Lexington, KY - We are driving a Cadillac but can only afford a Buick." That's the analogy given by Mayor Jim Newberry in describing the financial troubles that have beset the Lexington Policemen's and Firefighters' Retirement Fund (PFRF) since its creation in 1974.
Shortly after the merged government charter was approved in 1974, KRS 67A.360-570 was enacted, authorizing the Lexington Fayette Urban County Government fire and police pension fund. While every other city and county in Kentucky participates in the County Employees Retirement System (CERS), LFUCG chose to establish its own standards and criteria for benefits.
The fund is supported by LFUCG contributions, payroll contributions from active firefighters and policemen and financial investments. LFUCG's legislatively mandated contribution toward the fund has grown over the years from 13 percent of police and fire salaries to the current 17 percent.
The amount that active police and firefighters contribute has grown from 9 percent of their salaries to 11 percent.
In reality, however, these mandated contributions have fallen short of what is needed.
"We have over 36 years of managing the fund and only one year that it has been fully funded," Newberry said in a recent interview.
LFUCG is now playing catch up to keep the fund solvent. The Urban County Government's contribution was 26.5 percent in fiscal year 2008, and an actuarial report for fiscal year 2008 states that the percentage would have to increase to 46 percent for the next 23 years if the fund is to continue to cover its obligations to retirees. (Note: A new actuarial report is due out this fall but was not yet available when this article was submitted for publication.)
In short, the fund is paying out more than it is taking in, and LFUCG is infusing money - $70 million borrowed through a bond issue in 2009 and more planned for subsequent years - and scrambling for another quarter of a million to meet current obligations.
Disability claims at core
of the problem
A Police and Fire Pension Fund Task Force was appointed in August 2008 to look into the unfunded liabilities of the fund. In its interim report in December 2008 and in a follow-up supplemental report in February 2009, significant focus was on the area of disability claims as a main cause for drain on the fund.
The task force reported that an average of 42 percent of all LFUCG police and fire retirements are the result of a disability. Comparatively, CERS's rate is 8 percent, with Jefferson County/Louisville's disability rate averaging only 7.6 percent.
Part of the discrepancy lies in the criteria for determining disability. Even though the average rating for disabilities has been about 10 percent over the years, LFUCG can make a finding of "total disability" for an employee who is just 1 percent disabled - which occurred in at least one case in 2008, the task force found.
Tommy Puckett served on the pension fund's 12-person board for 14 years as an active policeman and was elected again in 2009 as a retiree of the police force. He sees the disability threshold as one of the biggest problems with the fund.
"Both chiefs - police and fire - want their men at a perfect 100 percent, which is absolutely impossible," Puckett said.
In other words, there is no "sliding scale"
for the various types of disabilities. The policeman who is 1 percent disabled is treated the same as the policeman who is 90 percent disabled.
Another issue is the continued employment for disabled safety workers. The CERS system requires that "reasonable accommodation" be made for employees with disability determinations to be placed into other classified positions. The LFUCG pension program does not have comparable requirements.
Puckett said the policeman who blows out his knee, gets surgery, and then wants to return to work is told he must retire with a disability.
"There are plenty of desk jobs he could do,"
he said.
Still another discrepancy is in the approval rate for disability claims. The CERS averages 25 percent approval of applications for disability retirement, while the LFUCG pension board averages a 90 percent or higher approval rate, with all applications approved in 2009.
The full impact of disability claims is not known, because no data is kept on the quantity or amount of funds allocated for each type of disability. In response to an open records request for this information, the LFUCG law department stated that no such records exist, citing an Attorney General's ruling that agencies do not have to create records that do not already exist and are not required to do research to compile such information.
Fund issues are contentious and longstanding
Conflicts over the fire and police pension benefits, along with legislative unfunded mandates, began early in the history of the fund.
In February 1974, the urban-county government passed a resolution opposing a house bill by the General Assembly establishing the pension fund. The bill passed, and the fund was created, but not without a final say in the matter from then Mayor H. Foster Pettit.
In his January 1975 State of the Merged Government address, Pettit criticized the state legislature for "passing laws which have grave financial impact on the budgets of local governments without first determining the costs. . ."
In reference to another bill that had addressed overtime pay for firefighters, he wrote: "This legislation produced a conflict which contributed to a ten-day firefighter strike of serious proportions and led to lengthy disciplinary actions and a federal lawsuit."
