Louisville Mayor Greg Fischer is proposing to use $7 million from the city's savings account and $3.8 million of its vehicle replacement fund to settle a claim with the Kentucky Retirement System for interest on Louisville firefighters pensions that were underpaid for decades.
The retirement system offered the $10.8 million settlement Monday. The two sides have been negotiating for months, after the KRS board initially asked for more than $12 million.
The money owed to the County Employee Retirement System results from the city settling two lawsuits by firefighters over back-pay issues.
In June 2010, the city agreed to a $45 million settlement with about 500 firefighters who said their pay had been miscalculated for decades. Six months later, the city agreed to a $14.2 million settlement with a group of 123 mostly retired firefighters over the same issue.
Those settlements meant the city was underpaying firefighters for years - and, as a result, also miscalculated its contributions to the retirement system.
This settlement with the retirement system is intended to cover interest that would have been earned had the correct amounts been paid into the system all along, said Steve Rowland, the city's chief financial officer.
"We paid CERS the principal amount we owed them" when the firefighter lawsuits settled, Rowland said. "But we didn't pay them any lost interest. They take the position that this is our obligation (because) ... if we had made correct payments, they would have invested it."
Rowland briefed Louisville Metro Council President Jim King and the council's Budget Committee chairwoman, Marianne Butler, on the settlement proposal Wednesday afternoon, along with the administration's plan to pay it.
Rowland said the council will need to approve both. An ordinance codifying all of that could be introduced as early as today.
"We just want to tell the KRS leadership that the mayor is in agreement with the settlement offer, and will make the recommendation to the council that they approve it," Rowland said.
Fischer spokesman Chris Poynter said the KRS board will also have to approve the settlement, and will likely vote on it later this month. No one at the retirement system could be reached for comment Wednesday evening.
"The city owed ... not only back pay but consequential damages under the judgment," said attorney Ann Oldfather, who represented the retired firefighters in their lawsuit against the city. "Certainly, having underpaid the pension is a consequential damage."
It's also another headache for the city that is already looking at a $12 million budget deficit that must be balanced by June 30 - and the administration is expected to unveil its plan to deal with that in the coming days.
But the pension debt was part of the projected $30 million deficit for next fiscal year, which begins July 1. Rowland said that because that debt will be paid in the next few weeks, next year's deficit has been reduced to a projected $20 million.
However, the plan to take $7 million from the city's savings account - its so-called rainy day fund - could be controversial with council members.
The city currently has about $60 million in the bank after taking about $4 million from the account to help pay the retired firefighters. The city paid the rest of that settlement with a $10 million loan from the Louisville Water Co., which it owns.
Poynter said withdrawing an additional $7 million won't harm the city's bond rating, which is essentially its credit score and figures into interest rates the city pays when it issues bonds.
"It won't have a significant impact," Poynter said. "If we go much lower, it would. So we can't see us dipping in any further."
But King said the council may want to explore other ideas for paying the settlement so that less is taken from the rainy day fund.
"Any time you reduce the rainy day fund by 10 percent in one fell swoop, it's a concern," King said. "And that's why the council needs to take some time and review this.
"On the other hand, if it's not raining right now, it's certainly very cloudy."
The Fischer administration has also tapped the city's four vehicle replacement funds before. Currently, those accounts have a combined balance of just under $20 million. The city took $1.2 million from the accounts to pay Oldfather's legal bill in August.
Rowland said there is enough money in the accounts to allow the proposed withdrawal without harming the city's ability to replace vehicles this fiscal year or next. By fiscal year 2013-14, the city plans to begin a "pay-go" system for replacing vehicles, which means money will have to be included in each budget for that purpose.
"The mayor hopes that by then the economy will have turned around and we'll start seeing some significant revenue growth," Poynter said.
King said he's comfortable with using money from the vehicle replacement funds to cover part of the bill.
"That's really nothing more than a reserve that has been established over the years," King said. "We're very fortunate to have it now."