Home » One-On-One: Bill Lear discusses the difficult reforms needed to prepare for even harder pension fix

One-On-One: Bill Lear discusses the difficult reforms needed to prepare for even harder pension fix

By Mark Green

William “Bill” Lear is chairman emeritus of Stoll Keenon Ogden PLLC law firm and chairman of the Kentucky Chamber Board of Directors. Lear is a former chairman of Commerce Lexington, a former five-term state legislator and is an active civic leader in Lexington and Louisville. In the General Assembly, he chaired the House Economic Development Committee and served as co-chair of blue ribbon task forces on tax reform, workforce development and economic. He is a Trustee of Keeneland Association, Vice-Chair of The Jockey Club and as a member of the Board of the Kentucky Seed Capital Corporation. He has been inducted into the Kentucky Economic Development Hall of Fame, the Bluegrass Business Hall of Fame and the U.K. College of Law Alumni Hall of Fame. He and his wife Evangeline live in  Lexington and have three children and six grandchildren.
William “Bill” Lear is chairman emeritus of Stoll Keenon Ogden PLLC law firm and chairman of the Kentucky Chamber Board of Directors. Lear is a former chairman of Commerce Lexington, a former five-term state legislator and is an active civic leader in Lexington and Louisville. In the General Assembly, he chaired the House Economic Development Committee and served as co-chair of blue ribbon task forces on tax reform, workforce development and economic. He is a Trustee of Keeneland Association, Vice-Chair of The Jockey Club and as a member of the Board of the Kentucky Seed Capital Corporation. He has been inducted into the Kentucky Economic Development Hall of Fame, the Bluegrass Business Hall of Fame and the U.K. College of Law Alumni Hall of Fame. He and his wife Evangeline live in Lexington and have three children and six grandchildren.

Editor’s note: This is a longer version of the interview than what appears in the June magazine.

Mark Green: You’ve managed to have active, significant roles in the private, public and civic sectors. You’ve been manager of a major law firm and Lexington legal counsel, served ten years as a legislator, wrote the law creating the Kentucky Cabinet for Economic Development, served on the Jockey Club board and as a Keeneland trustee, headed the Commerce Lexington board, been an urban developer and now are heading the board of the Kentucky Chamber of Commerce. What advice would you offer to someone aspiring to be active successfully in multiple realms?

Bill Lear: Sounds like I ought to be worn out! First of all, you can only do a lot of different things if you’re genuinely interested in them, and each of those things you mentioned, I have been very interested in. Some of them, all the way to passionate about, but certainly interested in all of them.

And the things you need to have in your quiver of arrows to do those things: First, organizational skills are really high on my list of traits of successful people. I’m a list maker, and I do it on paper. That’s one of the things I do. Work ethic and organizational skills often trump sheer brainpower. You have to learn to compartmentalize, meaning be able to segregate and focus on one thing to the exclusion of all others; that’s difficult to do in this day and time because interruptions from all of our communication systems and devices are so pervasive.

The other thing I’ve had the luxury of, that not everybody does, is enormous support from my law firm that has given me a lot of flexibility. For me, time is a fungible commodity. You have to be able to take a couple of hours in the middle of the day and do something other than your main job, maybe a civic function; you have to not just go to meetings but really work on something. This may mean you have to do some of your primary job early in the morning; I do that a lot. I don’t work evenings like I used to when I was younger; I reserve that time for me and my wife, I don’t take business calls at home at night and I don’t read a lot of emails. But during the day, I will go in several directions, and hopefully not all at once.

MG: How do you make time, and what methods do you use to stay informed about what is happening in your multiple fields?

BL: I don’t stay at my office and sit at my desk much. I move around. I talk to a lot of people. I read the things I think are the most important to keep abreast. I’ll put in a plug for your magazine, because for years I’ve read The Lane Report from cover to cover because it helps me to see what’s going on. Many times when I’ll read something there that I haven’t known about from someplace else, I’ll make a note and call somebody. If it’s something I think the law firm ought to be interested in, I’ll tell somebody here. Or I might pick up the phone and call and congratulate somebody.

In the horse industry, from Keeneland and my Jockey Club roles, every day I receive a list of interesting articles from the Thoroughbred industry, and I pick the ones I want to read and stay up with what’s going on from coast to coast. I stay abreast of economic development news. And then I talk to a lot of people.

