Urban County Council member Doug Martin sees dire financial consequences ahead for Lexington because of skyrocketing costs for the city's police and firefighter pension fund.
Add to that a high rate of police and firefighters who retire on disability, with lifetime medical benefits, and Martin said there will be no way for the city to avoid having to impose higher taxes on citizens and reduce services to pay the bills.
"That's a given," he said. In addition, Martin said, "We need immediate changes to stave off bankruptcy in the next five to 10 years."
Martin made the remarks during an interview before the council's Tuesday work session, where he painted a bleak financial picture for his colleagues.
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Martin, who represents the 10th District and is not running for re-election, has been an outspoken critic of the way the retirement benefits are structured. "The money we need in the bank to pay all the medical and pension benefits for police and fire employees and retirees was short by about $585 million as of July 2011," said Martin, who is a lawyer.
That means the city is facing pension catch-up payments of about $50 million a year for 20 years, he said. "We have, in my opinion, a runaway pension fund," he said.
In grappling with retirement benefit issues, Mayor Jim Gray appointed a pension task force last year led by Tim Kelly, retired publisher of the Herald-Leader, and lawyer Gene Vance. The task force is charged with making recommendations for pension reform.
Martin and fellow council member Kevin Stinnett serve on the task force. Stinnett said after Tuesday's work session that Martin's presentation "was the absolute worst-case scenario. His premise was based on a 100 percent funded pension, and we know we're never going to reach that goal."
Stinnett said the city needed to focus on finding a revenue stream for the pension and changing benefits for new hires to bring the pension up to an agreed-upon funding level, such as 80 percent, during the next 20 years.
The city's minimum payment to the retirement fund, set by state law, is about 17 percent annually of the police and fire payroll.
However, Lexington has made its required contribution in only three of the past 21 years, Martin said. In 2009 and 2010, the city issued two bonds totalling about $106 million to make catch-up payments.
If payments had been made, the retirement fund would have $80 million to $100 million more than it has today, Martin said. Asked why the city did not meet its obligations, he said, "You'll have to ask former mayors and council members."
Lexington is the only Kentucky city with its own city-funded police and fire retirement fund. All other police and fire departments are enrolled in the state-controlled County Employees Retirement System, in which benefits are not as generous.
Complicating the issue, Lexington's retirement fund is not controlled by the city but by the state legislature, which basically sets the rules on eligibility and payout. The situation came about when the charter for the merged city-county government was written in the early 1970s.
"The very powerful police and fire unions go to Frankfort almost every year to increase their retirement benefits," Martin said, adding, "They have more influence than the citizens do."
Among the reasons Martin gave for escalating costs:
The minimum age when a retiree may start drawing a pension went from 50 to 46 in 1994 and was eliminated entirely in 2002.
Police and firefighters may retire with 20 years of service, or they may work 16 years and buy four years of "ghost time." A public safety officer as young as about 37 may retire and draw a lifetime pension.
By contrast, Martin said, employees in the County Employees Retirement System must have 25 years of service to retire with full benefits, but they may retire earlier with reduced benefits.
Cost-of-living increases for retired police and fire are mandated at 2 percent to 5 percent a year. In the County Employees Retirement System, cost-of-living increases are usually 1.5 percent, but even that was eliminated by the legislature for the next budget year.
To bring costs under control, Martin said the city must:
Increase the number of required years of services from 20 to at least 25.
Freeze cost-of-living adjustments for retirees receiving more than $30,000 until the pension fund is restored to at least 85 percent of full funding. Martin said the funding level in July 2011 was 66 percent.
Move to a 401(k) retirement system for new hires or a hybrid system that is part 401(k) and part pension, or close Lexington's pension fund to future hires and have them covered under the County Employees Retirement System.
Fix the high rate of disability that allows employees to retire with 1 percent disability. During the past 20 years, an average of 37 percent of Lexington police and fire employees retired on disability versus about 8 percent under the County Employees Retirement System.
Chris Bartley, president of Lexington Professional Firefighters Local 526, said the pension task force was considering all of those options. The task force intends to have legislation ready to present to the state legislature in January, he said.