Why the life expectancy of Louisville's pension problems just got longer

Louisville's pension problems are going to continue even longer, thanks to a change adopted by the state's pension board that assumes a longer life expectancy for retirees in the system.

The city's ballooning pension bill was set to grow by 12%, or roughly $10 million, each year through fiscal year 2022-23, when it was then anticipated to plateau.

But now, following the board of Kentucky Retirement System's adoption Thursday of a new mortality table, those 12-percent annual increases will extend even further. 

This comes at a time when the city is facing a $35 million budget shortfall in the upcoming fiscal year, roughly $20 million of which is because of increased pension costs.

Louisville Metro Councilman Bill Hollander, D-9th District, told the Courier Journal that the budget for fiscal year 2019-20, which will be unveiled Thursday, was already going to have cuts because of pension costs. 

Read this:Kentucky's pension costs will rise again because people may be living longer

But what people need to understand, he said, is that won't be the end of the conversation. 

"We're looking at increased contributions for several more years, and this decision (Thursday) means a couple more than we had thought just last year," Hollander said. "It is a continuing problem. It's not something that's going to be solved with this budget."

Pointing to that growing bill from the state, Mayor Greg Fischer had pushed for tripling the city's insurance premium tax. Even a more modest proposal to double that tax, however, was rejected last month by a bipartisan group of Metro Council members — leaving Fischer to find $35 million in savings without new revenue.

The change this week, Hollander said, means an even larger percentage of Louisville's budget will go to pensions in years to come. 

"We're going to have to decide as a community, given how much money we'll be spending for pensions, what an acceptable level of services will be," Hollander added. 

Daniel Frockt, the city's chief financial officer, said Fischer's team is already assuming Louisville will contribute the maximum percentage, but they thought those payments would subside. 

Read more:Councilwoman accuses mayor's office of placing 'gag order' on city workers

The new mortality table, though, makes it more likely they will continue in fiscal year 2023-24 and possibly even longer. It's too soon to project how long the increases will last.

"It solidifies that this is a structural issue that needs a structural fix," Frockt said. "And it makes it even less likely that you could limp through the next four years (without new revenue). It extends it out five, six or seven years."

The KRS board's new mortality table assumes retirees will live longer than the previous table assumed, meaning more months of benefit checks sent out by the troubled state pension plans. That, in turn, requires higher contributions by employers in the plan — including Louisville Metro Government.

This week's change isn't as severe as the last major changes made by the KRS board in summer of 2017, which resulted in huge increases in pension costs for cities and counties, along with quasi-governmental entities. 

Cities and counties convinced the General Assembly last year to pass a law that phases in that massive hike. Under that law, the annual pension contribution of local governments can increase no more than 12% from one year to the next. 

The actuary on Thursday did not recommend any further change in the lower assumptions for investment rates of return or payroll growth that were adopted two years ago.

Currently, the KRS pension plans assumes men will live to age 84 and women will live to 87. The new mortality table increases that by two years for those who are currently 65 and by nearly four years for people who will retire at age 65 in the year 2040.

The actuary said the new assumptions are not based not on national mortality rates, but analysis of actual experience of members in the Kentucky pension plans.

The exact contributions required of plan employers will not be set until the actuary fully analyzes the financial condition of the plans after the fiscal year ends and presents an annual report to the board near the end of 2019.

The new assumption for city and county governments will drive up the costs they'll have to pay to the pension fund. Because annual increases are limited to no more than 12 percent, the effect will not be immediate.

The actuary recommended increasing the County Employees Retirement System non-hazardous plan payments to 30.8% of payroll — an increase of 12.8% from their current recommendation of 27.3% of payroll. The city will actually pay 24.06% of payroll in the upcoming fiscal year, thanks to the 12-percent cap.

And the actuary recommended increasing CERS hazardous plan payments to 57.6% of payroll — an increase of 23.8% from the current recommendation of 46.5%. The city will actually be paying 39.58% of payroll in fiscal year 2019-20.

Frockt said the city's payroll is roughly half employees in the non-hazardous plan and half in the hazardous plan, which includes police, fire and corrections workers.

Darcy Costello: 502-582-4834; dcostello@courier-journal.com; Twitter: @dctello. Support strong local journalism by subscribing today: www.courier-journal.com/darcyc.