Pension Crisis Looms: Some Believe Pension Could Lead Lexington into Bankruptcy

Lexington, KY – There it is, in stark, black figures: $585 million. To put that figure into perspective, stack 585 million one-dollar bills, and it would be 34 miles high. Laid end to end, 585 million one-dollar bills would nearly circle the earth — twice.

What else does $585 million represent? It is the estimated shortfall, debt and lifetime medical benefits the city owes its police and fire pension fund. This fund will provide benefits to hundreds of current and retired public safety personnel for the rest of their lives.

Put another way, every man, women and child living in Lexington would have to ante up $1,983 each to cover the $585 million, based on the city’s 2010 population.

But now that figure is staring us, the local taxpayers, right in the eye, unblinking. It is a budget-blasting figure that some predict could actually bleed the city dry.

“It’s more serious than anything we have — more serious than the next ten things we have,” said Doug Martin, 10th District Urban County Council member and someone who has closely studied the pension fund and its problems. “If we don’t take immediate and aggressive action now, Lexington will face bankruptcy in five or 10 years.”

“I don’t think those are scare tactics at all. I said as much in my farewell address,” added former Lexington mayor Jim Newberry (2007-2010). “I think it will lead to the bankruptcy of Lexington if it is not addressed.”

Lexington is the only city or county in Kentucky with its own pension fund. The rest of the state’s public employees are in the County Employee Retirement System (CERS). Lexington’s plan is more generous than CERS. Although the city has its own public safety pension fund, it does not have complete control over it. Benefits are set by the General Assembly. A local pension board, made up of numerous police and fire representatives, oversees it.

In only three of the past 35 years (2006, under former mayor Teresa Isaac, and 2009-2010, under Newberry) did the city meet or exceed the annual contributions that actuaries calculated were needed to cover future pension obligations.

“And that’s bad,” said Martin. “A lot of this we did to ourselves. That needed money wasn’t invested, so it didn’t have a chance to grow.”

For example, what is more valuable to you: a million dollars today or 20 years from now? That money would lose value over 20 years because of inflation. But if you invested it today, you could watch it grow substantially, year after year. Pension funds are like that.

“You are estimating what future costs will be, what benefits will be paid out, and then discounting them at some actuarial-determined rate,” explained Dwight Denison, professor in the Gatton College of Business and Economics and the Martin School of Public Policy and Administration at the University of Kentucky. “Once you’ve figured the value of those costs in today’s dollars, you can set aside enough to fund it.”

Pension funds are different than home mortgages, where you have a contract to borrow cash today and pay it back over a number of years. Pension payments are like a mortgage in reverse, except you don’t know exactly how the mortgage will be valued in the future.

In years when Lexington appeared flush with cash, the city still did not make its legally obligated contributions, and in years when the city appeared broke, it seemed to have a ready-made excuse not to make the full payment, critics say.

Other reasons contributing to the problem include the minimum retirement age for police and fire personnel being reduced from 50 to 46 in 1994 and then eliminated entirely in 2002; cost-of-living increases that were mandated for retirees, ranging from two to five percent annually; and the 75 percent salary cap on benefits being eliminated. Other reasons for cost hikes include a spike in the number of disability claims and the fact that overall, pensioners are living longer.

In 2009 and 2010, the city actually paid a total of $74.1 million more into the pension fund than was required. It settled a lawsuit brought by former police officers who claimed the city underpaid the fund.

It hardly made a dent.

Many other times, the city paid as little as 50-60 percent of what was required. The difference, year after year, added up to a colossal problem that has repeatedly been passed on to the next set of elected and appointed city officials.

The challenge was when the city needed to balance its operating budget and couldn’t borrow any more money to do it. Not paying the full annual recommended pension payment was an easy out, so to speak. The government knew it had the obligation; actuaries told it so, but still Lexington reneged on the deal.

In general, police and fire personnel have retirements that kick in at a much younger age, said Denison. Because of the hazardous nature of their jobs, they can claim benefits sooner, at age 40 or earlier, if they qualify. Disability comes into play too — more often than for “desk” employees. It is estimated that 38 percent of those earning a police or fire pension in Lexington are on disability, a staggering percentage when you compare it to the eight percent of CERS pensioners who claim disabilities.