One of my favorite apps on my iPhone and my iPad is a news app; you pick several of your favorite sources. My favorites are the New York Times, Top News Stories, Politico, and then ESPN and Golf Digest – I have to keep up with sports! – and USA Today and the Wall Street Journal. You can spend an hour or half an hour and find out what’s going on everywhere.

MG: What is your best advice to those who manage law firms, large or small?

BL: The toughest challenge in managing a law firm is similar managing any business organization: Keep your eye on the strategic view of things, don’t let the urgent overtake the important. We all have names for it: administrative default, administrivia. When you’re in management, it can interrupt your day over and over again, to the point that you either forget to do or don’t have time to do that which really moves the needle. That’s number one.

Number two is, one of my most important jobs when I was managing partner was to walk the halls, without any particular purpose, and spend time with people in the firm – not everybody every day, but over time to stay connected so you know what they’re doing, they know you, they know and appreciate the fact that you care about them and what they’re doing. And it may not be only what they’re doing at work.

MG: Has the economy’s slow recovery reached the legal services sector?

BL: The recession changed a lot of things for law firms. As the economy went downhill, demand for legal services did. A lot of business firms pulled things in-house or decided they didn’t need legal services for certain work. That has rebounded, but we’re not in the “go-go” years like we were in the ’80s, the ’90s and the first part of this century. We’re also not at a time in the profession when there’s one of the great new waves of legal work. For example, in the early days of environmental regulation, environmental law was huge. And as healthcare grew, healthcare law was a big, explosive new area. With the dot-com era and the technological explosion of the ’90s and the first part of this century and continuing today, intellectual property law was an exploding area. The same was true of mergers and acquisitions in the ’80s. Each of those areas is mature now. There are still significant practices in those areas, and I would encourage new people to take a hard look at them.

MG: What practice specialties might you recommend to law students or early-career attorneys today?

BL: Employment lawyers seem to be in great demand. Healthcare is still strong. Intellectual property is strong. Litigation is strong in spots, but we’re in a pretty long-term change from litigation that goes to trial to controversies being resolved by mediation and arbitration. Litigation is not what it used to be. The most notable one that’s down is bankruptcy, debtor-creditor law. A young lawyer in a good-sized Lexington firm just last night told me in his whole firm only one case went to trial last year. In my first year and a half of practice as an attorney, I tried two jury trials, boom, boom, and today almost nobody, unless they’re in criminal law, gets that kind of experience early. I recommend developing a diverse set of skills. When I started, you had to learn how to handle transactions, and I handled my share even though I really wanted to be a trial lawyer. You had to do real estate work; I did a fair amount early on, even though I never wanted to be a real estate transaction lawyer. I even had to do divorces. Some grounding in litigation and some grounding in transactions is very useful.

Then look at what industries appear to be growing in the geographic area where they want to practice. In Central Kentucky there is generally viewed to be a specialty in equine law, and there is some specialized knowledge and kinds of transactions. But at the end of the day, the folks who are successful in equine litigation are basically business litigators who have learned the subject matter of the equine industry. Folks who are successful doing the horse deals are good transaction lawyers who have learned the industry subject matter. The same is true for tax and up and down the practice areas. You’re taking skills that can be applied in a lot of industries, learning the subject matter of that specific industry and applying those skills there.

MG: How do you describe the current status and health of Kentucky’s Thoroughbred breeding and racing industry?

BL: It has rebounded a lot from the depths of the recession. The thing that hasn’t rebounded is the size of the foal crop. It’s decreased from 35- or 36,000 a year in the early part of the 21st century to about 22,000 now. Fewer mares are being bred, fewer stallions are in service and fewer foals are being born because there are fewer race days, there are fewer tracks. The industry nationally has settled into a norm premised on fewer race days, and that finds its way into the Kentucky breeding operations, sales at Keeneland and everywhere else.

Sales have bounced back a lot from where they fell in the recession. They have reached a stable plateau. While there is strong demand and strong prices at the upper ends of the market, the concern is that the lowest quartile is suffering pretty badly now. You see a lot of horses not sold at all or selling for really low prices at the end of some of the Keeneland sales, and that reflects the absence of demand all the way down to the bottom.

