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The Lane Report

Police and Firefighter’s Pension Fund
Needs Disciplined Management

The LFUCG Comprehensive Annual Financial Report for the year ended June 30, 2005 was released to the public and Urban County Council members in mid-January 2006. This report contains over 150 pages of fine print and is not recommended reading if you are looking to be entertained or motivated. To save taxpayers the drudgery of reviewing statistical data, from time to time I will comment on information contained in the 2005 Comprehensive Annual Financial Report.

Improving Financial Controls

Council members were disappointed that is took the LFUCG’s Department of Finance over 190 days after the end of the fiscal year to provide this year end audited report. With substantial reporting delays, it is not possible on a timely basis for either the city’s managers or council members to address important financial issues facing our government.

The Urban County Council approved a capital investment expenditure of about $9 million dollars this fiscal year to improve the timeliness, detail, transparency, and accuracy of financial data for the Urban County. The new accounting and human resources system is being implemented by the office of the CAO and the Department of Finance and will be phased into operation starting July 1, 2006.

This new integrated accounting system is designed to provide the city’s administrative and legislative branches with immediate and timely financial information. The new accounting system will help to promptly detect billing errors (sewer fee billing glitches), identify mismanagement (solid waste scheduling of under-time, overtime, and part-time workers), and compare actual monthly revenues and expenses versus forecast revenues and budgeted expenses. The new accounting system will also be able to evaluate the city’s cost to provide services.  Cost accounting will allow the city to outsource services and to use technology to reduce costs.

Public safety is the top priority of local government. Lexington spent in FY 2005, 50.2 percent of general fund expenditures in this important category.

Because of the failure of the LFUCG to maintain competitive compensation in recent past years, many of its public safety workers resigned and moved to higher paying positions at other local, state and federal agencies.

Under a recent Kentucky state statute requiring collective bargaining in Fayette County, Mayor Teresa Isaac negotiated a three-year agreement starting (July 1, 2005) with Lexington Firefighters and Police.

That negotiated agreement will provide a 5.0 percent pay raise each year of the contract plus increases in benefits and improved working conditions. Because of a three-year contact term, the pay of public safety employees during this and the next two fiscal years has been established.

Police and Fire Fighter's Pension Fund

Based on the LFUCG 2005 Annual Report, the Urban County Government’s top financial issue is the LFUCG Police and Firefighter’s Pension Fund.

Since July 1, 1999, the unfunded actuarial accrued liability (UAAL) of the pension fund has increased from $53.7 million to $165.2 million. As of June 30, 2006, only 68.3% of the pension fund’s long-term obligations (over 30 years) are projected to be available to pay estimated future benefits.

Police and Fire Fighter’s Pension Fund
Unfunded Actuarial Accrued Liability

Many factors impact the amount of the unfunded actuarial accrued liability - dates of retirement, pay raises, disability retirement, return on investments, life expectancy, cost of living allowance, etc. The precise amount of accrued liability will change as variable factors fluctuate over time.  It is more significant to look at the trend.  In this case, the seven-year trend line indicates that the amount of long term unfunded liability is increasing rapidly and the financial risk to Fayette County is significant.

The mayor, members of the pension board, state government, the council and public safety employees must demand disciplined management of the pension fund. Each stakeholder must take proactive efforts to ensure that the long-term financial viability of the pension fund is protected.

To allow the unfunded actuarial accrued liability to continue to escalate at an unacceptable rate ($111.5 million increase since 1999) jeopardizes the future financial integrity of your  local government and the pension fund.

According to the June 30, 2005 annual report, the current unfunded portion of the police and firefighter’s pension fund is $19.1 million. The net pension obligation in 2002 was $15.2 million. The amount of the current unfunded pension obligation from 2002 to 2005 has increased $3.9 million or 25.7 percent.

There have been numerous reports in the news and business press about the substantial financial risks that pensions place on business and government. For example, the City of San Diego has created a $1.2 billion pension liability and the city may have to go into bankruptcy. A report from the city attorney of San Diego on current pension fund issues facing San Diego is posted at www.edlane12th.com or you can google for “San Diego Pension Fund”.

LFUCG Police and Fire Fighter Pension Fund Board Members include:

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.