During a recent interview, Pettit said during his term he tried to improve the investments of the fund by putting financial management people on the board - not just police officers and firefighters.
"I didn't want the same people who would be receiving benefits to be reviewing applications for disabilities," Pettit said.
He is not surprised that the fund is still experiencing financial problems.
"The fund has been a concern for many years," Pettit said, "and it's a matter that needs to be examined."
Mayor Jim Newberry agreed, calling it a "perplexing challenge for our community."
Newberry has written several times about the issue on his official website and feels that LFUCG should have a pension fund comparable to "everyone else in the state." He has proposed that the Kentucky statutes be changed to mirror CERS provisions for future hires, while keeping in place benefits for those presently in the current system.
"No one is suggesting we tinker with anyone currently in the system," said Newberry. "But we either cut benefits for new police and firefighter hires or pay more in taxes to cover the money needed to provide the same benefits that current employees have."
Mention of cutting benefits for the LFUCG police force, however, does not sit well with Mike Sweeney, an active policeman and president of the Fraternal Order of Police, Bluegrass Lodge 4.
"We need to fix our own system," he said, "not mirror CERS."
Sweeney is adamant about keeping fair and equitable benefits for new hires.
"I'm not for throwing the new guys under the bus," said Sweeney.
Puckett is just as passionate.
"The new hires are like our children," he said. "These guys may not have Social Security in the future. We can't diminish their benefits."
Vice Mayor Jim Gray, who appointed the 2008 task force examining this issue and who is challenging Newberry in the November election, has also weighed in on the issue. In an e-mail response to questions about the fund, Gray stated that it is important for Lexington to remain an "employer of choice."
"While CERS may provide certain advantages for purposes of ensuring long-term employment benefits for our public safety workers," Gray wrote, "simply adopting the provisions in their exact form may not be the best solution."
He is critical of the statute that binds LFUCG to unfunded mandates.
"We should have never been forced by Kentucky courts to meet these contractual obligations in the first place," Gray wrote.
He is also cautious about continually shoring up the fund with borrowed money.
"I believe we need to first evaluate the results of the first bonds issued to ensure we are being financially responsible," he wrote.
Pension funds throughout
the nation are facing shortfalls
The LFUCG firemen's and policemen's pension fund is not alone in its financial struggles. Other private and government pensions throughout the country are experiencing difficulties and having to borrow money to stay afloat.
The Center for State and Local Government Excellence recently reported that the 84,000-member Kentucky Retirement System, of which CERS is a part, is facing a $6 billion shortfall.
KRS Executive Director Mike Burnside said that the CERS currently has 18,000 members in its hazardous duty pension program and, as of June 2009, is funded at 67.9 percent.
"Relatively speaking, this is below the 80 percent level that would be considered healthy," he said, "but it's a lot better off than some of the other funds that we have."
The KRS is planning to ask for a state audit on the nearly $15 million in fees charged by agents who invest the state's pension funds, and just recently the Securities and Exchange Commission has begun to review the system's records. The Lexington fire and police pension fund board is also examining ways to address the situation, starting with a hard look at itself.
"For years, the city didn't contribute enough to the fund," Puckett said. But he is quick to add that the pension board "fell asleep" for several years and did not properly oversee investments.
"They have awakened," he said.
Indeed, the board recently hired a new money management company to assure that funds are better invested and more diversified. And in February of this year, the board created a new Continuation of Benefits Subcommittee to ensure that due process and procedures are followed in determining disability claims.
Resolution may come later rather than sooner
Everyone interviewed for this article agreed that the fire and police pension fund is unsustainable as is and that something needs to be done. At question is whether the original task force findings - particularly those involving disabilities - will be revisited. And there are significant disagreements on whether to keep the status quo (with periodic infusions of money), to revise the current system, or to mirror the provisions of CERS for future hires while grandfathering in current members.
Any revisions to LFUCG's fire and pension fund will require tough negotiation and new legislation, which means that change may not come quickly. It is unlikely that all parties will come to the table until after the November elections, which leaves less than two months to prepare for the 2011 legislative session. In the long run, the biggest stakeholders - the general public - may drive the action.
As Newberry pointed out, "Sooner or later, taxpayers are going to have financial problems on their hands."
(Note: Representatives of the LFUCG Fire Department declined several requests for an interview or statement on this issue.)