Fayette County

Lexington cop discovers city shorted pension fund by $500,000

Lexington Fayette Government Center.
Lexington Fayette Government Center.

The city of Lexington failed to deposit more than $400,000 it had agreed in 2013 to give to the police and fire pension fund, city officials confirmed Wednesday. The city made a payment of more than $500,000 to the fund late last week to cover earnings on the missed payment.

The mistake — discovered by a Lexington police officer on the pension board — has prompted some board members to question whether the pension fund should separate from the city, which pays the salary for the pension fund’s one employee and manages its finances.

Lexington Police Sgt. Larry Kinnard, a pension board member, asked city officials for a detailed breakdown of how much the city has contributed to the fund. The amount the city puts into the fund can fluctuate each year.

That request led city Finance Commissioner Bill O’Mara to discover that an additional payment the city had agreed to put into the fund during a November 2013 pension board meeting was never transferred to the pension.

After O’Mara discovered the mistake, the city transferred $515,571 into the pension’s account Sept. 8. That $515,571 included $418,517, the original amount the city had agreed to add to the fund in November 2013, plus $97,054, the amount the money would have made if it had been invested nearly three years ago.

The missing money was discussed at a police and fire pension board meeting Wednesday.

O’Mara said Wednesday an accounting entry had been made to transfer the funds. But because pension payments involve payroll, there were problems making the additional payment. O’Mara said officials were notified that adding the additional payment through payroll did not work. But the city never went back and corrected the problem.

The money was never transferred.

Several pension board members — which include active and retired police and fire and some city officials such as O’Mara — said the city’s failure to put the money into the pension fund is why there had been so much distrust between the police and fire pension and the city.

“The city has handled all of the accounting,” Kinnard said. “There is no good way for us to track it.”

Moreover, Kinnard said he was concerned that the city had not caught the error — a $500,000 mistake —until he had asked repeatedly for a breakdown of the city’s contribution. Before becoming a police officer, Kinnard had worked in banking. He has also worked in the financial crimes unit.

The board voted unanimously Wednesday to send the issue of improving the financial accounting to a board subcommittee. Kinnard said after Wednesday’s meeting that separating from the city is an option the subcommittee will likely explore.

“Obviously, cost will be one of the issues discussed,” Kinnard said. Lexington’s police and fire pension is one of the few pension systems in the country whose employee’s salary is paid by a city or state government. The vast majority of pension funds are separate and have their own financial team.

Other options include getting an independent audit of the pension’s finances.

O’Mara said during Wednesday’s meeting that he was not opposed to the subcommittee exploring the issue and said he welcomed any suggestions on how to improve financial oversight.

O’Mara said the $515,000 came from the general fund. It’s not clear if he will have to return to the Urban County Council, which approves budget amendments, for additional money above what the city had already budgeted for its pension payments.

Councilmember Kevin Stinnett, who chairs the council’s Budget, Finance and Economic Development Committee, said he had heard about the issue and said he wanted to make sure that the council was also updated on how much the city puts into the pension account.

“I want to make sure there are safeguards in place,” Stinnett said.

Tommy Puckett, a retired police officer and pension board member, said the city has done little to gain the police and fire’s trust.

“And people wonder why I keep suing the Urban County Government,” said Puckett, who has filed multiple lawsuits against the city over the city’s contribution to the pension system.

Puckett said the $500,000 mistake illustrates a much bigger problem — the financial information that is provided to the board, which is supposed to provide oversight over the $630 million fund, is inadequate.

“It’s a $600 million pension plan and I can’t tell you anything other than what we spend each month,” Puckett said. “You people didn’t catch it. Was it intentional or are your people incompetent?”

The city implemented a reform to its pension system that passed in 2013. The unfunded liability — the amount it needs to pay all current and future beneficiaries — has continued to drop since that reform was implemented.

An actuarial report released in December 2015 showed the funding ratio — the amount of money it has compared with the amount of money it needs — at 78.4 percent. That’s a bump from 76.2 percent from 2014 and 72.3 percent from the previous year.

That report showed the unfunded liability of $171 million on July 1, 2015. That’s down $9 million from the previous year’s unfunded liability of $180 million.

Before pension reform was implemented in 2013, the unfunded liability was nearly $300 million.

As part of pension reform, police and fire employees agreed to an increase in the amount they contribute, which is now 12 percent of their paychecks. The city’s portion also changed. Every year the fund has an actuarial report that helps determine how much the city is required to put into the fund. In 2013, that report showed the city needed to increase its portion above what it had already budgeted for the pension fund. The total amount the city was to put into the fund that year was $22.8 million, which included the additional payment.

Beth Musgrave: 859-231-3205, @HLCityhall