Strong police and fire unions lobby hard in Frankfort to protect what they have won in the past.

If you think Lexington’s police and fire personnel will make concessions to help the city shore up the pension plan, think again.

Last October, Mayor Jim Gray appointed a task force to study the troubled program and to make recommendations for fixing it. Mike Sweeney, a detective in the police burglary unit, is president of the Fraternal Order of Police (FOP) Bluegrass Lodge #4.

“In my opinion, we’re not making headway,” said Sweeney. “The mayor wants us to come up with solutions for the pension liability. At this point, we haven’t come up with anything. It took 40 some years to create this, and it won’t be solved overnight.”

Sweeney said that anything the FOP or the Fraternal Order of Firefighters (FOF) agree to do must apply only to new hires — no give-backs by public safety personnel.

“The whole idea of this task force was to come up with new options going forward. They would apply to new hires, not people currently in the system,” said Sweeney. “That’s the only way the FOP and the FOF will agree to anything.”

So, if new hires pay more into the fund or are placed in a new retirement program, such as a 401(k), would that help reduce the debt?

“You’re looking at years down the road before it would make a huge difference,” said Sweeney. “It would certainly put a dent in it. It goes in the right direction.”

At 55, Sweeney is a 30-year police veteran eyeing retirement. He thinks the traditional 20-years-in and 20-years-out work/retirement days are becoming a thing of the past nationwide. It is just too costly.

A former Lexington police officer who is now an attorney also thinks the pension crisis shouldn’t mean concessions.

“Believe me, our pension benefits are not too generous,” said John Roberts. He says much improved pay was instituted for police and fire after he left the force in 1994. That watershed year was 2005, when fire personnel saw a 30 percent pay increase and police personnel a 23.8 percent hike.

“I’m getting a pension based on a really low wage. These other guys will get pensions based on much higher salaries. It jumped tremendously,” said Roberts.

Roberts suggests some kind of public safety tax on real estate in Fayette County might help. He and Martin think the minimum age for benefits should be raised — in most cases, from 46 to 50 or 55.

“(The city) started paying out too much at age 46. Cutting it is a way to save money, but I don’t know if it can be done for current people,” said Roberts.

“I’m sure it would be illegal,” said former mayor Newberry. “If a new officer or firefighter wants to sign up for duty, they’d have a reduced level of benefits. If they really want the job, they’ll take it. I don’t think it’s outrageous for Lexington to provide the same level of pension benefits that every other city or county offers.”

Newberry said accounting standards for how cities classify pension obligations have changed. These new rules may make pension debts appear much worse but create a more accurate reflection of reality.

“Each year, we funded the current year’s liability plus borrowed money (selling $106 million in bonds) to shore up the fund for prior years when obligations weren’t met. ($33.6 million in cash was also infused.) We had in place a longer-term plan that would have required multiple years of the bond sales to cover the obligations,” said Newberry.

The Gray administration is continuing that pattern, according to the mayor’s communications director Susan Straub, selling $65 million in bonds and paying another $28.7 million in cash in fiscal years 2012 and 2013 to try to reduce the pension debt.

The only place where changes to Lexington’s public safety pension plan can be made is the General Assembly, but that’s touchy. The politics are such that of the 138 legislators in Frankfort, only 14 have some or all of Lexington in their districts. There are 124 other legislators who really have no dog in the fight.

Some believe that if the police and fire unions cast this issue such that a vote for change means a vote against police officers or firefighters, “the politics of making the change will be pretty ugly,” said Newberry.

Nationwide, there have been 641 cases of municipal bankruptcy filed since Chapter 9, which was created for municipalities, was enacted. Many have to do with employee pension obligations that cannot be met. Stockton and San Bernardino, Calif. are recent examples. Generally, a bankruptcy judge forces a settlement of some kind.

How Lexington’s pension problem will pan out is anybody’s guess. In the end, Lexington taxpayers may be required to help rescue the fund. If it comes to that, the city may be sacrificing some of its future in order to pay for its past.

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