LOUISVILLE, Ky. (WDRB) – As he pushes for quick approval of a permanent tax increase, Mayor Greg Fischer has been saying for weeks that Louisville Metro government faces a “state pension-driven budget crisis” because of mandatory, sharply rising contributions to state-run retirement plans.
But what constitutes a crisis?
An analysis by WDRB News suggests that Louisville’s increased pension tab of $20 million in the fiscal year that starts July 1 amounts to only 3.1 percent of city’s expected general tax revenue, about $626 million.
That’s even granting Metro officials’ preference to measure next year’s pension bill not from this year’s, but from two years prior. The actual year-to-year pension increase, $10 million, would amount to about 1.6 percent of the city’s tax revenue, according to WDRB’s projections.
“That’s true mathematically, but that’s not the problem,” Fischer said.
Instead, he says the city faces a $35 million shortfall – of which the pension bills are a big component -- that must be addressed in the upcoming budget year that starts July 1, or else “devastating” cuts to public services are in store. The budget gap would then grow to $65 million by 2023.
The $35 million deficit would represent 5.5 percent of Metro government’s general tax revenue, according to WDRB’s analysis.
If the tax increase is not approved, possible outcomes include laying off police officers and closing libraries, fire stations and community centers, Fischer has said.
But city officials have been repeating the “shortfall” figures for weeks without information that would place them in context.
For example, what are Metro Louisville’s total projected revenue and expenses over the four-year window? What are the “shortfall” figures actually short of?
Fischer said last week that those figures could be provided, but in fact, the city has no such projections.
Metro Council member Kevin Kramer, leader of the council’s minority Republican caucus, said WDRB’s analysis shows the pension problem is “not an immediate crisis.”
Any budget problems the city faces stem instead from an inability “to establish priorities and stick with them,” he said.
“This isn’t about the pension (increase); it’s about an attitude toward spending,” Kramer said.
Metro Chief Financial Officer Daniel Frockt said the $35 million gap – even if not entirely created by pension contributions – is a pressing problem all the same.
“It’s genuine that we’re going to have to cut $35 million. If the feeling is, ‘They can find it’ – and we can’t -- then you are going to see $35 million in reductions, and the mayor has been very specific about it,” Frockt said in an interview last week.
But city officials do not have predictions for Metro government’s total revenue and expenses over the four-year window being discussed – a fact confirmed through an open records request.
Instead, the $35 million deficit figure comes from a single-page list of about a dozen relative changes in Metro’s expected expenses and revenues from the current budget year to the one that starts July 1.
That includes increased pension contributions but also pay increases mandated by union contracts, debt service and the city’s new team to fight graffiti, among other items.
So, if officials don’t know what the city’s revenue or expenses will be in 2023, how do they know it will be $65 million short?
The $65 million figure starts with the projected $35 million deficit for the next budget year, 2020. It’s part of the future years’ “shortfall” because the funding gap will continue if not addressed with recurring money, like the proposed tax increase, Frockt said.
Then, to arrive at the $65 million figure, city officials simply added the increased pension costs from fiscal years 2021 to 2023.
‘Perpetual growth’ in pensions to eat into budget
The crux of the problem, according to city officials, is that Metro government’s pension costs -- already a significant chunk of the city budget -- are projected to compound at 12 percent a year -- four times faster than tax revenue.
The pension plan most Metro government workers are in, which is run by a board appointed by Gov. Matt Bevin, lowered its assumptions for future investment returns, requiring local governments like Louisville Metro to pay more into the system to help make up for billions of dollars in unfunded liabilities.
Metro government says it annual pension bill will rise from $77 million in 2018 to $136 million in 2023.
“We have never seen this kind of perpetual growth” in pension costs, Frockt said.
Indeed, WDRB’s analysis shows the snowballing nature of that problem: The city’s increased pension burden would grow from 3.1 percent of its revenue base next year to 8.6 percent in 2023.
Justin Ross, a public finance expert at Indiana University, said next year’s pension increase may sound small in comparison to the city’s tax revenue, but because the problem is expected to compound year after year, officials are smart to try to nip it in the bud.
“It is tempting to solve the 3 percent problem in front of us,” he said. “It is much harder to solve the bigger problem in the long run, so I am sympathetic to the situation the city faces.”
Frockt did not dispute WDRB’s projections, but he said it’s not meaningful to compare the growing pension burden to the city’s revenue base.
Instead, he said, the increased burden should be compared to the new tax revenue available to deal with it.
For example, Frockt pointed to how the year-to-year increase in Metro’s pension bill ($10 million) would wipe out most of the normal growth in taxes ($18 million) in the upcoming 2020 budget.
Meanwhile, Metro government is already banking on that $18 million in tax growth to cover all the other costs that rise each year, such as raises mandated by union contracts and salt for winter roads, Frockt said.
By 2023, increased pension costs would nullify three-fourths of every dollar in new revenue.
“It’s gobbling up all the growth; that’s why we need to address it,” Frockt said.
Janet Kelly, director of the Urban Studies Institute at the University of Louisville, said it’s clear that the growing pension tab is a significant issue for the city, but it’s also fair to compare it to Metro government’s overall resources.
“It is always reasonable to view these pension expenditures in the context of revenue, because at the end of the day that’s how the city will have to address them,” she said.
Fischer and allies on the Democrat-dominated Metro Council are trying to pass a plan to gradually triple the city’s tax on insurance premiums, such as home, life and malpractice. The tax on auto insurance would remain unchanged.
Louisville’s tax on non-auto premiums would rise from the current 5 percent to 15 percent over the four-year window.
The council is being asked to approve the hike by March 21 so the increase can hit the city budget that starts July 1.
The tax hike would bring in $37 million in its first year, rising to $63 million in 2023. In other words, by 2023, the new taxes would basically cover the anticipated $65 million shortfall.
At first, the $37 million in new taxes would dwarf the city’s increased pension costs, but the two figures would move closer and nearly offset each other by 2023.
Embedded within the immediate $35 million deficit are two years’ worth of pension increases, a cumulative $20 million tab.
Metro government is covering the portion of the tab that applies to the current budget year -- $10 million – without a tax increase.
But the $10 million is nonetheless part of the projected shortfall for next year because it’s being covered with one-time sources of money, Frockt said.
The rest of the $35 million relates to growing expenses or drops in tax revenue that collectively create a $15 million imbalance, Frockt said.
The main factors behind those other items are a big increase in Metro’s health insurance costs for city employees in the current budget year, which the city is absorbing, plus an unexpected dip in the city’s tax revenue from corporate profits in the current budget.
Fischer acknowledged on Wednesday that the city’s immediate problem is not entirely because of pensions, but he said the $35 million hole is real nonetheless.
If the tax increase is not passed, the city will have to resort to painful cuts, he said.
“There is no easy solution here, unfortunately, or else we’d be doing it,” Fischer said.
Metro Council budget committee chairman Bill Hollander, a supporter of Fischer’s tax plan, said it’s fair to mix non-pension budget problems into the “shortfall” figures because that’s the reality the city faces.
“Clearly in the first year this is not entirely a pension issue, but it is predominantly a pension issue,” he said. “And we know with certainty, no matter what we do, (the pension tab) is going to keep growing pretty dramatically.”