‘It’s all about making a bigger pie and not stealing pieces from each other’
Louisville Mayor Greg Fischer discusses financial issues facing Kentucky’s cities and using innovation for economic gain
Greg Fischer was elected mayor of Louisville in November 2010. A native of Louisville, Fischer graduated from Trinity High School and went on to major in economics at Vanderbilt University. After college, he founded SerVend International and co-invented an ice and beverage dispenser used in fast food restaurants and convenience stores. He and his brothers grew SerVend into a worldwide corporation with more than 300 employees and $70 million in annual sales before selling the company in 1997 to Manitowoc, a Fortune 500 company.
In 1999, he founded Iceberg Ventures, a private investment firm, and later was a co-founder of bCatalyst, the first business accelerator in Louisville. Fischer has been an active investor and board member in numerous companies across multiple industries. He is a former partner and former CEO of Dant Clayton Corp., which designs, manufactures and constructs sports stadiums around the country.
Ed Lane: About 40 percent of your first term as mayor is behind you. What was the most significant issue you have faced to date?
Greg Fischer: I’m about 19 months into my four-year term so about 60 percent is ahead. The Ohio River Bridges Project has been a huge milestone for this administration and for the states of Indiana and Kentucky as well. As you know, the Bridges Project has been worked on for over four decades. Getting into a position where it was palatable for two governors, the people and our state legislatures to get the project going is a major accomplishment.
From a jobs perspective, Louisville’s had great momentum this last year. With Ford’s opening of its assembly plant and GE’s expansion, about 4,500 jobs have been created in Louisville by these two corporations.
EL: The Ohio River Bridges Project is under way. What is the current status of this project and the estimated cost?
GF: Fundamentally, we want to remember it is two bridges and one project. Indiana is in charge of the East End bridge and Kentucky is in charge of the downtown bridge and Spaghetti Junction.
Indiana is starting construction on some of the approaches. Kentucky just commenced the partial demolition of a building and preservation of a building on Main Street as it widens the bridge’s approach in downtown Louisville. So the project is under way. Both bridges are slated to be completed in 2018. The big move was getting the cost of the project from $4.1 billion down to $2.6 billion. Cost savings made the project feasible.
EL: Will there be a toll charge for use of the bridges?
GF: There will be tolls, and that’s what made the project financially feasible at the end. The most sensitive area of that has been the provision for a local “frequent users” toll for people who just commute back and forth across the river. The goal is to still have a dollar toll for a passenger vehicle.
EL: You recently announced your intention to merge the Louisville Water Co. and Metropolitan Sewer District in order to create a “stronger, leaner and more efficient” public utility system. What are the combined revenues of both utilities, and how much in cost savings do you feel can be achieved?
GF: Combined revenue of the two utilities is in the neighborhood of $250 to $300 million, and savings from operational efficiencies are projected to be $15 to $25 million. We are now starting to work out local operating agreements on our way to full consolidation.
EL: The MSD is under a consent decree to improve water quality. How well is this effort progressing and how much is the estimated total investment to upgrade Louisville’s sewer and storm system in order to comply with the EPA mandate?
GF: The consent decree is an $850 million commitment, and Louisville is several years into that. The good news is the city is well ahead of its regional competitors and is subject to a much less costly consent decree. Cincinnati and Indianapolis have consent decrees that both cost north of $2 billion.
EL: How is the city planning to fund sewer construction costs and retire any debt incurred?
GF: By ordinance, the MSD may raise sanitary sewer rates up to 7 percent a year. Louisvillians have been seeing a 6.5 percent increase in rates each of the last six years. Construction work will be complete in about 13 more years, so it’s a 20-year project. The cost of our sewer upgrades, relatively speaking, are much less than some nearby cities. As much as people are disappointed with the rate increases, from a regional perspective Louisville is in pretty good shape. Our country needs to address its sewers, roads, bridges, water lines; America is getting older, and its infrastructure needs to be replaced.
EL: Occupational and real estate taxes comprise about 80 percent of Louisville’s revenue. How have static housing values and high unemployment levels over the last three years impacted Louisville government’s revenue trends?
GF: The stagnation in real estate prices obviously has been a significant issue. We’ve seen a very small growth in Louisville’s real estate tax base.
