Lexington Mayor Jim Gray announced a breakthrough deal Friday to resolve the city's biggest financial threat, a $296 million unfunded liability in its police and fire pension fund.
"There were many who said consensus could not be reached on an issue as thorny and complicated as our public pensions," Gray said at the final meeting of the city's pension task force. "Well, today proves consensus can be reached. It can be done."
If the state legislature approves the deal, the 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. That does not include $10.8 million a year the city spends on debt service for $137 million in pension bonds it has issued.
Police officers and firefighters likewise would pay more of their salaries into the pension fund. Retirement benefits would be 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.
However, the basic plan — a defined-benefits pension — would remain intact, while public employers elsewhere, including Kentucky state government, are debating whether to abandon that model for something closer to a private sector 401(k) account.
The changes immediately would slash the pensions' unfunded liability — the amount of extra money the pension fund needs to pay all future benefits — by nearly half, to $161 million, Gray said. The pensions' funding level would jump from 64 percent to 75 percent.
Gray reached the deal late Thursday with local representatives of the Fraternal Order of Police and the International Association of Firefighters. Police and fire officials said they'll recommend their organizations vote to support the proposal.
"This was not easy, but in the end we have a plan that finally puts our pension fund on sound footing, ensuring that it will continue to support the retirements of Lexington's police officers and firefighters for decades to come," said Captain Chris Bartley, president of the IAFF Local 526, in a prepared statement.
"Today is not a day for joy, as there is a lot of pain to go around," Bartley said. "But it is a day to be proud."
Most state and local government employees in Kentucky, including Lexington's, collect pensions from the Kentucky Retirement Systems, which faces its own funding shortfall of many billions of dollars. However, Lexington — alone among the cities — has a separate pension fund for its police and fire employees, managed by a local pension board but ultimately controlled by the state legislature.
Like the state pension system, the city's police and fire pension fund got into trouble because it promised more money in future benefits than the government was setting aside.
Since taking office at the start of 2011, Gray has tried to reduce the shortfall by increasing the city's contributions and issuing bonds to raise huge sums. The police and fire departments have been getting close to half the city budget, up from one-third a decade ago, reducing the funds available for parks and recreation, streets, social programs and other municipal services.
Another complication for the police and fire pension fund: an unusually high number of disability retirements.
From 2006 to 2011, 38 percent of the 119 Lexington police officers and firefighters who retired were awarded disability pensions, according to a Lexington Herald-Leader analysis. That compared to only 3 percent for Kentucky State Police and 7 percent for Louisville's hazardous-duty workers, including police officers and firefighters.
An employee who makes $60,000 a year can draw more than $2.2 million if he retires on a disability at age 35 and lives 50 more years. He also — because of his early retirement — stops contributing to the pension fund years earlier than expected.
The deal announced Friday would make disability retirements less attractive by reducing the base pension from 60 percent of salary to 50 percent, though the payout could rise for more serious disabilities.
Pension advisors told the city the current system may "create an incentive for some to seek disability prior to (the) 20-year service minimum," according to the final task force presentation.
The deal did not address the cost of slightly disabled employees who are forced off the job by inflexible city rules, said Tommy Puckett, a former Lexington patrol officer who represents police retirees on the pension board.
In Lexington, there is a single job description for all police officers and another for firefighters. They require that everyone in the departments be capable of the most strenuous tasks — chasing and tackling criminal suspects or charging up ladders into burning buildings. If employees get hurt and no longer can do everything on the checklist, they're considered disabled.
"Obviously, this is something that needs to be changed because it would save us money," Puckett said. "We are turning people away who don't want to leave because they have a 1 percent total body impairment. One percent! You cannot tell me there aren't jobs these people are capable of doing."
The Lexington-Fayette Urban County Government will:
■ Pay $20 million a year into the police/fire pension fund, up from the current $11 million a year;
■ Leave control of the fund with the state legislature;
■ Not change the basic plan — a defined-benefits pension with cost-of-living adjustments (COLAs).
Police and fire retirees will:
■ Accept lower cost-of-living adjustments, or COLAs, tiered to their annual pension income, so those making up to $39,999 would get 2 percent; those making between $40,000 and $74,999 would get 1.5 percent; those making $75,000 to $99,999 would get 1 percent; and those making more than $100,000 would get 0 percent from July 2013 through July 2016, and then get 1 percent. Currently, COLAs are from 2 to 5 percent a year.
Active police and fire employees will:
■ Accept the same lower COLAs as retirees, though they won't get COLAs until age 50 or five years after retirement, whichever comes first;
■ Be ineligible for a pension until age 41;
■ Accept a smaller base disability pension of 50 percent of pay, down from the current 60 percent;
■ Contribute 12 percent of their salary to the pension fund, up from the current 11 percent;
■ Be eligible for a larger line-of-duty death benefit of 75 percent of final salary, up from 60 percent.
Future police and fire employees will:
■ Serve 25 years for a service pension, up from the current 20 years;
■ Be ineligible for a pension until age 50;
■ Accept the same contribution rates and COLA terms as current employees;
■ Accept a reduced "multiplier" of 2.25 percent, down from the current 2.5 percent. The multiplier is used in a formula with years of service and highest salary years to establish a base pension level.