The1st meeting of the Interim Joint Committee on Local Government was held on Wednesday, June 20, 2007, at 10:00 AM, at the Northern Kentucky Convention Center in Covington, Kentucky. Senator Damon Thayer, Chair, called the meeting to order, and the secretary called the roll.
Members:Senator Damon Thayer, Co-Chair; Representative Steve Riggs, Co-Chair; Senators Walter Blevins, Jr., Ernie Harris, Dan Kelly, Alice Forgy Kerr, and Johnny Ray Turner; Representatives Ron Crimm, Mike Denham, Ted Edmonds, David Floyd, Derrick Graham, Charlie Hoffman, Dennis Keene, Adam Koenig, Reginald Meeks, Brad Montell, David Osborne, Arnold Simpson, and Ken Upchurch.
Guests: Jill Bailey, City of Taylor Mill, Greg Buckler, Campbell County Jail, Paul Meier, City of Crestview Hills, Jerry Stricker, City of Covington, Richardson Harrison, Northern Kentucky Water District, Barb Schempf, CVG Airport, Mike Apgar, Sanitation District No. 1, Marty White, Kentucky Medical Association, and Ed Davis, Kentucky State F.O.P.
LRC Staff: Mark Mitchell, Joe Pinczewski-Lee, Donna Gaines, Brad Gross, and Marlene Rutherford.
Senator Thayer welcomed members to the Northern Kentucky region and recognized Representative Simpson who is also Vice-Chairman of the Northern Kentucky Legislative Caucus. Representative Riggs provided opening comments and recognized special guests, Speaker of the House of Representatives Jody Richards, Speaker Pro Tem Larry Clark, and Senate Majority Leader Dan Kelley.
Steve Stevens, President of the Northern Kentucky Chamber of Commerce welcomed the committee. He said the strength of the Chamber is derived from its members. He continued to say that the entire region in Northern Kentucky has extremely bright, talented, and dedicated individuals who donate countless hours of time and intellectual talent to make the region a better place to live. In addressing some of the state's many needs in the upcoming 2008 General Assembly he asked that the Legislature not be afraid to try new and different options for tackling the challenges before it.
Tim Carris, an executive with Merrill Lynch and the volunteer chair of the Chamber of Commerce's Taxation Committee. Mr. Carris covered three subjects: the Chamber Taxation Committee; the funding needs of local governments, and a special perspective about the funding mechanisms used by local governments.
In explaining the first of the topics of his discussion, Mr. Carris said that the Chamber Taxation Committee does not consist of just business leaders but a city administrator, city council member, and a county government official as well as lawyers, realtors, CPAs, manufacturers, and other consultants. There are sixteen members on the committee. The Taxation Committee develops and recommends state and federal legislative positions which are then recommended to the Executive Committee and subsequently approved and adopted by the Board of Directors. The common bond is the desire to improve the quality of life of everyone in the region. The Taxation Committee supports the recent legislative efforts to address local tax reform.
Continuing on with the second of his topics, Mr. Carris said that city and county governments rely on three primary sources of limited revenue: property taxes, insurance premiums taxes, and occupational license taxes. These sources of revenue are narrow and limited. Relying heavily on commercial and industrial businesses is inequitable. The lack of tax options result in overlapping taxes and revenue competition between cities and counties. According to Mr. Carris, the Chamber believes that the state's Constitution stands in the way of progress and growth and supports amending the Constitution to permit the creation of a multi-county, multi-jurisdictional revenue sharing system which would allow more local control of revenues and would spread the cost of services over a broader segment of the population. Such a revenue sharing system should be subject to voter approval. Counties and cities are in need of a more modern and flexible source of revenue. The Taxation Committee, Mr. Carris continued to say, on behalf of the Chamber of Commerce, argued for a key, foundational, structural change to the current local tax system and more public discussion about the need for flexible funding options for local government. A dynamic, successful, growing business environment depends on stable, reliable and predictable local governments. Employee pension costs are ever increasing as well as health insurance, gas, etc. for providing local services.
