Lexington officials explain pension reforms that lead to success in their Police and Fire retirement fund

As legislators search for ways to shore up the state’s woefully underfunded pension systems, officials from a local government with a pension reform success story explained the changes made to their system which allowed them to ensure stability of their system without issuing more bonds.

At a meeting of the Program Review and Investigations Committee Thursday, lawmakers heard presentations on local defined-benefit pension plans in the state and an explanation of reforms to the Lexington’s Police and Fire pension system which have been touted as a major success story, according to Lexington-Fayette officials at the meeting.

In a presentation by Scott Shapiro, senior advisor to Lexington Mayor Jim Gray, lawmakers were told of the woes faced by the Lexington-Fayette urban county government when it came to their police and fire pension plan.

Shapiro told legislators the pension system had spiraled out of control, leaving the city with an almost $300 million unfunded liability and costs to the general fund which had increased from seven percent in 2000 to 22 percent by 2012.

In response to the issues, the urban county government made changes to the pension benefits and guaranteed more money into the fund from the city which took their unfunded liability from $296 million to $161 million, according to Shapiro. The changes also helped the city reach an affordable annual amount and gave them the ability to pay down the liability over the next 30 years.

Changes made by Lexington-Fayette to their pension plan included:

• New, lower cost of living adjustments (COLA) tiers for new hires: going from 3%-5% to zero-2% depending on salary of the employee
• Increased employee contributions: 11%-12%
• Revised plan for new hires
  • Retirement eligibility changed from 20 years to 25 years
  • 2.5 to 2.25 benefit factors

It is also now set in statute that Lexington-Fayette must pay at least $20 million to fund each year as their actuarial required contribution. As for how they make that contribution, one of the Lexington-Fayette officials explained that the government does not wait until the end of the year to make the payment but is instead paying the ARC with payroll and contributes at the same time employees do.

With these changes, the government added a clause that if the pension plan exceeded 85 percent funding level, the COLA rates could be adjusted back up by the pension board as long as the reinstated 3%-5% COLAs do not reduce the funding level below that 85 percent.

Because of these reforms, the officials told legislators they were able to forego a $34 million bond issue they had planned to shore up the system.

Lexington-Fayette Police and Fire retirement system is the only local defined-benefit pension plan still open to current employees, according to a staff report about these type of local plans.

The staff presentation explained that a House bill passed in 1988 closed local-benefit pension plans to new enrollees in most areas of the state.

While most of these plans are fiscally sound and have few members left in the system, the presentation explained that there are still some issues with the plans that would need to be fixed by the General Assembly.

Three recommendations were made in the presentation, which included: revising the statute for the governing boards of the plans, establishing a way to repeal the plans, and revising the timing of actuarial reports.

The recommendation regarding establishing a way to repeal the plans received questions from lawmakers who asked what happens to the funds when there are no beneficiaries left in these systems.

In response, the staff member presenting the information, as well as the financial director for the city of Henderson explained that without a way to repeal the plans and explicit permission put in statute by the General Assembly, these cities and counties are currently unable to move the funds into their general funds or elsewhere.