Lexington, KY - Last April, my council report in this magazine discussed one of the most serious threats to Lexington's long term financial stability - our massive, unfunded liability for the Policemen's & Firefighters' Retirement Fund. Lexington's pension consultant recently provided updated financial projections on our pension shortfall that I want to tell you about. But first a short overview:
As of July 1, 2008, Lexington's Policemen's & Firefighters' Retirement Fund needed an additional $247 million to honor its projected pension commitments to retirees. To catch up on years of underfunding the pension, the Lexington-Fayette Urban County Government (LFUCG) borrowed and contributed more than $70 million to the fund in April 2009, and borrowed an additional $36 million for the fund in May 2010.
So did it work? Have LFUCG's contributions significantly reduced the shortfall in the Policemen's & Firefighters' Retirement Fund? No. And it's not even close. The new projected shortfall in the pension fund as of July 1, 2010 is $222 million. This means that LFUCG's $106 million in contributions only reduced the 2008 shortfall by about $25 million. The rest of the bond proceeds - almost $80 million - merely offset new shortfalls that occurred between 2008 and 2010. In other words, it took about $80 million just to break even.
As with many cities, this crisis has been growing for years. Over the past decade, LFUCG's pension liability has increased almost 900 percent, from a projected $37 million shortfall in 1997 to more than $325 million currently. LFUCG's current projected pension liability includes both the $222 million fund shortfall as of July 2010, plus the $103 million unpaid balance of our pension bonds.
During these years, LFUCG's contributions failed to keep pace with investment losses and runaway pension benefits. The General Assembly eliminated the minimum retirement age and salary cap for retirees, imposed a mandatory 2 to 5 percent annual cost of living adjustment, and required collective bargaining for Lexington's public safety workers. Further, between 1997 and 2010, almost 39 percent of LFUCG's public safety employees retired on disability, compared to about 8 percent for the rest of Kentucky. Finally, the stock market crash of 2008 wiped out 27 percent of the pension fund's assets, and the 5.3 percent per year average investment returns over the past 10 years have fallen short of the 8 percent annual returns projected by analysts.
These problems will be difficult to fix. Lexington's Policemen's & Firefighters' Retirement Fund is governed by Kentucky statutes that can only be changed by the General Assembly. And because Lexington's police and fire unions are politically active and wield formidable political influence, prior attempts to explore sustainable pension solutions with the General Assembly have failed. Finally, other than coverage in Business Lexington and Southsider Magazine, the Lexington news media have shown little interest in LFUCG's growing pension fund liability; thus, most citizens aren't even aware of Lexington's financial peril.
We have serious decisions to make. A new dedicated public safety property tax could pay down the pension liability, provided that other existing property taxes are reduced to carry some of the burden. But more money itself won't solve our pension problems. Lexington's public safety employees and unions must support significant reductions in pension benefits for new hires, and support the passage of fair and reasonable disability rules.
Whatever direction we go, the runaway pension shortfalls in the Policemen's & Firefighters' Retirement Fund must be stopped. If we fail, Lexington may be faced with significant and long-term reductions in public safety and other essential services for many years to come.