Fort Smith police, fire pension could run out in 13 years, says accounting firm

The Local Police and Fire pension fund (LOPFI) has a new insolvency date. According to accounting firm BKD, the city’s older pension plans – representing retirees prior to 1983 – will run out in 13 years if the city makes no further contributions beyond the general annual requirement.

In 2015, the Board faced insolvency by 2021 and voted to make a one-time contribution of $700,000 to extend the date. Fort Smith Finance Director Jennifer Walker approximated the contribution bought the city another 15 years, but reducing the extra contribution to $150,000 in 2016 lowered breathing room to BKD’s 13-year estimate.

Walker told Talk Business & Politics on Thursday (June 8) it would take an estimated $1.5 million annually to solidify the program for the older pension plans. Current employees, she estimated, are fully funded through a city contribution of between 21-23% of the employee’s salary and employee participation of around 6-8%.

Walker further explained how tentative – and volatile – the insolvency estimates are. “In 2015, we contributed an extra $700,000. That got us halfway to where we would need to be to be fully funded. That was a one-time contribution. In 2016, we couldn’t come up with that and still meet our budget goals. The discussion of the Board at the time was, ‘Let’s wait till the end of the year'” before considering further contribution, but the city ended up settling in at $150,000, Walker said.

She continued: “The 13-year window assumes we’re not making any extra contributions. That’s why we’re making those extra contributions. The estimate was down to five or six years, and that’s when we figured, ‘Okay we have to do something.’ It goes quick. Those extra contributions have to be made every year in order for it to count. You can make them one year and get that number up, but the next year, it is going to go right back down if you don’t make the contribution again.”

Asked to explain what placed the city in this position, Walker said older police and fire pension plans (pre-1983) “had lots of benefits and things were going great.”

“Then sometime in the ’80s they switched over to LOPFI. We put everybody in the LOPFI plan, but we also took money from old pension plans and dumped into that as well. The new plan, which has actually been managed by LOPFI from day one, is clearly defined, and has a DROP plan so you can plan out retirement 8 years in advance. The new plan performs very well. They have historically met their obligations and are essentially fully funded.”

But because the city dumped old plans which were in “bad shape” into the system, it created a liability on the city’s books. Historically, those liabilities were simply “a footnote” on financial statements, but the Governmental Accounting Standards Board (GASB) would later rule cities would have to record their liabilities onto the balance sheet.

“Now all the sudden we had to take a liability we’ve always had and report it on the net position of our balance sheet, and that was the intent of passing the regulation – because people were ignoring those liabilities and they were just getting higher and higher and higher,” Walker explained.

As the modern plans solidified, the older plans grew more problematic because “either a) cities weren’t contributing enough, or b) the plans were giving too rich of a benefit,” Walker said, noting as an example 3% cost of living adjustments “in perpetuity” and transfer of pension plans to spouses upon a pensioner’s death.

“The plan can’t afford it.”

Walker’s recommendation to the Board on Thursday was to “come up with a dedicated revenue stream that they at a minimum reserve the funds of that dedicated revenue stream into the city’s LOPFI fund.” Walker continued: “That reserves the funds for LOPFI without actually sending the funds outside the city. We would contribute what we’re currently contributing to the LOPFI organization, and would take the dedicated revenue stream and reserve in our funds to offset.”

In a memo to city leaders, BKD suggested something similar, noting that if the fund is exhausted in 2029, “the city would have to find additional financial resources to fund the required contribution.” The firm suggested city leaders “continue to be proactive in finding possible alternative funding sources and begin to assess the impact of the continued decreases to the fund balance of the LOPFI contribution fund.”

Additionally, management should establish “a formal policy on maintaining an adequate reserve in the city’s general fund.”

The Government Finance Officers Association (GFOA) recommends a minimum of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.

“This would require an unassigned fund balance of approximately $6.4 million in the city’s general fund for the year ended Dec. 31, 2016,” the memo stated.