MG: What issues does the Thoroughbred industry face?

BL: I’m working a lot now on uniform national medication. The industry tried to do it on its own from its own organizations and did not get it done. There are a lot of places in the industry where the facilities, the racetracks, are not the kind of facilities that attract new fans. We don’t have that problem here; Keeneland, I say without fear of criticism, is the best racetrack in the country. I tried to pursue a national compact among states that did not come to fruition. An effort called the National Uniform Medication Program has made some success, but it still is very inconsistent in adoption throughout the country. We at the Jockey Club, Kentucky Thoroughbred Association, the Humane Society of the United States, Keeneland, the Stronach Group, which is another big track, and a group of individuals called WHOA, the Water Hay Oats Alliance, are trying another option, which means things other than medications. U.S. Reps. Andy Barr from Lexington and Paul Tonko from New York – a Republican and a Democrat – co-chairs of the Horse Caucus in the House of Representatives, have co-sponsored legislation to allow us to establish a national organization to set the same rules and penalties and enforcement mechanism in every racing state. That’s one of the big issues facing the industry.

MG: Keeneland is a jewel.

BL: It is a jewel. It’s kept up. The purses are great. People enjoy coming. There are few places in the U.S. today where young people want to dress up in coats and ties to go to a sporting event. They do that at Keeneland. It’s not the only good track. Saratoga is a wonderful track. So is Del Mar. Churchill Downs and Santa Anita are excellent large tracks. But on the other end of the scale, there are some big, aging tracks where you might see 2,500 fans on a racing day in a venue that will hold 75,000, and it doesn’t have the kind of energy or attraction that is going to help the industry grow.

MG: As a legislator, you wrote some of Kentucky’s primary economic development law. How did that come about?

BL: I began serving in January 1985. After four or five years, the speaker of the House came to me and said, “I would like you to take over the Economic Development Committee. I think we need to shake things up, because I’m not satisfied, and a lot of people are not satisfied.”

That was an area I was interested in. I did was creates a really blue ribbon task force – you would know a lot of the other folks on it – to look at our economic development programs and structure. It met for a couple of years. We brought in national economic development experts. We created an entity unlike any other in the United States, a true public-private entity with significant private-sector authority and positions on the governing board, the Kentucky Economic Development Partnership.

We tried to accomplish three things. One, remove politics from the economic development function. We heard lots of stories about out-of-state prospects coming to Kentucky to establish factories and being taken to the industrial park of a friend of somebody close to the seats of power, so we wanted to get politics out of it.

Second, we wanted continuity. Kentucky had had a series of economic development or commerce secretaries who came in with a new governor, took a year to understand the job, worked for a couple years, then spent the last year of the term looking for a new job. We had an on-and-off thing. Where that’s really important is relationships: The best economic development people forge relationships, and it’s really important with people outside of the United States to have long-term relationships and establish trust. It’s equally important with the economic development site consultants all around the country; if they don’t know who’s in charge one week to the next, one month to the next, it’s impossible.

The last thing, which goes hand-in-hand, is a greater level of professionalism. We made the head of economic development exempt from the salary cap applicable to other parts of state government; to get the kind of people you need, you have to do that in this day and time.

MG: Did Kentucky pick among others’ best practices or come up with some of its own?

BL: The structure that we ended up with was unique. I’m told it’s been copied other places around the country. As of that time, nobody else in the United States ran or had an organization like the one we created. But there were some best practices from others – we had two consultants who had worked around the country. Other places had strategic plans for economic development. Kentucky had never had one; this legislation required us to have one. Other places had had great success with developing clusters of like-kind businesses, and we put emphasis on developing clusters of like-kind businesses. The best example in the country is Silicon Valley; that’s a cluster of like-kind businesses. We weren’t geniuses breaking all new ground; we did copy the best. But the structure was new and unique.

MG: Economic development approach nowadays includes incentives. Kentucky’s incentives were updated in 2009 to make investments by existing businesses eligible also. Do you think Kentucky is up-to-date and competitive today with its incentive package?

BL: I do. We still offer some of the incentives Gov. Paul Patton came up with actually before he was governor. Some of those were in place when I became chair of the Economic Development Committee; some were adopted while I was there and others since. We’ve got a pretty competitive array. Most of our incentives are not giveaways. Most are earned credits based upon creating jobs of an appropriate level that weren’t here before. I think we’re in good shape.