Mr. Carris suggested that there are a number of modern funding mechanisms that deserve study and consideration. Modern funding mechanisms would be uniform, standardized, and easily understood which will allow increased compliance and more focused on consumption rather than on payroll. A tax focused on consumption would have the added benefit of allowing non-Kentucky residents to share in the burden of necessary local services. In a community-wide study, Vision 2015, one of the six strategic directions adopted was that of effective governments. The goal for an effective local government will enhance the economic competitiveness of the region by ensuring that high quality public services are effectively provided.
Representative Simpson pointed out that Northern Kentucky is unique in that it has several local governments and before he would look at creating more flexibility in the taxing system he would hope that local leaders would engage in more fruitful discussions relative to the merger of certain services. He said that Vision 2015 is a perfect blueprint for the future and one of the components of that plan is looking at governmental services to ascertain how local governments can operate more efficiently. How local services are provided needs to be reviewed, and once local communities are doing their part in reducing the tax burden, members of the General Assembly will be more open to exploring avenues for increasing revenues.
Senator Harris asked how many small cities are in Boone, Kenton, Campbell Counties and where they are located. Mr. Stevens said there were nearly 40 small cities in those counties. There are three incorporated cities in Boone County, approximately 22 in Kenton, and the balance in Campbell County.
Senator Thayer indicated that a consumer-driven revenue source would require a constitutional change. And, as a revenue measure, would have to begin in the House. Senator Thayer indicated that he supports local flexibility and decentralizing the funding from the state. He could support a provision local referendum especially if decreases in taxes at the state level were included.
Kenton County Judge Executive Ralph Drees and Deputy Judge Executive Judge Scott Kimmich discussed the local government retirement system (CERS). Upon his being appointed to the office of County Judge Executive, Judge Executive Drees said that he established a committee to review the county's retirement plan and as a result all employees pay into the retirement systems. He did indicate that some of the benefits decreased but at the same time the salary of low pay scale employees increased. Kenton County has 317 employees providing services to 155,000 citizens, the cost to those citizens is $20 per person. He said that in reviewing the system, the employee contribution rate has increased only once in 15 years. Items, in his opinion, that need to be considered for change, (1) calculating retirement based on the last five years rather than last three; (2) raising the employee contribution; (3) changing the health plan participation benefits for hazardous duty employees; (4) raising the minimum retirement age to 65 years, and (5) creating a two-tiered retirement system. In the past, Judge Executive Drees indicated public employees made less money than those in the private sector; however, that is no longer true. He asked that the Legislature make the necessary changes to keep cities and counties operating, while being fair to the citizens of Kentucky.
Senator Kelley said that in moving forward it may be wise to involve input from taxpayers about this issue rather than only from individuals benefiting from the retirement system. He pointed out that benefits are set by statutes and cannot be changed unless both chambers are willing to agree to change. He also said that the Legislature has to be informed of any problems by local governments. He said that the GASB (General Accounting Standards Board) rules have forced employers with pension systems to focus on the issue. He said the reason the problem has developed is because actuarial analyses and contributions for the pension and there are two other areas that are key which are the health insurance and the cost-of-living which are expectations and which have not been funded. Local and state governments and the Legislature needs to work together to come up with solutions to the problem.
Senator Thayer acknowledged former Representative Jim Callahan in attendance, a former chairman of the Northern Kentucky Caucus.
Representative Riggs pointed out that local governments have control of overtime, bonuses and what kind of healthcare plan is chosen by local governments even though the Legislature makes the rules.
Representative Graham said that from the House standpoint the issue came up late in the last session. This is a very complicated and serious issue. The Governor has appointed a Blue Ribbon Committee to study the issue and the Legislature is looking at the recommendations that may be made by the Blue Ribbon Committee. He said that many of the public employees are drawn to public service because of the benefits and not the salary. Representative Graham continued to say that in order to continue to provide the services, a plan has to be developed that will allow those individuals to remain in the job--otherwise there will be a drain on the best employees. He agrees with reform but cautioned not to rush into reforming the system.
Representative Hoffman said that the House does sense the urgency in addressing the issue but that it is a very complex problem and does not need a hastily contrived solution--an actuarially unsound plan. Many good discussions are coming out of the Blue Ribbon Committee. Also, in addressing this issue, two other issues that need to be discussed are the ability of local governments to continue to have good employee recruitment and retention. There have been many sacrifices by public employees who in the past have not had the ability to earn a lot of money. He looks forward to working with local governments to solve this complex issue.
