Prepared food tax, business license may be part of Fort Smith pension solution

The Fort Smith Board of Directors didn’t shy away from considering a prepared food tax and re-instating of a business license fee to address a looming shortfall in a pension fund for Fort Smith police and fire department employees.

Board members met for more than two hours Tuesday evening (June 23) to discuss the pension funding issue and other city matters.

Fort Smith in 2004 implemented a higher 3.28 multiplier for the “LOPFI” pension plan, up from the base multiplier of 2.94. When the base multiplier was adopted, the city had an $11.863 million balance in its pension contribution fund and was adding $1.346 million annually to the plan. That was before the financial crisis of 2008, when the plan started withdrawing more money than the city was putting in, setting it up for the eventual insolvency projected for 2019.

Fort Smith City Administrator Ray Gosack said in a memo that moving the multiplier back to BP1 would save the city $447,534 in 2016 and $516,297 a year by 2026. He also said the BP 1 multiplier is used by a “vast majority” of cities participating in the pension program. The Board voted June 2 to revert back to the “BP 1” multiplier of 2.94. That change moves the plan’s insolvency date from 2019 to 2021.

“Our projections show that the city’s LOPFI Contribution Fund will be depleted in 2021. In 2015, we project that the city will spend $900,000 more than it receives in this fund. The annual deficit grows to an estimated $3.1 million by 2026,” Gosack noted in a memo to the Board.

Gosack presented the following financial plan to address the shortfall.
• Reduce general fund spending by $170,800 a year;
• Increase franchise fees on electric, telephone and gas from 4% to 4.25%, and increase franchise fee on cable from 4% to 5% to generate $554,000 a year (maximum rate state law allows);
• Raise $1.435 million from business license fee; and
• Consider pay adjustments, staffing levels and other measures to reduce costs for LOPFI payouts.

While the lengthy discussion Tuesday covered several topics, the more detailed and sometimes frank discussions focused on solutions that included a prepared food tax, general fund budget cuts of up to 3% and reinstatement of a business license fee.

PREPARED FOOD TAX
A 1/2 cent prepared food tax would raise an estimated $900,000 a year, and could be used by the Fort Smith Advertising & Promotion Commission to pay for operations of the Fort Smith Convention Center. The city now pays around $770,000 from the general fund to subsidize convention center operations.

A 1 cent prepared food tax was rejected by 62.7% of those who voted in a November 2011 special election.

City Director Tracy Pennartz said the prepared food tax is a “very feasible option to look at,” and it could be “a long-term step” toward resolving the pension problem. Director Mike Lorenz agreed, and said Fort Smith is disadvantaged compared to Fayetteville and other cities with a prepared food tax to support tourism in their cities.

But later in the meeting Director George Catsavis expressed doubts.

“i don’t think a food tax is going to fly … not after the last fiasco,” he said.

Director Keith Lau said he also doubts the city can sell a tax increase without “tangible” cuts and other budget changes. He said he is not interested in pushing another tax for a plan that doesn’t provide a “total fix” for the pension problem.

But Director André Good said there is a different political environment now than four years ago when the voters rejected the tax.

“Now it’s for police and fire,” Good said.

BUDGET CUTS, BUSINESS LICENSE
The push for budget cuts, vocalized primarily by Directors Lau and Pennartz, could include a reduction in contributions the city makes to the retirement plan for non-uniformed employees. Reducing contributions down to 6% could save up to $340,000 a year. Lorenz said such a move would be fair considering they just voted to reduce benefits for fire and police workers.

But City Finance Director Kara Bushkuhl said fire and police already get a benefit package more substantial than non-uniformed employees. She prefaced her objection to the contribution reduction idea by noting that  “no one speaks up for non-uniformed employees.”

As to a business license fee, the Board is looking at three options. The first option could generate $1.976 million. It would collect $20 per employee for businesses with employees from 1 to 500. The fee would be capped at $10,000.

The second option could raise at least $1.435 million with a plan that would charge a business $20 per employee from 26 to 500 employees with a cap at $10,000 a year. Businesses with 25 or fewer employees would not pay a fee.

The third option would charge a flat fee of $150 for all businesses and raise an estimated $761,550 a year. The cost to manage all three options is estimated to be $107,000 a year.

Pennartz said she has talked to at least a dozen business leaders and none liked the license fee, but did not object to the idea.

“I still think that’s a very viable option,” Pennartz said of the license fee.

City staff was asked to present refined options during a July 14 study session. The Board could vote on other options to address the pension shortfall at a July 21 board meeting.