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The Lane Report

Getting Back to Basics - Financially

Each day I serve as your representative on the Urban County Council, I learn more about how government works on behalf of Fayette County's taxpayers.

I have been very impressed with the professionalism and abilities of the top managers of Lexington's Urban County Government. Commissioners and department directors work in a political environment. It is often not easy for them to expedite improvements to government operations. Politics can be a sticky process.

For the benefit of taxpayers, here is an update on three important financial matters facing Lexington. These issues need careful and ongoing attention from local government.

Police and Firefighter's Pension Fund (P&FF Fund)

The LFUCG annual report for the fiscal year ending 6/30/04 indicates the P&FF Fund has an unfunded actuarial accrued liability (UAAL) in the amount of $137.7 million. The UAAL is the long-term pension deficit projected by the LFUCG's independent actuary over the life of the fund. The current portion of the UAAL is estimated at $18.2 million on the city's balance sheet.

This liability is an estimate as of the annual report date and will change dependent on the market value of the fund's stock and equity investments, life expectancies, retirement ages, COLA's, interest rates, and future contributions into the pension fund.

The P&FF Fund liability will likely continue to grow because pension benefits are tied to annual compensation and the number of public safety employees.

The impact that pension fund liability can have on government and private businesses should be of concern to Fayette County taxpayers. (See the June 13 Business Week article "Sinkhole! - how public pension promises are draining state and local budgets").

Insurance Coverage

LFUCG is self-insured. The city's Division of Risk Management is will managed and saves Lexington's taxpayers approximately $2 million annually by administering a self-insurance program.

Auto liability, general liability, property and casualty, and workman's compensation loss claims are verified, negotiated and paid by Risk Management. As of 6/30/04, $19.5 million in insurance claims were shown as a current undiscounted liability on LFUCG's audited statement of net assets. This is the estimated amount of future claims the city is obligated to pay.

The self-insured risk management program was started in 1985; at that time, LFUCG was required to fully fund actuarially accrued claims.

The current policy of local government is not to accrue cash for claims on an "as incurred" basis. Instead, claims are now paid by the LFUCG on a "pay as you go" basis. As our government grows so does its exposure to risk. One financial risk the LFUCG can eliminate is its current policy to fund claims on a "pay-as-you-go" basis.

Risk Management recommended an $8.1 million budget for LFUCG insurance loss payments this year. This budget was reduced to $4.5 million in the Mayor's budget. Underestimating losses on a "pay-as-you-go" basis can also have a serious negative impact on LFUCG's annual budget.

"Rainy Day" Fund

LFUCG's cash contingency - affectionately called the "rainy day" fund - contains about $6.0 million. This fund should be increased to $40 million over the next few years. The fund amount should equal about 15 percent of the LFUCG's general fund expenditures.

The "rainy day" fund serves many benefits:

• Helps reduce the interest rate charged for funds borrowed by local government;
• Allows the government to provide services without excessive cuts or tax increases during declining or static economic conditions;
• Provides funds in a local emergency - like a tornado or ice storm;
• Would be available in the event of a large insurance loss.

I believe tax dollars should be saved when the economy is strong and a budget surplus is available. These savings will allow local government to operate more cost effectively during strong and weak economic environments.

The LFUCG needs to manage the taxpayer's dollars on a more "fiscally conservatively" basis. These three examples indicate that more discipline is required by the LFUCG in managing important financial matters. Carefully analyzing local government's financial obligations and providing adequate funding for pensions, risk management, the "rainy day" fund, should be a top priority of Lexington's administration.

Your comments and suggestions are always appreciated.




If you would like to contact Ed Lane he can be reached via at EdLane@LFUCG.com ; and by letter at 200 East Main Street, Lexington, KY 40507.

Councilman Ed Lane represents the 12 th District on Lexington Urban County Council. He is the owner of a commercial real estate services firm and publishes a statewide business magazine.

“I want to conservatively spend our tax dollars,
eliminate waste, and bring sound business ideas
to local government.”

To contact Ed Lane's 12th district council offices, e-mail him at edlane@lfucg.com.