Deputy County Judge Executive Scott Kimmich addressed the committee regarding county jails. He noted that during the last eleven months 14,000 individuals have been booked through Kenton County jails and not one of the individuals was charged with a county or city crime. It is a state system and counties are partners in that system. Kenton County's portion of the partnership this fiscal year will cost the taxpayers of Kenton County $4.8 million to run the county jail. The Department of Corrections controls all aspects of the prisoners and facilities of the jail. He asked that consideration be given in dealing with credit for time served that local governments be reimbursed for the credit of time served in the county jail. In Kenton County it would average between $85,000 and $100,000 per month depending on the "season" which would mean between $1 to $1.5 million which is approximately one-third of the debt service for a new $40 million facility. He asked that the partnership continue between counties and the state but that the state shares more of the burden of running that partnership.
Representative Simpson said it is very important for local officials to work in concert and that the three counties in Northern Kentucky discuss the economies of jails. He pointed out that Jefferson County has one jail with a county population greater than the collective population of the three counties.
Mr. Kimmich said that Kenton County has open dialogue with Boone and Campbell Counties as Kenton County prepares to build its new facility. Northern Kentucky has three very qualified elected jailers and as long as that position remains a separate constitutional office, merger would be difficult because each has certain constitutional powers and responsibilities for inmates. The county continues to operate within the framework of the constitution and statutes to look for efficiencies and partnerships.
Representative Simpson said that he would hope that on questions of jail consolidations if there are constitutional or statutory problems that should be changed to allow local government the foundation to provide services in a more efficient manner that those concerns would be shared so that they can be addressed.
Campbell County Judge Executive Steve Pendery and County Administrator Robert Horine next addressed the committee. Judge Executive Pendery said that not only do pensions have to be reviewed but health insurance as well. Health benefits have been dramatically improved over the years and this is the major problem in the Kentucky system. Local governments are free to experiment in health care systems. He said that Campbell County introduced health savings accounts (HSAs) for their employees last year. With an HSA, decision-making power is put back in the hands of employees. After the HSAs were introduced, there was a 38% decrease in the health insurance costs. Two years earlier they were dealing with a 43% increase in health insurance costs. The fiscal court chose to invest the savings in the future of employees. Employees are better off having made the transition to the HSA. He said that if health care is a big problem in the state pension arrangement and if it is possible to manage a transition so that employees have a chance to see it is in their best interest to make the change everyone wins. Health care solutions are available that are fair across the board and address some of the concerns expressed earlier today. He agreed that the costs of pensions is causing people to talk about consolidation of services and ways to save in local government, but the savings gained will not be enough to pay for the problems being identified. And, when consolidations are done and improvements made, it is not always a financial savings. He gave the example of fire departments that use volunteers in order to save money. In this type situation, when there is consolidation of services, it is difficult to get volunteers who will be working side-by-side with a paid individual.
Mr. Horine reiterated an area in which local government needs help is jails. In 1984, he said, the per diem paid by the state for counties to house state prisoners was $30 per day. Today that per diem is $30.94 per day. The effect has been to transfer the cost of housing prisoners from state government to local government at a cost of over $100 million per year so that county governments are subsidizing operation of local jails. Local government needs help with the daily per diem. Recently, calculations were turned in to the federal government of the per diem cost per day for housing prisoners without any medical benefits, which are paid by the federal government. That cost was $43 per day.
Mr. Pendery also discussed 911 fees. Technology is moving rapidly, he said. Land lines are being lost in favor of cell phones. The next advance in doing business is the Voice Over Internet Protocol (VOIP). Money shared out of taxation of land lines goes to local government, monies shared out of cell phones taxation to state government, and VOIP is controlled by federal government. Revenue sources for local governments are decreasing. When the 911 dispatch was consolidated, which relies on land line revenues, the number of land lines reduced. Local governments need the Legislature to restore the funding that has been lost by receiving more of the tax revenue from cell phones to finance local governments to operate dispatch operations. As cell phones shift to the VOIP they will need to work with the federal government. Local governments appreciate any flexibility the state can provide and willingness to listen to issues confronting local jurisdictions and work together to find solutions.
