On June 1, 2019, all local governments across the state of Kentucky will have completed the first annual increase in their contribution to the pension system due to the passing of HB 362.
The bill, which was passed during the 2018 legislative session, caps the County Employees Retirement System (CERS) employer's' contribution rate increase up to 12% per year over the prior fiscal year for the period of July 1, 2018 to June 30, 2028.
David Eager, the executive director for the Kentucky Retirement System, said that HB 362 was passed to help phase in the pension increase amongst the 1,100 CERS entities across the Commonwealth.
He noted that initially, the yearly pension increase was going to be 50%, but in the hopes to ease the financial strain on local governments, HB 362 caps the annual increase at 12%.
"This was done to minimize the budget shock, and they can take it in smaller bites," Eager said.
Because of this increase, all three governments in Madison County are being forced to tighten the purse strings on their respective budgets to accommodate.
Local governments are seeing this increase because of the estimated $42.7 billion of unfunded liabilities amongst the eight retirement systems that fall under the Kentucky Retirement System (KRS), resulting in the requirement to invest substantial additional amounts to their pension funds to make up the extreme deficit.
Several causes factored into this long compounding issue. One being lawmakers failing to fund what actuaries said was required between 2002-13; bad assumptions for payroll growth and investment returns that cause actuaries to not ask for enough in contributions; and investment losses in the 2008-09 recession.
Because of this, Kentucky has the third highest pension-related budget burden in the nation in a report from the Center for Retirement Research at Boston College.
The three local governments -- city of Richmond, the city of Berea and Madison County -- fall under the CERS, a system that statewide has a total liability that totals $11,075,900,000 with a funded ratio of 59%.
In the local governments in CERS, there are two categories in which employees that receive a pension fall under. One of which is non-hazardous employees, which include administrative assistants, secretaries, etc. Hazardous employees include police officers, firefighters, etc.
City of Richmond
In numerous instances, Richmond City Manager Rob Minerich has said that this increase is something that is always in the back of his mind, and that Richmond is in "good financial condition," compared to other cities its size, to handle the nearly $1 million annual increase the city will face over the course of the next eight years.
"The previous administration over the last eight years got the city into really good financial condition, and before then, they were backed into a corner and in a tough spot," Minerich said.
Currently, the city employs 254 workers, and for fiscal year 2019, which ends in June, the city is paying $3,379,202 in pension costs.
In eight years, upon approaching fiscal year 2028, the city's pension costs will rise to a total of $11,234,516.
Throughout that time, the difference will account for a $7,855,314 pension increase projected at 12%, and 4% employee raises per year.
Minerich explained that for a span of 20 years, state government paid into what is called the ARC (annual required contribution), and when they didn't fund that, they weren't keeping up with the pension costs.
"One problem that I have is I don't think it is fair to the taxpayers of the state and these employees and these pension systems," Minerich said. "There needs to be complete transparency of where the money is invested, who the firms are that are investing it and what the broker fees are...There's not been transparency for that up to this point."
Whereas the CERS has always paid their ARC, there is strong advocacy from the Kentucky League of Cities to separate the CERS from the KRS.
"They would like to separate us because we are so well funded," Minerich explained. "I don't think that will ever happen because I think that we are one of the better funded pension plans, and if we separate from the others, it is going to hurt the whole picture."
In regards to whether or not separation would benefit the county employee system, Minerich responded, "I don't know if it benefits -- it would probably make us more solvent as a pension system, but if you look over all of the KRS, they really need us as a pension system. All (pension systems) contribute to their own but it is under KRS, they are separate but they are looked at together."
Minerich said that some ways that the city is looking to save money is keeping the employee number where it is, not adding departments or divisions and paying of the city's current and only outstanding bond, which is to be paid off in the next fiscal year.
"You start collecting $175,000 here, $100,000 here and every chance you get to nab some money like that, you do it," Minerich said. "I don't think we will have as much (money) for equipment and capital outlay for vehicles, equipment and big projects, I don't think we will have a lot of that to spend."
