Lexington police and fire pension unfunded liability ballooned during last year, two studies say

jkegley@herald-leader.comDecember 5, 2012 

Despite recent cash infusions into Lexington’s police and fire pension fund, the fund’s estimated unfunded liability grew by about $40 million in the last year.

Results from two recent studies measured the unfunded liability at about $300 million, compared to a $258 million estimate which has been used by the city and many of the pension fund's stakeholders for the last year.

The new, higher estimates were presented separately in two reports. One was a yearly financial report compiled by the city, and the other was a report presented Wednesday by Public Financial Management Inc., known as PFM, a consulting firm hired last month help fix Lexington's pension crisis.

The city's latest Comprehensive Annual Financial Report, which was made public Nov. 15, listed the unfunded liability at $296.8 million. That number is based on preliminary figures, the source of which had not been released Wednesday, city spokeswoman Susan Straub said.

However, the PFM consultants presented a similar estimate from a separate study. In a report to Mayor Jim Gray's pension reform task force Wednesday, the consultants estimated the unfunded liability to be between $290 million and $303 million.

It was unclear what accounted for the increase in the city's measurement; a draft of the city's most recent actuarial study had not been finalized and made public Wednesday.

PFM consultants attributed their projected increase to multiple factors, including longer life expectancies of retirees entering the pension system and more conservative investment return assumptions.

Nationally, money paid into pension systems and invested has seen lighter returns. Previous actuarial studies assumed Lexington's pension fund would see about an 8 percent return on investments. The Hay Group, an actuary working with PFM, changed that figure to 7.5 percent.

"That's a change that's consistent with national trends, to move toward more conservative investment return assumptions," said Michael Nadol, managing director at PFM. "That change alone, all other things being equal, would increase the size of the unfunded liability ... by about 12.5 percent."

The higher estimate presented by PFM came as a surprise to some members of the pension task force, especially in light of the measures the city has taken to make payments on the debt. In the last four years, the city has paid $60 million cash into the fund and taken out bonds worth about $130 million, Mayor Jim Gray said.

For the unfunded liability to have grown "lends even more urgency to what we're doing," said Tim Kelly, chairman of the task force and former publisher of the Herald-Leader. "If that assumption by The Hay Group is correct, we're going in the wrong direction."

PFM presented other findings in its 26-page report Wednesday. It was the firm's first report to the task force since it was hired last month.

Among the findings, PFM reported that the city has paid less than what was owed into the pension fund for 21 out of the last 24 years, contributing to the unfunded liability.

The group also reported that Lexington's police and fire pension board has granted retirees cost-of-living adjustments that have outpaced the rising costs of consumer goods. Yearly raises of 2 percent to 5 percent have contributed to the growing unfunded liability, the report said. Since 1983, the cost of consumer goods has risen by about 129 percent, but Lexington police and fire retirees pensions have increased about 157 percent, it said.

Pension board members Larry Kinnard and Tommy Puckett disagreed with that measurement.

Josh Kegley: (859) 231-3197. Twitter: @HLpublicsafety.

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