers, and the .ree hedge fund companies >> obviously the number of defense attorneys did make me realize at there's some big money here, and they can afford the best in the country. >> the agreements that these three hedge fund compani entered into with krs were alwa declared a secret. we have never been able to find thve in any public record, w never been able to find them on krs's website. all of these defendants, your honor, are seeking to keep private their dealings with krs.

>> smith: the defense has called for the case to be dismissed. but dfather 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 abundant examples, eur honor, where these th fund managers told krs, "oh, this sub-fund manar refuses to disclose their fee," charged to the public and the taxpayers oft ky. and then your honor... >> smith: they say you're on a big fishing expedition, lookingi for damagiide information, that you don't really know if 's there. >> the united states supreme court has said that the point of discovery iso be on a fishing expedition. and it is the beauty of civil litigation that we don't havef to know 100%at everybody did when we file the lawsuit. when we survive those motions to dismiss, it's gonna 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 gets to know about it, and i've never seen a case... >> smith: paamco and prisma said in a letter to frontline that they did what they were hired to do. nt but declined to beviewed. blackstone's attorney spoke to us about the fees. we don't know what the fees were exactly. >> i, i can tell you what blackstone's fees were. >> smith: right. b we know whckstone'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.he >>the fees were disclosed. the nature of the fees were disclosed. the contract ld out the fee structure for the underlying portfolio funds. >>mith: in vague terms. >> you're characterizing it a certain way. it laid outhe fee structures. >> smith: there is no transparcy issue, in your

view. >> there is no transparency issue. ceived.ow exactly what the there were target benchmarks that were established. mes 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: in april 2019, an appellate court dismissed the lawsuit. the plaintiffs are now taking their case to the kentucky supreme court. >> ...to defend our reputation. just because a complaint shreds us, it doesn't mean it's true. >> smith: people in industry and 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 up in the last hearing, when their lawyers, you know,ort of accused us of grabbing things from discovery and sending them

to the media somehow, you know. look, if they're proud of what they do and their business model and how they do it, well, then, stand up and tell e world about it. (car engine starts) (machine whirring) >> smith: every month, kentucky retirement systems makes overio 100,000 pepayments, withre the averagtiree receiving around $1,500. the total outflow isearly $2 billion a year but by 2013, the krs board and kentucky legislators worried that in the future, they would their obligations.ney to meet >> in 2013, pensions had moved to the forefront. i think people started to realize we let this debt get out of control. >> smith: lawmakers decided it changes. to make some drastic

>> we changed the system soer that you no loet a defined-benefit plan if you're a state employee.ri and you got this hcash balance plan. >> smith: basically, a 401(k)-type plan. >> basically, 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 firefighters, and thouof other public servants. public school teachers were spared. existing workers would keep their defined-benefit pension, buedall new hires would be m to a 401(k)-style plan. >> eveni. the reason why i stopped you tonight, you're swerving. >> the move into 401(k)-yle plans, this was widely seen as a compromise, but it's a big difference. and it's a lot more uncertain with a 401(k) plan. >> smith: tom loftus is a local

reporter who covers pensions. policemen and the fireh the >> i don't think it went down well with anybody. >> there is no way that we can continue bause of demographics to offer the same plan to people who are not currently state employees. >> smith: one year later, afr reforms went into effect, the pension crisis resurfaced as anr issue in the gtorial race, this time for state teachers and school workers. >> the most important thing to do is stop digging. >> sth: the long-shot candidate was matt bevin, a former hedge fund manager and tea party farite. >> we have a legal and a moral obligation... >> his campaign promise was, if the pension system is bankrupt,c the inviolable conis moot, because if you don't have those dollars to pay those benefits, then, okay, you don't pay those benefi. >> the reality is, if thee, money's not thhen we have to think about, "how do we tighten our budget?" >> his big issue is to shrink

government in kentucky.ll to make it s. uh, he believes in private sector, he does not believe in vernment. pensions.me is to shrink the >> ...or why we indeed will be the next governor and lieutenant govern of this commonwealth of kentucky. we had at that time, and continue to have, the worst-funded pension system in the united states. we need a fresh start. we truly do. we need a fresh start.at this tells us e as a state are in dire risk of becoming financially insolvent. and that if we are unable to meet the pension obligations isthat we have to people, comes at the expense of about, everything elsewecare would fund. (crowd cheering, drums rolling) our state workers who have bee promised a pension should be given that pension. >> smith: once in office, bevin decided to stop shorting the pehaion system and to make w are called actuarially require contributions, or annual arc