Incentives are always going to be a part of a winning package, but today the most important factor is caliber of workforce. That’s something every state in the country is facing. Both technical skills and what are referred to as “soft skills” are really important. Quality of place, quality of life, which is everything from healthcare to housing costs to what sort of interesting and fun things there are to do in your community, all are important. But workforce and its handmaiden, education, are the two most important criteria. Some people criticize incentives, but if you don’t want to do incentives you don’t want to be in the game because they’re part of every deal of any consequence.

MG: Are there key metrics you watch to gauge how effectively Kentucky and its communities are competing against their peers for economic development?

BL: Well, how well you’re doing, in some regard, in education systems and in workforce training and workforce availability is how effectively you’re competing. But you can get a scorecard list of all the projects they’ve done, county by county, over the last year, from the Cabinet for Economic Development with an open records request (and online at thinkkentucky.com/KBIIS/KBIISLocXpnsnSrch.aspx). You’ll see new projects and you’ll see projects for existing businesses. The vast majority of job growth is always going to come from existing businesses, which is why the incentives recognize that now, even though they may not have early on.

MG: You are rare in that you are a civic and business leader in both Lexington and Louisville. Are there key differences, facts or issues that people in each city should understand about the other when they’re attempting to do business, or to expand and work in both?

BL: The reality is we’re very much alike in terms of our approach to business. Culturally, Lexington probably thinks of itself a little bit more Southern, and Louisville thinks of itself as a little more Midwestern, but the differences that might have existed 20, 25 years ago have largely disappeared. Just about all the major banks, all the major law firms and a lot of other major companies are now in both places. A lot of people who may live and have their primary office in one city, and I’m one of those, in recent years have done a lot of work and been involved in a lot of civic activities in both cities.

Until I stepped down as managing partner of the firm, I was very involved, and still am to an extent, in business organizations in Louisville. I was on the board of the Speed Museum and engaged in other things. When you grow up in Lexington in the era I did, it was almost an article of faith that you don’t like Louisville. There still is some of that today, mostly due to the athletic rivalry of UK and UofL. But I got over that a long time ago. I like Lexington better than I like Louisville, but I don’t hate Louisville! I’ve got too many friends there, too many clients, too many colleagues. It’s a neat city. We’ve both got a bevy of great restaurants. We’ve both got a lot of arts and cultural facilities. Louisville has some things we don’t have: The Kentucky Center for the Arts is above and beyond anything Lexington has; the Speed Museum is unique within the entire state. But there are some wonderful things Lexington has. They’ve got a nice little racetrack there; we think we have a better one here. But they do have a pretty important race there; I’ll give them that!

MG: State aim to reform the state tax system and fund the pension shortfall later this year. You have some expertise in this area. Is there any low-hanging fruit to go after first?

BL: The lowest-hanging fruit, in terms of the easiest money, is probably increasing the cigarette tax. But politically that’s difficult because Kentucky was for a long time such a tobacco-growing state; it is to an extent still. We’re also the state with about the highest incidence of smoking and lung cancer. Most people would consider that low-hanging fruit, except that it’s pretty tough. And after that, it is a challenge.

MG: During the Brereton Jones administration, you were on a blue-ribbon tax reform panel. But, as with other seriously-compiled recommendations, no action followed. Why has this happened multiple times?

BL: The “T” word is like poison in political circles. Since ours in the mid-’90s, two other blue-ribbon task forces have turned our tax code inside out and come up with recommendations. That’s probably why Gov. Matt Bevin says he’s not going to use a task force. We’ve had two, maybe three, strikes, and not gotten anywhere. The reason is you can’t do genuine tax reform without creating winners and losers. And the winners, by and large, will tell you that they thought they were always entitled to it, and they don’t show nearly the appreciation that those who would lose show anger. That’s probably the single biggest impediment.

And there’s the general anti-tax view in the electorate. A lot of legislators in both parties get elected on a promise they will never raise taxes, period, end of story. If you’ve got 50 taxes and increase four of them and decrease 10 and leave the rest the way they are, somebody’s going to accuse you of violating your pledge because you raised the ones that you raised. It’s a daunting task, but if it didn’t need to be done we wouldn’t have had the task forces we’ve had, and wouldn’t have the current governor and most of the legislative leaders agreeing we need to do tax reform.

