The troubled Kentucky pension system will cost the city of Owensboro, Daviess Fiscal Court and a host of local governmental and public agencies millions of dollars in additional payments to the County Employees Retirement System (CERS) starting next year, a state official warned on Thursday.
According to State Budget Director John Chilton’s message to city and county leaders, without structural changes to the state’s underfunded pension plans, local governments will have to pay 50 percent to 60 percent higher employer contributions.
For Owensboro government, the increase will be a total of almost $2.9 million annually for its hazardous and nonhazardous employees. This year, Owensboro will pay just more than $5 million to CERS. Next year the price will be almost $8 million.
The total increase to Daviess Fiscal Court will be about $1.7 million.
It doesn’t stop there. School boards, special districts and boards, utilities, planning commissions, community action agencies, libraries, housing authorities — all of them will be seeing their pension costs going up by half or more.
In Daviess County, the Green River Area Development District will face $237,590 in higher payments, while the Housing Authority of Owensboro will pay $104,512 more. The Owensboro Board of Education will have to pay out $731,000 more for its nonteacher employees, while the Daviess County school district will pay an additional $1.5 million. Audubon Area Community Services will get hit with a $1.3 million hike.
For Owensboro Municipal Utilities, the additional cost will be $1.7 million. Big increases are also in store for the Owensboro Riverport Authority ($229,000) and the Regional Water Resource Agency ($412,000).
Owensboro City Manager Bill Parrish says the additional cost to the city will be even more than the numbers provided by Chilton.
“Our analysis is a bit higher, likely because we are hiring the additional seven police officers authorized by the fiscal year 2017-18 budget,” Parrish said on Friday. “Assuming that no legislative changes are made during the upcoming special session of the General Assembly, and if these rates are placed into effect fiscal year 2018-19, then the numbers climb to $3,183,971. This includes an increase of $2,656,338 paid for by the General Fund.”
For the Owensboro Police Department alone, the pension payment increase will amount to 25.3 percent of OPD’s entire $12.6 million budget, Parrish said.
“This may give you some sense of how significant this increase is to the city budget,” Parrish said. “Not to be too simplistic, but the city will have two options to deal with the shortfall: Cut expenses (reduce services — that is, lessen parks opportunities, reduce public safety staff, limit street repairs) (and) raise revenues (taxes).”
Parrish called the increase “untenable” for the city. “This increase is so large that reductions to make up the loss will change the entire complexation of this government and its services to the public,” he said. “The best thing the state could do, from my perspective, is to slowly increase rates over time so that we can absorb the cost rather than a large grab for funds over a short time.”
The city is already having trouble recruiting some workers because pay rates are comparatively low. Less attractive pensions makes city pay even less attractive, he said.
“We are suffering significant shortfalls in recruiting and retention of CDL drivers (and others),” Parrish said. “That means that not only will we have to pay more to the state for the pension system, but I will also have to pay more in local salaries to make up for the loss of the pension.”
Mayor Tom Watson said his first hope is that the increased costs will be phased in over few years to lessen the impact.
“I’d like to see it phased in over a three-year period so it’s not such a financial hardship on cities of all sizes,” Watson said. “That will bankrupt some of them. Then, if we have to come up with it, look out, here comes more cuts. It will be difficult. It’s hard to promote your city when you are constantly having to cut services and limit things.”
A special session of the General Assembly is expected in November to consider legislative solutions to the pension crisis. Last week, PFM Group, a consulting company, recommended sweeping changes to the pension systems, such as increasing the retirement age for teachers and law enforcement officers, and placing new teachers and nonhazardous public workers into 401(k) retirement plans.
“To address budgetary implications to the Commonwealth and to all employers, priorities must be set and choices must be made,” Chilton said. “Unfortunately, the choices are not happy choices – make structural changes to the pension plans and/or reduce other spending. Governor Bevin and the members of the General Assembly are considering, but have not decided upon, changes to KERS, CERS and the other state plans.”
Although Fiscal Court alone faces $1.3 million in additional costs next fiscal year, County Treasurer Jim Hendrix said he is adding the Daviess County Sheriff’s Department’s $380,000 projected cost spike to the $1.7 million liability, because he does not anticipate the sheriff’s budget can support a hit like that alone.
Daviess County has been able to support a healthy reserve fund for more than a decade, but Fiscal Court only adds about $150,000 to it per year, which means most of the added pension contributions will come out of the county’s savings account. Judge-Executive Al Mattingly said he and the commission budget for these kinds of issues. Fiscal year 2018-19 will likely survive this kind of setback, he said, but future cost projections remain foggy.
“We can take this for one year or maybe even another,” Mattingly said. “But this is a big hit — and not just for government. This is a big hit on the citizens, because we may be able to take it out of reserves this year, but that means less miles of road we pave or fewer projects we put on in the parks.”
Mattingly said the local government cost projections add fuel to a pension fire that’s already out of control.
The increases are based on payroll size. But even smaller entities will have to pay more. For instance, the Riverpark Center will have to fork over an additional $50,000 to covers its workers, and the Owensboro-Daviess County Convention and Visitors Bureau will be charged an additional $22,181. The city of Whitesville, with a payroll of only $165,000, will see its CERS bill go up by almost $16,000.
The CERS plans are better off than other Kentucky plans, but the funding level is below 60 percent of what is needed, Chilton said.
“This is in spite of the fact that the assessment of funding levels is based on the old actuarial assumptions that were used in the fiscal year 2016 calculations,” Chilton said. “Applying realistic assumptions, CERS plans’ funding levels are actually much lower. In addition, using the same investment rates of return that corporate plans are required to use – the Corporate Bond Index rate – the CERS unfunded liability goes from $5 billion to $9 billion.”