payments. >> we have an $82 billio pension problem. there are going to be hard decisionmade 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 t rest of the state budget. >> and we had better clean it up. >> that isn't what's controversial. what's controversial is, he's saying we can't really afford to keep pensions going, so teachers from this point forward, teachers won't get pensions in kentucky anymore. >> we have exhaustively gone through everything we can to ensure that we do in fact deliver on the promise. >> smith: bevin concluded that' the teachepension system was unsustainable. >> "keeping the promise" will save kentucky's pension systems. >> smith: under a proposal called "keeping the promise," all newly hired teachers would be moved to a 401(k). >> so on a going-forward basis... >> smith: existing teachers would also contribute a greater

percentage of their salary to s shore up the otem. you were eradicating the nsion for new teachers. >> correct. i mean, this is... in other wos, for new people who ar not currently employed by the state, they would not be given a defined-benefit plan because it is not possible to promise that to them with anyen conf that we can deliver it-- we can't. i think this is a very morally sound plan. >> smith: state senator robert stiverendorsed the plan. >> ...something that the people of kentucky will understand and acct as the direction we need to go in keep your hands off our pensions!at >> a passione crowd of state workers, educators, and retirees took to the steps of the state capitol with one message-- they want theirio pensns. pr >> a pension is ise! >> a pension is a promise! >> the proposed bill calls for new employees to me to a 401(k)-style plan and current employees kick in threpercent

of their salaries to shore up retiree althcare funds. >> you're going to be looking at specific countries and we're going to look at each one. >>mith: christina frederick-trosper, the teacher from knox county, was alarmed. her salary was already a challenge live on. kentucky's teachers have seen their wag, adjusted for inflation, increase by less than half a percentage point in the last two decades. yo>> so i'm going to give serbia first. >> smith: now trosper feared that lawmakers would come after her pension.gu >> in about , september, i really started paying attention to what was happening. anjust, everything just ki of snowballed for me. like, all of it just kind of came together. you dug the hole. h i didn't dig te. >> smith: one day, trosper attended a town meeting and confronted senator stivers about his plan. >> you all made a consciou decision to not fund youron obliga and i don't care when you got 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 nd it properly, because promise you your days in the sena will be no longer. they will be no longer if you pplause)ix this. that's all i care about. >> smith: it seemed likeou something snapped in >> yeah, it did. and i told everybody i had an out-of-body experience. i can go through a 300-page bill... m not the type of person who, you know, sits back a lot of times, but i shocked myself. i wanthat 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 pension. isand what you're proposin going to kill us. you will kill us. you will kill public education. >> i understand that ly perfectly. she is having certain fear of an unknown system where she's very comfortable with a known system. >> smith: and she's woied there will be less incentive

for teachers to sign up, knowing that they won't have a defined-benefit pension plan, and at she has young children and the quality of the teachers for them will be less. >> well, that's an opinion.ar thermany teachers that are teaching in the parochial systems that don't have those types of systems. and they have very good outcomee anlts. uh, universities. i don't think many teachers have defined-benefit pensions in universities. now, they're paid fferently, and more. >> smithand more. and that's a difference.vi >> and west inia, 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 outof lass today. >> smith: west virginia teachers in turn sparked similarho demonstrations in ok and arizona. >> this is what democracy looks

like! >> it's the latest in a wave of protests sweeping across the country, led by teache who say the future of public education is at stake. i think west virginia inspired us, because it happened next door in a mountain state types of things that we same and that they were able to achieve their goals, i think, reallygnited us. >> my funding first!ng my fun first! my funding first! vote! >> smith: bevin's controversial "keeng the promise" reforms were crafted into senate bill one. >> senate bill one shall pass. (shouting): >> smiading 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, plse! i'm going to ask you to please... >> smith: they'dike to have your hide. >> some. >> smith: well, the teachers were out there chanting. >>eah. look, at the end of the day, we're trying to save the system for them.