MG: Some tax reform discussion references Tennessee’s consumption-based tax structure as a model. If Kentucky attempts to shift from income-based to consumption-based tax revenue, what will be the obstacles?

BL: The simplistic description of Tennessee’s tax code is, they rely heavily on the sales tax. Their statewide sales tax is 7 percent (5 percent on food), and it approaches double digits when you include local sales taxes. They don’t have an income tax.

I don’t think it’s economically feasible to eliminate Kentucky’s income tax. To lower it and raise the difference from the sales tax – let alone raise additional money if that’s what the governor believes to be necessary, and the pension crisis probably does make it necessary – you’ve got to do one of two things. You’ve got to expand the base dramatically or up the rate. We have a 6 percent sales tax that produces about $3.6 billion, so each penny is worth $600 million. The most interesting discussions going on, and that cause the most debate and consternation, are about expanding the base. The ideal tax rate has the broadest possible base and the lowest possible rate.

But if you look at one of these tax expenditure studies, for fiscal year 2016 through 2018 you will see yearly sales tax (revenue) is $3.6 billion, and there’s about $3.5 billion exempted. So you say, “Well, this is not hard. We’ll just expand it to everything and cut the rate back to 3 percent, and we’ll be in exactly the same place we are now.” But to expand everything like Tennessee, we have to tax food bought at grocery stores. We have to tax residential utilities. We have to tax prescription medications, prosthetic devices and the like. We have to tax churches and charitable organizations on their purchases, which Kentucky doesn’t. What sounds like a great idea in concept runs into things that people don’t consider a “loophole.” A loophole is something somebody else gets and you don’t; the big ones in Kentucky are exemptions, meaning everybody gets them. So that’s what you run into.

And then there’s the whole issue about services. If the sales tax at the 6 percent rate were expanded to all services, that’s another $2.5 billion in revenue, but Florida tried it many years ago (1987), and it blew up in their face. In my years in the legislature, we would see states try things, and it would blow up like a lab experiment and everybody else would say, “Whoa, that’s a bad idea.” That was 30 years ago, but even the task force I chaired recommended expanding taxes on services to some degree.

MG: Do reform efforts to expand the base ever discuss phasing in changes to soften them?

BL: I’m not aware of any, but that would certainly be possible. I’ll give you a flip side, though, that relates to our current dilemma about pensions. I have suggested what might be a useful approach to paying for the pensions is: Do the tax reform to make our tax code as competitive as possible, simplify it, make it more efficient, more attractive to business location and growth, get it like we want it to be for the next many years; and then for a finite period of time, tack an additional penny on the sales tax dedicated only to eliminating the pension gap and sunset it. Figure out how long it would last, sunset it, and you can park that issue off to the side and go about the business of trying to grow the state.

That is a suggestion from the cheap seats, but it’s at least one way – assuming you could get the base to the point where that generates the revenue and you’ve reformed the pension system to stop the bleeding going forward and all you’ve got to deal with is this unfunded liability.

MG: The phrase “a business-friendly tax code” is used to describe the most desirable outcome. What is the business community’s preference for a tax structure that would best support economic growth, job growth and income growth in Kentucky?

BL: There are some very specific things. The inventory tax that’s viewed as discouraging to many types of businesses could be eliminated. There are still some death taxes left that, while they’re not big, create the impression this is not a place wealthy folks want to live their final years. Those are some fairly easy ones. Some accounting differences would help that I probably should leave up to the accountants to explain. The biggest ones are making the corporate income tax as low as possible – and the personal income tax, which in the eyes of a lot of people, is pretty high in Kentucky because local occupational license tax (on individual wages and business net profits) gets tacked on top. If you’re a person at the high range of the Kentucky tax, which most business leaders and companies are likely to be, you’re paying 6 percent to the state, and then you’re paying an extra 2 to 3 percent, depending on what city you live in, so you may have an effective state and local income tax of 8 or 9 percent. It is a lot when you add it on top of the federal income tax burden. Those would be the top-of-the-line items to create a more business-friendly tax code.

