Actuaries says fiscal health of Lexington's police, fire pension system has slipped

bmusgrave@herald-leader.comNovember 13, 2013 

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Less than a year after a pension reform package was passed, the fiscal health of the city's more than $590 million police and fire pension has slipped slightly, actuaries for the pension told its board Wednesday.

The pension system's funding ratio — the amount of money it has versus the amount of money it needs to cover all current and future beneficiaries — dropped from 76.2 percent to 72.3 percent for the fiscal year that ended June 30.

The slight decrease was expected, said Todd Green, of Cavanaugh McDonald Consulting, an actuarial firm for the Lexington police and fire pension fund.

"We were expecting a slight dip in the funding ratio," Green said at Wednesday's police and fire pension fund meeting.

The drop can be attributed to several different factors: The fund is still reeling from $125 million in investment losses suffered in 2008, a larger-than-expected number of retirements over the past year and a difference in the way the fund calculates salaries of police and fire.

"It's not unusual after pension reform, to see an increase in the number of retirements," Green said.

Scott Shapiro, a senior adviser to Mayor Jim Gray, said the average number of retirements in the 10 years prior to pension reform was 33. This past year, there were 82 retirements, or a 148 percent increase. A larger-than-expected number of retirees can increase the liabilities of a retirement system.

Because the funded ratio went down, the city's contribution to the fund must increase. The board approved Wednesday a slightly less than 2 percent increase to the city's portion, which resulted in an additional $381,000 payment to the pension fund.

Bill O'Mara, the city's commissioner of finance and a pension board member, said Wednesday that the city had already set aside the additional money to pay for the increase. That brings the city's total contribution to $22.8 million.

When the pension deal was announced earlier this year, city officials said the unfunded liability — or the amount it needed to fund the system — was supposed to drop by 45 percent from $296 million to $161 million.

The actuarial analysis released Wednesday said the total unfunded liability is $204 million — or about $44 million more than originally projected.

Shapiro said that the pension system is on track to pay down that unfunded liability in 30 years.

"The important thing is that it is now being managed," Shapiro said.

Urban County Council members recently voted to set aside some of the city's surplus for additional pension costs. Several council members have expressed frustration that the city has had to continue to set aside money for the police and fire pension after being told that it would only cost the city $20 million annually.

On Wednesday, Shapiro said a lot can change the unfunded liability of the fund from year to year, such as an increase in promotions, number of new hires and retirements and the performance of the stock market. He said $20 million was a conservative figure.

As part of a reform plan that the city and firefighters and police agreed to, both sides committed to increasing payments into the system. Lexington-Fayette Urban County Government would commit $20 million a year — up from the current $11 million — to more aggressively pay off the pensions' unfunded liability over the next 30 years.

Police officers and firefighters pay more of their salaries into the pension fund. Retirement benefits were trimmed in several ways, including smaller cost-of-living adjustments for some retirees, smaller base pensions for disability retirements and a reduced payout formula for new hires. Future employees would be expected to work longer before they retired.

Beth Musgrave: (859) 231-3205. Twitter:@HLCityhall

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