Photo by Michael L. Jones

In a bold move to keep new tax revenue in-house, small cities are considering matching Metro Council’s proposed increase to the insurance premium tax.

To fill a large budget hole created by escalating pension costs, Mayor Greg Fischer suggested last week that the city may need a potential increase to residents’ insurance premium taxes, which must be passed by Metro Council by March 23 to go into effect for the next fiscal year starting July 1.

Likewise, many of the 83 small incorporated cities with Jefferson County are also affected by increased pension costs, and their residents would be impacted by Metro Council raising insurance premiums on the county level.

However, such new tax revenue from residents of small cities would go to Metro Government, unless these small cities also raised their insurance premium tax rates to the same level — which some city mayors and councils are also considering passing before that March 23 deadline, to keep such revenue in-house.

Just as Metro Government levies a 5 percent tax on a wide variety of insurance premiums — such as vehicle, fire, casualty, health and life — so, too, do most of the 83 small cities, with a few exceptions. Technically, these are referred to as license fees imposed directly on insurance companies for the privilege of doing business in the city, with these extra costs passed on to customers.

This is how it currently works: The life insurance premium tax rate in Jeffersontown is 5 percent, and because that matches the countywide rate set by Metro Government, the small city gets to keep all of this tax revenue. Yet if Metro Council raised this tax rate to 10 percent before the March 23 deadline and Jeffersontown failed to make any change, this additional 5 percent taxed would go to Metro Government in the next fiscal year.

However, if Jeffersontown also acted to raise its life insurance premium tax rate to 10 percent before the deadline in March, then it would keep all of this tax revenue next year, while Metro Government would continue receiving none of this tax revenue — only the 10 percent tax revenue from the non-incorporated parts of the county.

In an interview with Insider Louisville about the dilemma that small cities now find themselves in, St. Matthews Mayor Richard Tonini said that the St. Matthews City Council would have the first reading of legislation at its meeting on Tuesday night that would increase its insurance premium tax rates to whatever percent that Metro Council ultimately raises them at the county level for the fiscal year beginning July 1.

“We are just positioning ourselves to be ready,” said Tonini. “If you miss out on this, then it will be 2020 before you can do anything about it.”

St. Matthews Mayor Richard Tonini

With roughly 80 local employees, Tonini said that St. Matthews is facing the same type of budget crunch as Metro Government and many other cities are the state — as the Kentucky Retirement Systems mandated a 12.5 percent increase in pension payments for workers in the County Employees Retirement System (CERS), and the state constitution limits the means by which cities are allowed to raise revenue.

“We don’t have the budget that Louisville has, but these (pension cost increases) that are being pushed on us are affecting our budget, just as it is Louisville’s,” said Tonini, who added that he understood where Fischer was coming from. “There are some smaller suburban cities that have no employees in the pension system and they won’t be affected by it, but those of us who have services and are part of CERS are definitely going to be adversely affected.”

Last week, Insider received a draft of sample legislation that would allow any small incorporated city to increase its insurance premium taxes to the same level set by Metro Council, similar to the proposed ordinance before the St. Matthews City Council on Tuesday that was described by Tonini.

Mayor Tonini said this proposed St. Matthews ordinance was drafted by the city attorney John Singler, who is also the attorney for numerous other small cities, including Lyndon and Middletown, two of the largest in Jefferson County. He added that Singler has drafted similar legislation for the councils of other small cities to pass in anticipation of Metro Council raising the insurance premium tax rates on the county level.

Jeffersontown Mayor Bill Dieruf issued a statement to Insider indicating that the city is considering matching whatever insurance premium tax increase is passed by Metro Council, as these funds will be needed in anticipation of service cuts across the county.

“In the last two budget cycles, Jeffersontown anticipated increased pension costs related to the shortfall and reserved funds,” stated Dieruf. “However, additional revenue may well be needed in the likely event Metro Louisville cuts services. In the past, those cuts have typically been significant in the Suburban Cities. Therefore, we are considering retaining the premium taxes our residents pay to ensure they receive necessary governmental services.”