that's, that's the irony of al of this, in my mind, anyway, is that here we are trying to saved the systems,e're getting all this pushback. vote them out! vote them out! vote them out! >> smith: angry and fearfulec teacherse a regular presence in the state capital. >> i'm the only governor in the lifetime of any of thesell teachers that has funded the plan, and yet they seemingly hate what we're doing and they say... >> smith: on a local radio show, governor bevin shot back.i >> i mean, the r is, this is a group of people that are throwing a temper 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 teaers. i mean, matt bevin obviously has decided he's comfortable crossing that line. (chanting) >> i'm just flabbergasted at how remarkably uninformed folks are. there's an o saying that you can't win an argument with an ignorant person. and so if a person is uninformed about a topic,

they're not even able to make their own case forhat they believe. these are educated people with the ability to listen and to understand. so if they truly still believeat his is bad for them, it is due to being misinformed.an d they're, like, "how dare you say we don't understand." >> smith: well, the choice of language is such... >> agree >> smith: you're seen as arrogant, dismissive, talking down to teachers, firemen, policen. >> if people want to be offended, they can be offended by anything. yocan parse things, take things out of context, evenke ta them in context. >> smith: do you think you've been appropriately careful in your choice of language, and d really served thate... >> yes, i do, and i think if people really... >> smith: ...in a constructive way? >> yes. >> smith: you do. >> whether... does everybody agree with that? no. >> smith: no regrets? >> no. i... here's the thing, i'mte trying to save a sthat 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, state

republicans tried a last-minute maneuver. >> if we do not take action on p thsion bill, there will be massive layoffs across the commonwealth of ntucky. >> they were called into a crowded capitol committee ro, handed a bill, and told they were going to vote on it. a >> this ood compromise plan. >> but it turns out that they were handed a sewage bill, tha they were swapping out anything that had to do with sewers, and putting in languages that changed the pension system inng kentucky forever gorward. >> well, first of all, this is very unfair to vote on a bill that, i didn't even check the number of pages that are ond this bill,hen ask us to make this, this decision today, and then limit discussion and... >> no one had a chance to read it, outsidof 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 thing is about to beco.nd this >> this is a committee meeting, sir. >> yes, sir, it is.>> nd we're allowed to ask

questions or anything pertaining to this bill, whichha none oseen except a couple of you guys. rown out here in my years in service. we've had three or four... >> smith: there was a lot of anger in the room. >> extreme anger. it was an unpleasant task 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 to read, unfortunately. i had no choice. but you have to consider all of the factors--e 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 we can have a debate, a full debate on it, knowing that the optics were terrible. >> i'm concerned, first of all, that what we're doing is illegal. i'm hoping that we can have a representative of the teacher organization to testify herebi today on thi. would that be permitted, mr. chairman? >> uh, that's not on the... in

the orde no. >> is there... could you explain why we're not having a representative of the teachers to testify on this bill, since theyre the main people who are going to be affected by it? >> we have heard loud and clear how the teachers feel about sb 1, and this plan has made changes responsive to those questions. does anyone have a question on the bill? well, that's why i'm, i asking these questions about the bill... >> representative richards. >> can 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 interested in hearing the democrats' objections to the bill. >> seeing no other questions, madam secretary, please call the roll. >> mr. chairman!ch mrrman! >> it was absolutely just gut- wrenching to watch them vote. >> you're out of order, sir. >> no, you're out of order, too! by this statute, you're out of order. >> it was, "well, this is what we're going to do and this is how we're going to do it.

and we'rgoing to over-vote you because we have a supermajority." >> all in favor in the title amendment, signify by saying aye. all opposed? >> (yelling): no! >> how can you guys shdjourned. the morning without cutting 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 the bill before it passed. >> in 20 years at the stater capitol, i've neen protests like that. the teachers kept coming and coming.th were there every day. >> a penon is a promise! >> a pension is a promise! >> a pension is a promise! >> a pension is a promise! (cheering) >> decades ago, that general assembly made you a promise. >> yup! >> they said that if you dedicate your life to public service, that while we wouldn'tu pay you , we would

