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PASSING LANE
- September 2006
Local Government Pensions: Time Bomb about to Go Off These excerpts are from an article by Neil Hackworth, deputy executive director of the Kentucky League of Cities. It was originally published in City Leaders. The full text is available for download by clicking here.
Legislation enacted in 1998 gave cities with existing plans the option of joining the County Employees Retirement System (CERS). Cities that started a defined-benefit plan for employees after Aug. 1, 1988, were required to join the county system. Cities which opted to join CERS had to pay the cost of including long-term employees into the program and decide whether to offer hazardous or non-hazardous retirement to police officers and firefighters. Non-hazardous duty retirement allows an employee to retire with full benefits after 27 years of service or upon becoming 65 years old after five years of service. Benefits are calculated by multiplying the number of years of service by a percentage factor. In general, employees with 27 years of service receive about 60 percent of the average salary they were paid during the five years when they earned the most, plus individual health insurance coverage under the state’s plan. Hazardous duty retirement allows an employee to retire with full benefits after 20 years of service or at the age of 55 following five years of service. These benefits are calculated using a higher multiplier. In general, employees with 20 years of service receive 50 percent of the average of their highest five years of salary plus “full family health coverage” under the state plan. Obviously, this means that many police and firefighters can retire in their early 40s with 50 percent of their salary and full family health coverage. Most of these workers take other jobs, including new positions as police and firefighters where they can become entitled to a second pension under CERS. And these retirees are entitled to a lifetime of full family health insurance which, given current life expectancies, can be for 30 to 35 years beyond their retirement. As might be expected, many city workers lobbied their city councils to join CERS to give them access to these pension benefits. Police and firefighters lobbied for hazardous duty retirement benefits, as well. Most cities agreed to these changes, fearing that employees would take jobs in nearby cities where these benefits were being provided or leave for the private sector, where they typically could get a better salary as well as pension and health benefits. Over the next several years, most cities joined CERS and most adopted hazardous duty retirement for fire and police. Today, local governments, including cities, find themselves with a state-run defined pension fund that has substantial unfunded liabilities. As of June 30, 2005, the pension system’s unfunded liability in the retirement account totaled almost $326 million for non-hazardous retirees and just over $343 million for hazardous duty retirees. These are probably manageable. Unfortunately, however, the health insurance account had an unfunded liability of more than $2.1 billion for non-hazardous and just over $924 million for hazardous duty retirees. That amounts to a staggering total of more than $3 billion for the combined funds. It is hard to see how cities and, ultimately, Kentucky’s taxpayers are going to make good on these retirement promises unless something is done to stop the bleeding. In an effort to make these funds actuarially sound, the state has mandated that cities and counties pay substantially higher contributions each year to the pension fund for their employees. In fiscal year 2006-2007, those contributions will be 28.21 percent for hazardous and 13.1 percent for non-hazardous. These rates are already forcing cities to consider service reductions. And they are projected to increase to 44.8 percent for hazardous and 24.17 percent for non-hazardous by fiscal 2016, just 10 short years away. Clearly, such astronomical rates will ultimately require cities to reduce the size of police forces and eliminate substantial numbers of firefighters. It was state government mandates that caused the problem, and local governments have very few options open to them for covering these unfunded liabilities except by drastically reducing services. In the end, state and local governments must sit down together and look for a common solution to this ever-growing pension mess. What is clear is that without state action, the time bomb will eventually go off and all Kentuckians will pay the price. Rood & Riddle Grand Prix
Rolling Stones Get Post Position at
Kentucky fans turned out in record numbers when Rolling Stones tickets went on sale, snapping up over 50,000 tickets in the first six hours. Population Factoid
The U.S. is the world’s third-largest country, exceeded in population by only China and India. Should Kentucky Abolish Its Corporate Income Tax?
A long-standing objection to the corporate income tax, nationally and at state levels, is that it imposes double taxation on the net income of corporations, first at the corporate level and again at the shareholder level when paid out as dividends. Since 2003, the double burden at the federal level has been lessened by taxing “qualified dividends” at the lower rates applicable to capital gains instead of ordinary income rates. Some observers regard the federal move as a transitional step towards complete elimination of double taxation of dividends. In Kentucky, however, it would make more sense to eliminate double taxation by abolishing the state’s corporate income tax. It is well recognized that corporate income taxes have negative effects on economic growth and development. A basic effect is that the tax slows the growth of capital in the form of plant and equipment. In turn, slower growth in plant and equipment means slower growth in employment and in productivity. These effects have been well demonstrated in the real world. At various times in the past the federal government has used investment tax credits and accelerated depreciation guidelines to reduce corporate taxes and thereby stimulate the economy by encouraging greater capital formation Is Kentucky’s corporate income tax worth enough to state government to justify its adverse effects on the state’s economic growth and development? Based on fiscal and economic considerations, the answer is NO. The question, however, is one that must be answered through our democratic political process.
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Copyright 1996-2006, by Kentucky Business Online. All rights reserved. Editorial content
is copyright 2006, Lane Communications Group The Lane Report is a trademark of Lane Communications Group. All other trademarks are the property of their respective owners. |
In the late 1970s and early 1980s, the Legislative Research Commission conducted a study of local government pension plans in Kentucky. It found that 35 to 40 Kentucky cities had defined benefit pension plans for police officers and firefighters and, in some cases, non-uniformed personnel. The study revealed that most of these plans were under-funded. 
The Rolling Stones are coming to a sold-out performance at Louisville’s Churchill Downs with “A Bigger Bang” than ever before and bringing along one of the hottest acts in the music industry. Opening for the Stones, Alice Cooper will thrill fans on Sept. 29. The Dave Matthews Band, Van Morrison and Kanye West also opened for the band as part of “The Bigger Bang” tour, though they will not be performing in Louisville.
The U.S. population is projected to reach 300 million within a few months. The population reached 200 million in 1967 (39 years ago) and is forecast to reach 400 million in 2040 (34 years from now). At this time, about one in eight Americans is an immigrant (36 million persons).
In a report entitled “State Business Tax Climate Index” and released earlier this year by The Tax Foundation, Washington, D. C., the business tax climate in Kentucky was ranked 44th , placing Kentucky among the nation’s 10 worst states. Kentucky’s rank was 40th for the corporate income tax as a single category. Such rankings should not be dismissed as unimportant in the competition among states to attract and retain commercial and industrial firms. This is especially so with respect to comparisons of taxation because information on rates, collections, and relative burdens is available in comparable forms that facilitate objective analysis.
Kentucky’s corporate income tax is not a major source of tax revenues. Over the 10 fiscal years between July 1, 1995 and June 30, 2005, it has varied between 3.16 percent ($207.4 million) and 6.26 percent ($478.5 million) of total general fund receipts. Indeed, the 6.26 percent reported for 2004-2005 includes some tax receipts shifted from the individual income-tax category to the corporate income-tax category. (The shift reflects changed procedure for collecting taxes from subchapter S corporations, LLCs, and pass-through entities whereby the incorporated entity now pays estimated taxes and the equity owners receive tax credits against their individual income-tax liabilities.) In the previous fiscal year (2003-2004) the corporate income tax was only 4.35 percent ($303.3 million) of general fund receipts.