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Court Dismisses City's Pension Lawsuit, Ft. Wright to Consider Appeal

A judge in Franklin County dismissed the City of Fort Wright's lawsuit against the Kentucky Retirement Systems' Board of Trustees.

In the suit, the city alleged that the board made illegal investments on behalf of the County Employees Retirement System.

Cities across Kentucky are being asked to increase their contributions to the state pension system and Fort Wright already dedicates 11 percent of its budget to such contributions, Mayor Dave Hatter said. Under proposed changes, the city could see that climb to 14 percent - or more, he said.

In a 16-page Opinion and Order issued Thursday, Franklin Circuit Court Judge Thomas Wingate ruled in favor of the KRS board of trustees, saying in part that, “There is nothing in the record or in the City’s pleadings to this Court that persuades this Court that the Board did not follow the law or did not appropriately apply the facts to the law.”

The cause of action in the case was the City of Fort Wright’s claim that the KRS Board of Trustees had illegally invested in hedge funds and private equity funds on behalf of CERS. The city claimed that these types of alternative investments were not permissible under Kentucky law, thus making them illegal.

The Court agreed with the Systems’ interpretation of the statutes, and further confirmed that the CERS investments in alternative assets have been reviewed and approved by both the Kentucky Auditor of Public Accounts and by the Systems’ independent auditors, a news release from KRS said. The Court noted that, “The (state) Auditor has not indicated any disagreement with the types of investments about which the City complains.”

On Wednesday, Hatter said that Ft. Wright city council may move to hold a special meeting to consider an appeal of the ruling, which he has not yet seen in full.

"My initial reaction is, it's disappointing and frustrating," Hatter told The River City News on Saturday.

The mayor noted that Ft. Wright has been financially responsible with no long-term debt and "a pretty good amount of money in the bank." "Things are going well," he said.

But, as part of that responsibility, the city has always contributed what it was asked in terms of the pension system, which is severely underfunded, forcing the General Assembly to pursue changes. Hatter said that some figures place KRS at only 15 percent funded.

In some projections, Hatter said, the city could see 22 percent of its budget dedicated to pension contributions.

"In the long run, it's just not sustainable. We've always done what we were supposed to do according to whoever is sending the numbers," Hatter said. "We make our contributions, the employees make their contributions, the money gets sent down to Frankfort and it gets intermingled with funds down there."

On Wednesday, the city already has a finance committee meeting scheduled and may add a special city council meeting afterwards to discuss pursuing an appeal. 

"I want to appeal it unless the city attorney tells us it doesn't make any sense," Hatter said. "And even for political reasons, I think we should appeal to keep this in front of the public."

Like many cities, Ft. Wright leaders want to see a complete separation of CERS from KRS, "and have a separate board and hold the investments of CERS to a high fiduciary standard where they're not making investments in these hedge funds and not having fees on cities," Hatter said.

"CERS would be its own standalone thing and cities, through a board, would be able to control how the money is being invested and so forth because at this point we don't have control, we just get a bill and send the money in," Hatter said.

"This pension thing is not going away. It's like a giant albatross for the entire city," Hatter said. "While I'm glad the governor is trying to tackle this, it's a critical issue for the state - they're trying to hang the entire (situation) on the cities and we've never not made our contributions."

Trying to find new ways to pay for the pension costs is challenging for cities. Typically, most revenue for cities in Kentucky comes from payroll and property taxes. Cities can increase property taxes each year by 4 percent plus the compensating rate, without being subject to recall by voters. For Ft. Wright, that would only generate an addition $50 to 60,000 per year, Hatter said. "That doesn't even pay for one cop," he said.

"If we get a two hundred to three hundred thousand dollar increase per year in the cost of pensions, you can clearly see, in not too long, we have an unsustainable situation," Hatter said.

Ft. Wright is in a strong position than other neighboring cities also facing increased contributions. Most of its revenue comes from businesses' payroll taxes rather than property. "But eventually the numbers don't work anymore," he said. 

Hatter believes that one reason the state system has been resistant to separating the two systems is, "because when you take city and county money out, then it gets very dire."

"It's a big freaking mess," Hatter said. "I think a lot of cities are potentially staring at bankruptcy as a result of this."

Written by Michael Monks, editor & publisher