guarantee you a solid retirement. (cheering) but they broke the promise. b and thke the law! >> yes, they did! >> put them in jail! >> 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 rst! (cheering) we deserve better. er that just felt like ano slap in the face. to take our pension bill and put it onto a sewer bill, we thought, "oh, that's symbolic." >> ♪ because we deserve better than that! ♪ in our schools we deserve better than that. ♪ in our country, we deserve bett than that! ♪ in kentucky, we deserve it was perfect. i mean, they couldn't have chosen a, a better metaphor. 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! r >> smith: many, likedy wieck, blame wall street for creating the mess. >>ote them out! vote them out! vote them out! >> smith: others blame the governors and lawmakers whoec ned the pension fund over decades. >> i want to submit to you that this budget does not take us to that next level. >> smith: inside the capitol,g with teachers fille gallery, lawmakers debated how to cut the budget to shore uppe thion fund. >> i do love public education. >> smith: many of the cu proposed were to public education. >> we can do better, we must do better. if we want to have that world-class education system h that all of us want e, i can submit to you this budget does not do it. >> vote them out!

vote them out! >> i think teachers are beginning to realize that the whole system is under assault. whha is going to happen to t generation of children? will they be able to learn ifch they come into sl, because the social safy net that's very thin as it is has been >> ladies and gentlemen, the teachers know that the textbooks and learng materials in this budget are sliced by $16.7 million. no new textbooks... >> all of those that are up for re-election right now, that were 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 howany of us come out in 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, kentucky's attorney genal has successfully blocked bevin's sewer bill in court. but teachers are afraid of what the future holds the pensions of some other kentucky state workers are facing insolvency in around three years. teachers worry that when the time comes for them to retirehe the state won't haveoney to pay their pensions.e >>ll remember in november! we will remember in november! >> stote lawmakers don't want raise taxes. voters don't want to accept tax increases. retirees, i think rightfully,ut don't want to acceptto benefits that they were promised. so in kentucky, the bill is coming due now. t we are goingsee situations where pensn funds literally

do not have the money to paype out benefits tle who have been promised those benefits. >> and yet i'm being fought, in some instances by the veryng people that we're tro save-- it's like saving a drowning victim.dy it's like some they're fighting you, fighting you, pulling you under. you just need to knock them out and drag them to shore. >> yeah. >> it's for their own good and we have to save the system. >> governor matt bevin, couldn't put it any more succinctly than that. i appreciate the wake-up call. he i won't be the governor this thing falls apart. >> it's tough medicine but... >> the next governor, regardless of who they are, or what ideogy they represent, it won't matter what lie they give, reality will come crashing hom (people talking in background) >> here we go, d! >> let's go, d! (cering) >> the endgame is pretty clear. pensions aren their way out. >> go, go, go, go!

(applause and cheeng) >> so what we're going to have owithin the next generati 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 awato their own teachers, the one beneyou p got for sure wasension to retire on with some security and dignity at the end of your career.er but in kentucky, ahis summer, that might to be gone. >> parents, real quick, we've got pictures at 5:00, right here. h >> smith: whatappens if you have no pension? >> i don't want to think about that. i don't know. i don't... i don't know. >> that's excellent! what is the difference betwe 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. take your papers with rvive.

you have a great day. i'll see your beautiful faces tomorrow. that's all right. >> narrator: next time... >> this is just the beginning. >> narrator: a violent neo-nazi movement. >> what do you think was goingh on in house? >> they were making bombs. man: >> narrator: frontline and propublica investigate. >> they are actively recruiting military members. does that surprise you? go to pbs.org/frontline... >> this is what democracy looks like! >> ...for a look at how instates nationwide are de with the pension problem. >> what is kentucky's problem is new jers's problem, is illinois's problem, is connecticut's problem >> state lawmakers don't

ters don't want to accept tax increases. >> and read more from the hedge funds that kentucky invested with. then connect to the frontline community on facebook, twitter or pbs.orgrontline. >> frontline is made possible by contributions to your pbs thank you.om viewers like you. and by the corporation for public broadcasting.jo support is provided by the john d. and catherine t. macarthur foundation, committed to building a more just, verdant and peaceful world.on more informat macfound.org. the ford foundation: working with visionaries on the frontlines of social change worldwide. at fordfoundation.org. addional support is provided by the abrams foundation, committed to excellence in jonalism. the park foundation, dedicated to heightening public awareness of critical issu. the john and helen glessner family trust.ng supporrustworthy journalism that informs and inspires.

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(lisa bright) >> we need to keep in mind that all of these individuals lived and died before antibiotics were readily prescribed. so really what this gives us an opportunity to do is see what gppens when bacteriaoes unchecked when a simple infection could kill you. (music)