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Louisville Plan To Use Surplus Funds For Pensions Makes Sense, Expert Says

Offering money
Getty Images/iStockphoto
Offering money

Louisville Metro had a budget surplus of about $4 million from the last fiscal year due to factors including a slowdown in spending and higher-than-expected corporate property tax payments. Now government officials say they want to put most of that money toward paying the city’s increasing pension bill, a strategy one expert said makes sense.

Some of Kentucky’s pensions are among the lowest-funded in the nation, and the state pensions Louisville participates in are less than 60 percent funded.

And city leaders expect that pension bill to rise significantly for the next several years. Some want to raise taxes, but one attempt to do that to avoid budget cuts this year failed and other some other tax options are limited by state law.

Now, with an unexpected $4 million available, there’s talk of using a chunk of those funds to offset the pension bill, which is expected to grow more than $10 million a year for the next several years. The city’s chief financial officer, Daniel Frockt, recently addressed the Metro Council’s budget committee, where he said the administration is suggesting dividing $2.7 million into payments over the next three years.

Frockt said pension payments are projected to take up more and more of the city's budget in the future, so:

"The thought is that this offset will allow us to kind of manage the reductions needed in a little more humane manner and a little more organized manner," he said.

Essentially, putting what may look like a drop in the bucket of estimated pension payments toward the total sum could help cushion the blow to the city's budget later on.

But will it work?

"Using surplus budget monies is an effective way, a tried-and-true way, to deal with the problem," said Keith Brainard with the nonprofit National Association of State Retirement Administrators.

Brainard said pension plans in Hawaii and Rhode Island, for example, have successfully used surplus money to increase their funding levels. But he thinks Louisville still needs a larger strategy for paying the required contribution while maintaining a budget for needed services.

The pension bill for this year is $100 million. City CFO Frockt projected the pension bill will reach $141 million by 2023.

Gerald Young, a researcher with the non-partisan, nonprofit Center for State and Local Government Excellence, said properly funding the pensions is important because the city has promised certain benefits to retirees. And if the pensions aren’t funded, it could hurt the city’s ability to attract good workers.

"It's all part of recruiting and retaining a talented workforce," Young said. "And with the low level of unemployment nationwide right now, that's something that's a real challenge for state and local employers competing with the private sector."

Late last week, lawmakers introduced an ordinance with details of the proposal to allocate $2.7 million to a pension mitigation fund starting with the next fiscal year. They also recommended using some of the city's surplus funds to move up a police recruit class after one was canceled amid budget cuts this year, and shore up the Rainy Day Fund. Lawmakers are expected to take a final vote on the allocations next month.

Amina Elahi is LPM's City Editor. Email Amina at aelahi@lpm.org.