Fort Smith Director wants to ‘soften the impact’ of pension problem

The city of Fort Smith is facing a coming insolvency of its police and fire retirement contribution fund as early as 2019, but there are no plans to address the continually declining fund balance in this year's budget cycle as the city looks to possible solutions in future years, which could involve tax hikes.

According to documents provided to The City Wire by city of Fort Smith Finance Director Kara Bushkuhl, the Arkansas LOPFI (Local Police and Fire Retirement System) Contribution Fund in the city's budget is expected to withdraw $1.161 million more from the retirement fund during Fiscal Year 2015 than it pays in. The fiscal year is expected to still begin with $6.514 million despite the withdrawal of more funds than revenues.

The total fund balance is expected to only be $287,792 when Fiscal Year 2019 begins and continue going into the negatives at growing levels in subsequent years, culminating in a projected negative fund balance of $10.621 million by Dec. 31, 2022.

City Director Keith Lau, who last year raised the issue of unfunded liabilities in the police and fire pensions and other financial issues during budget meetings, said he would do the same during this year's budget meetings between city administration and the Board in an effort to formulate a plan to put more money into the fund's budget.

"I have been trying since I took office to address the financial problems with the underfunding of the LOPFI retirement fund. My position has been and remains the city should be allocating more general fund monies to soften the impact or at least delay the insolvency of the LOPFI fund. Doing so would allow the state legislature and or the city more time to solve the funding problem. Currently the LOPFI fund is scheduled to insolvent in 2019. Any change to state and local  law would not show revenue increases until 2018. I think it is fiscally irresponsible to not allocate more money to the problem in the 2015 budget. I will be discussing my position in the November Budget meetings."

PENSION FUND HISTORY, FUNDING
Bushkuhl explained that contributions to the plan — which the city is mandated by state law to keep funded in order to meet retirement obligations for the city's retired first responders — come from a variety of sources. Two revenue sources include millage rates of one mil each charged for both 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. Formerly, fire responders in Fort Smith paid 6% of their salaries to retirement funds, but that changed to 8.5% in 2011.

With revenues (contributions) to the plan totaling $6.35 million while money taken out of the plan sits at $7.511 million, the city has started exploring its options.

Bushkuhl said the city of Pine Bluff is in a similar situation as Fort Smith, with too many obligations and not enough money to meet the required contribution limits. So Pine Bluff approached the Arkansas Municipal League about proposing legislation that would allow local cities to raise millage rates by a vote of city residents to add more money to the retirement contribution funds. It was a plan that Fort Smith quickly embraced, Bushkuhl said.

"I do know that the Arkansas Municipal League has included a resolution in their packet of legislative actions for 2015 — a request to allow a constitutional amendment whereby cities can ask for additional millages for police and fire pension. So right now, we're restricted by the state to have one mil for each. And it does have to be a constitutional amendment. It does have to be voted on by the people to allow us to raise the millage."

MILLAGE ISSUES
In order to raise enough money to fully fund obligations before the fund goes broke in 2019, Bushkuhl said Fort Smith would likely go to voters seeking to more than double the current millage rates.

"I'd say a minimum, we'd have to double it to two (mils) each. I think it may have to be higher, to two and a half (mils each)."

By doing the 2.5 mil rate, the city would raise an additional $2.068 million for each pension plan, or a combined $4.135 million. The additional monies is not only enough to stop the bleeding, but to start replenishing the fund well into the future.

But while a millage rate increase may appear to be the solution to the problem, it is dependent on a statewide vote on passage of a constitutional amendment allowing rate hikes beyond the current maximum of one mil. Then it would need a winning vote of Fort Smith citizens who in August voted down a two mil increase for the public library. During the run up to the vote, Library Executive Director Jennifer Goodson said a homeowner would pay an additional $40 per year on a $100,000 if the increase had passed. The millage vote failed by a vote of 64.02% against to 35.98% for the increase out of 4,343 votes cast.

A possible vote for a millage increase for police and fire pensions could also be in discussion during an expected vote for a millage increase of between 4.5 and 6.5 mils for the Fort Smith School District, which plans to construct a third high school in Chaffee Crossing should the millage pass, as well as an events complex featuring a basketball arena and fine arts center on property it would lease from the Fort Smith Regional Airport.

OTHER REVENUE OPTIONS
Should the legislature fail to push through a constitutional amendment or voters fail to pass local millage rate increases following passage of said amendment, the city would have to look at other ways to fund the increases it needs before the fund goes broke in 2019.

Sales taxes are already nearing 10% and Bushkuhl said a new sales tax is unlikely, though she said when other current sales taxes like the one cent for streets comes up for renewal, it is possible the city could ask for reallocation of funds to support the pension fund.

Another option is levying franchise taxes on water and sewer customers. Water and sewer customers in the city do not pay franchise fees while cable, phone and most public utilities have the fee added on.

"There are other cities that charge franchise fees on their water and sewer and their sanitation," she said, adding that it was "not a real favorable option because we like to keep our fees as low as possible. But it is a possibility for a revenue source."

The franchise fee set by the city's Board of Directors, not a vote of the people, sits at 4%. It can be raised as high as 4.25%, according to state law.

Even though the city could charge franchise fees, Bushkuhl said it was a "balancing act because the Board has to look at the water and sewer fund and the sanitation fund and determine if (it is) a charge they want to pass onto … (customers) because that would have to be passed onto the customer. Just like the gas and electric franchise fees, those are on your bill every month."

Bushkuhl's comment regarding the franchise fees was made Oct. 1, before City Administrator Ray Gosack revealed on Oct. 3 that negotiations with the United States Department of Justice regarding an administrative order related to wet weather overflows had broken down, with the city expecting a lawsuit at any time from the DoJ.

At the time, Gosack said the city would likely increase water and sewer rates in coming months to raise the funds necessary to eventually be in compliance with the federal Clean Water Act. City Utility Director Steve Parke has previously said compliance with the act to prevent any overflows could cost the city an additional $150 million in coming years.