Senator Kelley said that on the issue of inequities in jail funding, the General Assembly feels it an important responsibility to make sure that the inequities that put pressure on local budgets are dealt with in a effective manner. He noted the successful passage of the Medicaid cost bill from the 2007 Session of the Kentucky General Assembly. Cost drivers in the area of jail funding need to be reviewed carefully.
Mr. Pendery noted that cities are treated differently according to their size and different classes of cities. He suggested that it may be time to look at a classification system for counties giving different powers and responsibilities according to size.
Mayor Irvin "Butch" Callery, and Commissioner Steve Megerle, City of Covington spoke next. Mayor Callery offered comments for possible solutions to the pension and health insurance problems. He stated that funding for retiring health insurance is separate from the pension funding and rests solely on the employer contribution and any return on investments. Liabilities of the insurance fund are calculated in the same manner as the pension fund so when the actuarial reviews the pension fund, the same method is used to determine costs for health care. A solution to the growing employer costs is to keep the retiree health premium increases below the actuarially assumed rates. In general, if the long-term medical inflation can be reduced by one percent, liability could be reduced by ten to fifteen percent. Another solution, he continued to say, is a separate subset of CERS population for cities or counties. City and county employees are grouped with school employees for funding purposes with school employees being the largest class of employees in CERS--over 50%--and the average wages earned by the classified school employees are less than the average of city and county employees. Another cost driver is the cost-of-living increase which are unfunded liabilities.
Senator Kerr said she was unaware of any previous governor who had taken on the task of appointing a committee to review this issue and applauded Governor Fletcher for having the issue studied.
Mr. Megerle compared communities and the current pension contributions and the contributions needed in 2013. He recommended possibilities for solving the problem. He said all the recommended possibilities would need to be done at the same time in order to avoid further problems. First, there exists the need to look at creative methods such as bonding, re-channeling resources for the current obligation and deficit in all pension programs. Secondly, the current pension programs offered to employees needs to be reviewed be it a review of a defined contribution plan or 401K plan, as well as whether defined contribution plans should be replaced by defined benefit plans or a blend of age versus services in its defined contribution plan. Thirdly, there needs to be a look at the age of retirement. He also pointed out that North Carolina has a section in its Constitution that prevents pensions from being used for other purposes and requires full funding of all pensions and their obligations both health care and actual wages. He agreed with Mayor Callery that the pensions should be divided between health care and the actual wage component. A constitutional amendment would prevent the Commonwealth from having future pension deficits. If pensions are changed, the burden must not be put solely on local governments to fully contribute because they will not be able to survive.
Representative Montell stated that there is both a contractual and moral obligation to public employees and there has to be balance, fairness, and accountability to the taxpayers funding the pension and health care for public employees. The CERS is a system in crisis, but our other retirement systems are in crisis as well. What is being heard from CERS is a pre-cursor of what is coming with other retirement systems. The General Assembly has some tough decisions to make and changes must be made. The Blue Ribbon Committee is discussing and receiving good information for making recommendations for a solution.
Jill Bailey, Taylor Mill City Administrator, addressed the committee. Taylor Mill is a fourth class city and employees approximately 42 employees, she said. The city is already being faced with the problem and recruiting and retaining quality employees. The city cannot compete with the salaries of other cities in the region. The pension crisis is also an issue for the city. After countless meetings of discussion of issues involving the retirement system those discussions never lead to a resolution. The issue appears to have no momentum, no energy, no forward movement to a satisfactory conclusion. The problem is that this has no face or identity. Local governments are strapped with limited funding options. Services will decrease because of a lack of funding.
Rep. Crimm noted that the small cities within his district in Jefferson County are facing the same problems and situations mentioned by Ms. Bailey.
Rep. Denham asked Ms. Bailey what she thought was the single biggest problem on a daily basis, other than pension problems. She said it was the revenue streams because they constantly battle to keep the current revenue streams in place and are always looking for original and creative ideas to conserve services and provide better resources efficiently. Because the City of Taylor Mill is mainly residential, they do not have the income needed to support the services they provide. She said the city is looking across boundaries and combining services. They recently teamed with Campbell County to provide LAS services in the area. After Representative Denham asked her opinion on multi-jurisdictional revenue sharing. She said that she had concerns but was not prepared to address that matter.
The meeting adjourned at approximately 12:15 p.m.