Lexington, KY - One of the most serious threats to Lexington's long term financial stability is the massive unfunded liability in the police and fire pension fund. As recently as the fund's July 1, 2009, audit report, an additional $258,078,308 is needed to generate enough income to make required payments to pension retirees during their lifetimes. This number would have been even higher had the Urban County Council not borrowed and contributed $70 million to the police and fire pension in April 2009 to begin the long and painful process of shoring up the fund.
So how did we get in this mess? The short answer is that LFUCG contributions have not kept up with the spiraling costs of benefits being paid out by the pension fund. Since 1997, the unfunded liability of the police and fire pension has increased over 700 percent, rising from $36,769,227 in 1997 to the current sum. A Police & Fire Pension Task Force formed in 2008 found that a number of significant factors have led to these dramatic increases.
First, changes in Kentucky laws governing Lexington's fund have increased benefits to retirees. The minimum retirement age was reduced from 50 to 46 in 1994 and then eliminated entirely in 2002. Also, new annual cost of living increases were mandated for retirees, ranging from 2 to 5 percent compounded annually, which now average 3 percent and have been set as high as 5 percent in 2007. Finally, the 75 percent salary cap on benefits to retirees was eliminated.
Significant pay increases for police and fire employees has also contributed. From 1999 to 2006, the number of active police and fire employees increased from 870 to 1,065 individuals, and the payroll for active employees increased from $37 million to over $57 million. Also, the average salary for police and fire employees has increased as the result of collective bargaining.
Finally, a disproportionate number of police and fire personnel in Fayette County - approximately 42 percent - retire as a result of a disability, where only 8 percent of retirements in the "hazardous duty" portion of the County Employees Retirement System (CERS) are the result of a disability. Except for Lexington, all other police and fire retirees in Kentucky fall under the CERS plan.
This huge discrepancy in disability retirements is caused in part by the antiquated statute that governs Lexington's police and fire pension fund, which requires a finding of "total permanent disability" if a physician finds that an injury prevents a disability candidate from performing any of his or her duties at full capacity. Thus, unlike the CERS plan, LFUCG is required to make a finding of "total permanent disability" for an employee who only has a 1 percent disability. Also, between 1999 and 2008 the Pension Fund Trustees approved an average of 98 percent of the disability applications it received, while CERS only approves about 25 percent.
Fixing the police and fire pension fund will involve painful choices. We must change Kentucky law to require that new LFUCG police and fire recruits are included in the County Employees Retirement System (CERS). We must also change Kentucky law so that disability applications in Lexington are governed by the same rules that apply to CERS. Finally, we must find a way to pay for the current $258,078,308 unfunded liability, plus the $70,000,000 we borrowed for the fund in 2009. This is an amount of debt that will burden our economy and our children for decades.