Lexington Mayor Jim Newberry on Wednesday laid out a proposal to create a second retirement system within the city's police and fire pension fund with benefits that would mirror the state's county retirement system.
The plan, which would require the approval of the state legislature, would create a new system for all new police officers and firefighters hired after a date not yet specified.
The retirement benefits in that second system would be less than the benefits in the city's current pension fund.
Members of the new system would be eligible to retire with full benefits after 25 years of service. They would contribute 9 percent of their salary to the pension system. Retirees would receive an annual 1.5 percent cost-of-living adjustment on their pensions and $15 for each year of service for health insurance.
Currently, members of Lexington's Policemens' and Firefighters' Retirement Fund are eligible to retire after 20 years of service. Members contribute 11 percent of their salary to the system. The retirees receive between a 2 percent and 5 percent cost-of-living adjustment determined by the pension board and receive the same health insurance benefit as active employees.
The city would continue to meet its obligations to the current employees and retirees who have been paying into the current pension system, Newberry said. The proposed change would affect new employees.
The changes are needed because of a more than $400 million unfunded liability in the pension system and in its health insurance benefits, Newberry said. "You can do the math. The city has a $274 million general fund budget."
Newberry made his pitch to the members of the city's pension task force, which is charged with making changes to the system.
Representatives from the Fraternal Order of Police and the International Association of Fire Fighters said they need more information and more time to consider the proposal. They also questioned whether creating a second pension system within the fund would work.
At this point, it's unclear how much money the city would save if a second retirement system were estwablished or what effect such a change would have on the existing one.
"We can't make a collective decision with the limited knowledge we have right now on behalf of our constituents out there, the police officers and firemen," said Mike Sweeney, president of the Bluegrass Lodge No. 4 of the Fraternal Order of Police.
Also, Newberry's proposal doesn't completely mirror the state system. The state includes an officer's overtime pay in the calculation to determine his pension benefit, Sweeney said. In the city's current system, overtime pay is excluded, he said.
One point that is clear is that mirroring the County Employees Retirement System would create a disincentive for police officers and firefighters to retire on disability, said Tim Bennett, the city's public safety commissioner.
Overall, 7.9 percent of the police and fire retirees in the state system went out on disability. In Lexington, 41.5 percent of police and fire retirees went out on disability.
The city and state use similar definitions for disability, but the formula used to calculate disability pension is different, he said.
Under the state system, an officer with eight years of experience making $43,000 would receive $10,750 a year in disability benefits if he retired.
Currently, a Lexington officer with eight years of experience, making $43,000 and with a disability rating of 10 percent could receive $25,800 a year if he retired.
The state system is both the floor and the ceiling for the proposed pension changes, Newberry said. "CERS, for better or worse, sets the market for police talent in Kentucky."
The city's pension system needs to match the state system so Lexington is competitive in recruiting officers and firefighters, he said. At the same time, if the benefits in the city's system are higher, taxpayers are paying a premium for that service, he said.