In the 2018-2019 fiscal year budget, the non-hazardous pay cost $1,258,354 and the hazardous pay is $336,118, totaling $1,594,472 in pension costs to the county.
In the upcoming 2019-2020 fiscal year budget, the non-hazardous cost to the county will increase to $1,409,497 and the hazardous pay price will rise to $376,444, noting a total increase of $191,469 in the upcoming budget.
Right now, the county pays both hazardous and non-hazardous pensions for its nearly 180 employees, but does not directly pay for the employees at either the clerk's office or sheriff's office. Instead, the pension payments for those two offices are taken out of their respective budgets, which are separate but within the county's budget.
Madison County Judge/Executive Reagan Taylor explained that the county is seen as a fee county, a county with a population surpassing 70,000, and therefore, the sheriff's office and clerks office's finances are separate.
The clerk's office employs 20 full-time and three part-time employees, which accounts for $1,522,850 and includes full-time salaries and wages, overtime wages, part-time salaries and wages, vacation and sick leave, health insurance and employer matched social security and retirement.
For the sheriff's office retirement pay, the county budgets for a total of $453,800 for both the 23 hazardous employees and nine non-hazardous in the fiscal court budget.
"Eventually we have to fund them, because we give them so much," Madison County Treasurer Glenna Baker said. "Like this last year we had $1.5 million that the general fund from the Fiscal Court had to give them to supplement them and when that goes up, that means our supplement goes up."
Taylor explained that with more money having to be put towards pensions, the fiscal court will receive less money back from the county clerk, which he says is an indirect financial hit.
"Just the fiscal court, we are going to have to come up for our employees an extra $191,000, plus we have to come up with the extra for the clerk and the sheriff," Taylor said. "And not only do we have to come up with that, we have to come up with $250,000."
In the course of four years, the fiscal court will have to come up with an extra $1 million.
As far as its game plan to accommodate the increase in costs, Reagan said, "We just continue to try and be as efficient with spending and looking at ways to save money."
Some of the decisions to cut costs include buying salt in bulk, so that it is cheaper over the course of time.
"We are doing everything that we can, so that we can make sure that raising taxes would be our last resort," he said. "At the end of the day, the local governments can not continue to get passed down unfunded mandates without some form or fashion of revenue streams for it."
The counties main revenue stream is from property taxes, then occupational taxes.
"This is a problem that has been going on for many, many, many years," Baker said about the pension problem. "It didn't happen overnight. And it's not going to get fixed overnight. Again, you can't continue to pass these things down."
City of Berea
In the city of Berea, 148 city employees all fall under non hazardous payment, including their firefighters and police as Berea chooses not to offer or pay hazardous pay.
"We did that because of costs," City Administrator Randy Stone said, explaining that hazardous pay is much more expensive to both the city and the individual employee. "In the late 80s when Berea joined the CERS program, we chose not to and we have stayed with the non-hazardous ever since."
In fiscal year 2019, Berea is paying $1,108,836 in pension funds. Because of the $44,000 increase, the city will be paying $1,153,189.44 in fiscal year 2020.
"So every year we budget for it and the more we hire and the more we have to pay for CERS and retirement does play into the factor of how much increase can you give for raises," he said.
Stone added that this increase in pensions will limit the increase that the city can give to employees or even the amount of heads that they are "able to sustain over the years."
"Any increase like that has a direct impact on your employees, what you can pay your employees, the number of people you can add to your staff," he said. "You know the more you have to pay in employee costs, it's less day-to-day operational money that you have to spend in the budget. Any increase, including a CERS increase, directly impacts the operation of the city, negatively."
He said that in order to accommodate the increase, he said the city just had to budget where they see any opportunity to do so.
"The only opportunity that the city has, or any other cities have is taxation," Stone said. "Either cut services, or raise taxes if any cost becomes unbearable. Any increase in any expenditure that we have is a direct burden on the city."
Reach Taylor Six at 624-6623 or follow her on Twitter at @TaylorSixRR.