Jeffersontown Mayor Bill Dieruf

Dieruf is also the president of the Kentucky League of Cities, an advocacy organization for local governments that has pushed for so-called #FreeCERS legislation to separate CERS from the troubled Kentucky Retirement Systems and allow it to be independently managed.

The Kentucky League of Cities and supporters of #FreeCERS cite the fact that local governments have always met 100 percent of payments for their workers’ CERS plans, as opposed to the Kentucky General Assembly, which failed to adequately make payments for the troubled state workers’ plans in KRS for over a decade.

Despite this, Kentucky Retirement Systems leadership dramatically changed the formula for pension payments to increase them for all plans — both county and state _ in 2017, which legislation passed last year set as an annual 12.5 percent increase for local governments.

“Unless and until there is a collaborative solution to the revenue limitations Kentucky cities face, there will simply be no other option for most communities,” stated Dieruf. “At KLC, we continue to work with legislators on strengthening the County Employees Retirement System by seeking separate management focused solely on the growth of the system.”

In a statement last week warning of devastating cuts to city services unless new revenue was found, Mayor Fischer cited this pension dilemma, saying it was “not something that Metro Council or I created. It’s a challenge created by Frankfort’s years of inaction, exacerbated by the 2017 pension formula change.”

J.D. Chaney, the deputy executive director of the Kentucky League of Cities, told Insider that its officials spoke with Metro Louisville officials two weeks ago to discuss their options amid increased pension payments, also stressing the need for a “collaborative effort” among cities across the state that are facing the same tough decisions.

“A lot of cities have already maxed out, either legal or practically, because of the constitutional constraints, their revenue options,” said Chaney. “And it’s going to be a different assessment with each community because we are so diverse, our tax bases are different, but these discussions are happening at almost every city hall.”

According to Kentucky Department of Insurance figures provided to Insider by the Kentucky League of Cities, most of the 83 small cities in Jefferson County have a 5 percent premium tax rate across a number of different insurances, such as fire, casualty vehicle, inland marine, health and life insurance. The exception is health insurance, as the majority of cities impose no tax on these premiums, though Metro Government does so.

Some small cities have insurance premium tax rates that are even higher than the rate set at the county level. For example, Shively and West Buechel have already set its tax rate at 10 percent, while Audubon Park is at 9 percent. Hurstbourne, Prospect, Houston Acres, Strathmoor Manor, Sycamore and Woodlands Hills all have insurance premium tax rates of at least 7 percent.

In the 2017 fiscal year, Jeffersontown pulled in nearly $3 million of insurance premium tax revenue, with the rates set at 5 percent. Looking ahead, a Metro Council increase of premium taxes to 10 percent sets up the possibility of roughly $3 million in extra revenue going to Metro Government, unless Jeffersontown acts quickly and also passes legislation to raise its rates before March 23, in which case it would receive this hypothetical $3 million.

After Jeffersontown, the small cities with the next-highest insurance premium tax revenue in 2017 were Shively ($2.2 million), St. Matthews ($1.8 million), Lyndon ($1 million) and Middletown ($832,218). That same year, the 83 small cities collectively brought in over $30 million in revenue from these taxes, while Metro Government collected over $58 million.

Louisville Metro Government’s insurance premium tax revenue grew to $62 million in the 2018 fiscal year and is projected to increase to $63.6 million in the current fiscal year ending June 30.

Several Metro Council Democrats have spoken against increasing the premium tax for vehicle insurance, saying that this would be discriminatory for west Louisville residents, as their rates are much higher than the rest of the city.

However, a vehicle insurance tax exemption would leave behind a large bulk of Metro Government’s revenue from insurance premium taxes, as those taxes make up roughly 44 percent of total insurance premium tax revenue for the city. Subtracting this vehicle tax revenue from the 2017 totals, a hypothetical doubling of the tax rate would have brought in an extra $32.5 million.

Last week, Fischer stated that Louisville anticipates a $65 million budget gap over the next four years unless a new source of revenue is found, which could lead to major service cuts and up to 317 layoffs across all city departments in the next fiscal year alone, including the closure of library branches, fire stations, health clinics, community centers, pools and golf courses.

Mayor Fischer’s office did not respond to inquiries from Insider for this story.