MG: You are the current head of the Kentucky Chamber of Commerce board. What policies is the Chamber currently advocating?

BL: We are very interested in pension reform. We published the “Leaky Bucket Report” in 2009. We were at that time almost the proverbial voice crying in the wilderness. It is the darkest economic cloud hanging over Kentucky today; it really does affect a lot of things. We’re very interested in that getting done and done well. Obviously, we’re interested on behalf of business in what any tax reform looks like.

We are establishing a workforce institute, ratcheting up our involvement in trying to bring the business community together with the education and training communities, to do a better job of helping create the kind of workforce we need. That will not just make our existing businesses better and more competitive but help us attract new businesses. And we’re focusing a lot of attention on Kentucky’s infrastructure, both the traditional roads, bridges, rails, but also 21st-century infrastructure: broadband and the like. The one hopeful sign these days out of D.C. is it seems like both parties are very interested in spending money to upgrade and improve America’s infrastructure.

MG: Any fix for Kentucky’s now worst-in-the-nation unfunded pension liability is going to be costly and painful. Barring the return of a high-growth economy that would generate strong investment returns, is there a least worst way to begin to take on this problem? You suggested a dedicated, sunsetted penny sales tax.

BL: Well, that’s how to get us out of the hole we’re in. The longer-term issue is how to reform the pension systems themselves so that we are solvent and solid going forward. There really are no easy fixes.

I’ll give you some basics: Public employees are going to have to work longer. I remember vividly from my days in the legislature the bills to reduce the amount of time for full pension benefits from 30 to 27 years. In the House of Representatives, there were two or three of us who voted against it. Nothing against public employees, but private-sector employees weren’t having that privilege. Historically, the thinking was we pay public-sector employees less, so we’ve got to be more charitable in their pension system. I don’t think that’s true anymore, and defined-benefit plans are a real thing of the past. There were reforms adopted in 2013 that are going to help, but they won’t help enough and won’t begin to have an impact for another 12 to 15 years. We have to deal with how long people have to work to qualify for full benefits.

We have to deal with the issue of what pay level you use to determine pension benefits. People’s pay escalates over time and is at the highest level in their final years. The issue is how many years you base the pension level on – their last three, their last five, their last X years? From a mathematical formula basis, if most of your career you pay in at a low level then your pension is computed at the highest level, that math doesn’t work. We have to deal with that. We’re going to have to deal with cost-of-living increases.

There may be legal handcuffs on dealing with these as it relates to existing employees because there’s a doctrine called the “inviolable contract” in pensions. The basic concept of it is – and there’s actually a statute that says that – pensions and benefits represent an inviolable contract between state employees and the state. That’s been interpreted to mean once they have come to work under a given benefits system, you can’t cut it back for them. You can only cut it back for new hires. How far that goes is not entirely clear under the law. That may be a subject for discussion in the pension reform efforts.

MG: You do some mentoring. Is this done with intention? Are there any best practices for mentor-mentee relationships, setting them up, maintaining them, that you might share?

BL: I haven’t necessarily set out to do that. What I have set out to do is to be a good teacher and a role model. By that I mean number one, give people my best advice and counsel, not just about decisions they have to make but how I think they should go about coming to a decision, what they ought to take into account. I mentioned organizational skills – I spoke to a young lawyer who worked with me on some things and I didn’t think was as organized as was appropriate and said how important it is. You can do it any number of ways, but if you don’t know how to, here’s how I do it. You don’t have to do it my way; I’m not one who says you have to do everything like me. Part of being a good mentor is just being available and willing to listen. And sometimes it’s just being willing to listen and lend a sympathetic ear, but more often it’s being willing to listen and provide advice and counsel in a nonthreatening way.

MG: Do you have any closing comment?

BL: You mentioned all these different things that I’ve been involved in, one of which is politics. I’ve had a lot of young people come to me and talk about getting involved in politics: “Should I run for this? Should I run for that?” I always tell them I believe getting in politics is an admirable thing. I believe elective office is the highest calling in a democratic society; I really believe that. But I tell young people, be successful in whatever your chosen career is first, and then decide to run for office. I see too many people who run too early, and even if they succeed in getting elected, they never reach the level in their career that they otherwise might.■

 Mark Green is executive editor of The Lane Report. He can be reached at [email protected].