Fort Smith police, fire retirement plans pose big budget problems

Pensions for police officers and firefighters in Fort Smith are costing the city of Fort Smith large sums of money each year. And the city fund responsible for paying into the system is projected to go broke sometime in 2019.

According Fort Smith Finance Director Kara Bushkuhl, the Arkansas LOPFI (Local Police and Fire Retirement System) Contribution Fund in the city's budget has already been drawing more than is contributed for many years. Documents Bushkuhl provided to The City Wire paint the picture when it comes to police and fire pensions. Money put into the system versus the amount of money taken out to pay into LOPFI stayed in the black on an annual basis through 2007.

The next year (2008), the city withdrew $33,771 more than it put into the fund. And the snowball continued from 2008 to the current fiscal year (2014).

Even with the city on track to withdraw $1.161 million more from the fund during the next fiscal year than it pays in, the retirement contribution fund is expected to start fiscal year 2015 with a balance of $6.514 million. But that total fund balance is expected to only be $287,792 when fiscal year 2019 begins and continue going into the negatives at growing levels for the foreseeable future, culminating in a projected negative fund balance of $10.621 million by Dec. 31, 2022.

The funding of contributions to the plan comes from a variety of city sources, Bushkuhl explained, adding that the state of Arkansas mandates all cities to contribute to retirement plans for its fire responders. Two revenue sources include millage rates of one mil each charged for the police and fire retirements, as well as funneling 10% of district court fines to the pension contribution fund. The millage rates of one mil for each retirement fund bring in about $1.378 million each, or $2.757 million combined each year. The fines contribute about $137,000 per year to the fund.

Other funding comes from a portion of the eighth-cent sales tax for the new fire station at Chaffee Crossing, with about $500,000 in sales tax proceeds contributing to retirement contributions for firefighters stationed to the new firehouse.

Police officers and firefighters are also required to contribute to their retirements. Fort Smith fire responders reviously paid 6% of their salaries to retirement funds, but that changed to 8.5% in 2011.

But one of the major issues contributing to a drain on the retirement contribution fund, Bushkuhl said, is the old retirement plan the city's first responders were under until 1990. The plan, she said, allowed employees to work for the city's fire or police departments for a total of only 20 years and retire with half their annual salary for the rest of their lives.

In order to keep up with the number of retirees collecting from the retirement plan, the state has a base amount required by the city to be contributed for employee retirements – 15.67% of a police officer's pay and 17.49% of a firefighter's pay.

On top of those figures, the state uses an amortization formula to determine the city's contribution level to cover individuals already drawing off the system. With the amortization and base contributions combined, it means the city must contribute 32.36% of police officer's salaries and 39.5% of firefighter's salaries to retirement funding annually.

"Right now, they're both underfunded," Bushkuhl said, adding that the fire contributions are underfunded to the tune of $19 million, while police are underfunded by $17 million.

And even though funding is running into deficits for the retirement contributions, Bushkuhl said the state of Arkansas does not allow municipalities to sidestep responsibilities to retirees who in some cases started drawing retirements in their 40s after putting in 20 years of service before moving onto another full-time job.

In all, there are 118 retired firefighters drawing on the system and 93 retired police officers.

"Until all of those people are gone, that old pension plan for the police and fire will continue to survive," she explained.

Current estimates by the state of Arkansas project another 16 years of the city having to contribute the additional rates on top of base contributions for employees and retirees. But even with an additional 16 years to go — and that number could change based on formulas that take into account life expectancy and the fact that the city still has six employees who will be entitled to the former retirement plan — the plan will go broke by 2020, less than six years from now.

"I think it is a critical problem … because quite frankly, we just don't have it in the general fund," Bushkuhl said.

And the problem is expected to get worse based not only on the current obligations that will be due, but on future obligations that are still mounting.

"Every year, the amount of contributions changes based on salary that we pay, overtime … it's on overtime, regular salary and longevity. So this number we have to contribute continually goes up," Bushkuhl said.

The city's general fund budget from FY 2013 to FY2014 was flat at $47.9 million and sales tax revenues so far this year continue to be flat, as well. For the first eight months of the year, the total tax collections including the August report from the city's sales tax collections are up 1.37% from the same period last year but off budget estimates by 1.04%.

So with drawing additional monies from the general fund not an option, what other options are there? Bushkuhl said additional revenue sources or tax increases are a possibility.

Asked about layoffs to balance the contribution fund, Bushkuhl said job losses in the police, fire and other city departments were not on the table.

"Not yet. That's not a direction that we're looking at for 2015."

Asked whether it was a possibility beyond 2015, Bushkuhl replied, "I don't know. I can't really answer that. I would think the first thing we would do it come up with some other revenue source. I don't know what it would be."

Bushkuhl said the hope is to have a funding mechanism in place by the time state mandates requiring detailed municipal reporting of unfunded pension liabilities goes into affect in 2016.