Nation & World

Lexington, Kentucky, mayor says pension costs have 'spiraled out of control'

FRANKFORT — For every $5 the city of Lexington spends, $1 goes to its public pension obligations, proof that "our pension costs have spiraled out of control," Mayor Jim Gray said at a news conference Monday.

"For Lexington and Kentucky, if ever there was a 'going out of business' model, this is it," Gray said. "Our pensions are unsustainable. There is no more kicking the can down the road."

Gray, Louisville Mayor Greg Fischer and other local government leaders spoke to urge the 2013 General Assembly to pass pension reform, which could include a reduction in retirement benefits and a massive infusion of extra state cash into the Kentucky Retirement Systems. The various pension funds of KRS have a $13.8 billion unfunded liability.

The 30-workday legislative session begins Tuesday, but it's unclear whether the legislature will seriously consider pension reform during this session, largely because nobody has identified where to get the several hundred million dollars a year needed to shore up the pension funds. An overhaul of state taxes proposed by a task force last year could raise some or all of the money, but the fate of tax reform also is uncertain in the 2013 session.

"We're hearing a uniform interest in pension reform," Fischer said. "Nobody has come up with the magic formula of how to pay for it, which is obviously what the challenge is. The desire is there. The method is what the great discussion will be centered on."

Senate Republican caucus chairman Dan Seum said it's possible that state government could afford much higher pension contributions without too much pain simply because the economy is growing and tax revenue should rise with it. Seum, R-Louisville, attended the mayors' news conference Monday.

But a report published last week said it's unrealistic for Kentucky to count on "natural revenue growth" to make larger pension payments. State budget officials forecast revenue growth of $213 million this fiscal year. Even if none of that money went to other spending needs, such as education, it still might not be enough to satisfy the pension funds, said the report by the Kentucky Center for Economic Policy in Berea.

"There's no getting around the need for additional revenues through tax reform, including perhaps a dedicated funding source for the pension payment," the center's authors wrote.

In the meantime, skyrocketing pension obligations are squeezing out other priorities, from police to playgrounds, the mayors said Monday. State lawmakers have failed to adequately fund state pensions, dragging down the entire retirement system that serves more than 337,000 state workers, local government employees and state police, they said.

Among the other measures they said would help, the mayors embraced proposals approved last year by a legislative task force. These include repealing a law requiring annual cost-of-living raises for public pensions and placing new public workers in hybrid cash-balance plans that are similar to private 401(k) accounts, but with a promised return of at least 4 percent. Presently, KRS guarantees lifetime pensions to public workers based on their highest years of salary.

In Lexington, the state's second-largest city, spending on pensions jumped from 6 percent of the city's outlay in 2000 to 20 percent in 2012, Gray said. That includes Lexington's contributions to KRS for its employees enrolled there and the cost of a separately managed but similarly struggling plan for its police and firefighters.

If the pension obligation keeps growing, Lexington will be able to afford little else, Gray said.

"These are real numbers," he said. "These are not abstractions. They are very real numbers. And if you were in business and looking at your income and balance sheet, you would say, 'This is insane.'"