Occupational taxes had a nice rebound this past year. Corporate and net profit taxes have been hit by the recent economy. The tax base is growing, but it’s growing slower than the city’s expenses are increasing because of pension and healthcare costs.
One recommendation the Blue Ribbon Tax Commission (appointed by Gov. Steve Beshear) suggested was that cities share in the state’s sales taxes. Elsewhere, 38 states share sales taxes at the local level, and that provides cities more diversification in tax revenues. Now, that approach is to be contrasted with a local-option sales tax.
EL: Would you raise the sales tax, ask for a share of the current state sales tax, or would you have a local-option sales tax on top of the current sales tax?
GF: Whether it’s a private business or the business of government, a more diversified revenue stream has better odds of staying level or growing. Kentucky cities do not have a sales tax component to their revenue stream. The second possibility is the local-option sales tax: where the citizens of a city can vote on a specific project, for a specific time period, paid for in a specific way. Most all of our competitive cities have that option as well; Kentucky cities do not. So when you see capital investments being made by other cities in their arts district, recreation center or forensic crime lab, frequently they are funded by a local-option sales tax.
EL: Are you in favor of a local-option sales tax to diversify tax revenues for Louisville? Would you lower the occupational tax to help offset a new sales tax increase?
GF: Absolutely. We’re not looking for more money per se; we’re looking for more revenue diversification.
EL: The Kentucky sales tax is 6 percent. What do you feel would be an appropriate share for Louisville to receive?
GF: Six percent (smiles and laughs). The issue is, Louisville generates $2.4 billion a year in total state taxes. Louisville receives $1.2 billion a year from Frankfort after the taxes are redistributed. I’m not going to complain about that because Louisville has responsibility for the rest of the state. But as it relates to the local sales tax option, that’s one of the reasons the Kentucky General Assembly should give cities tools – so they can compete with Austin, Denver and other major U.S. cities.
EL: A recent drug bust that arrested 26 persons and found $4 million in drug money implies that there is a significant demand for illegal narcotics in the Greater Louisville area. What is your assessment of the severity of this problem?
GF: Throughout the United States – whether it’s in rural areas, small or big cities – there is illegal activity taking place. At the root of crime there is a lot of drug activity. Louisville uses what we call intelligence-based policing because it’s not just a drug issue; usually there is some type of violence. Louisville doesn’t have a police unit that is solely focused on drugs; instead it’s focused on the broader issue of crime.
EL: A recent report suggests that 50 percent of Louisville’s population growth is due to immigrants. From what areas are your new citizens coming, and is Louisville recruiting from any of these countries?
GF: No. We embrace immigrants and promote Louisville as one of the great international cities in the heartland of America. Immigrants are everybody: from a refugee to a Ph.D. It’s hard to paint every immigrant with the same brush. A lot of Louisville’s entrepreneurial activity involves immigrants. It’s a strategic advantage for Louisville to have a broadening and more diverse population.
EL: What impact is UofL’s Nucleus program having on Louisville’s economy?
GF: Nucleus is doing well. Obviously, the city is involved, in terms of the Tax Increment Finance program, which is helping make these deals financially feasible. Nucleus’ downtown geographic location is excellent because it bridges our NuLu district with the waterfront, as well as serves as a 21st-century job creator. Nucleus is also creating a very useful connecting point in our built environment in relation to the UofL campus.
EL: You and Mayor Jim Gray are promoting the Bluegrass Economic Development Movement to encourage advanced manufacturing in the metro areas of Louisville and Lexington and the I-64 corridor between the two cities. How is BEAM progressing, and what will be its first major initiative?
GF: It’s going very well. BEAM is finishing up the research stage right now. We have to define the area in which we’re going to be working and the governance, human capital and innovation in the developments needed in order to further cement the BEAM region area as one of the leading U.S. manufacturing centers. The focus is on productivity, quality and safety.
If BEAM is one of the best advanced-manufacturing regions in the world, businesses will come. Some of the initial work will be directed to human capital as it relates to preparing the region’s workforce for the changing needs of the workplace.
EL: Ford Motor Co. has officially opened its renovated Louisville Assembly Plant and started manufacturing the 2013 Ford Escape. What impact will this advanced-manufacturing facility have on Louisville’s unemployment rate and occupational tax revenues?
GF: That’s a good question. Louisville has a 2.2 percent occupational tax and, of course, as part of the incentive package to Ford the city rebates a percentage to the employer, which reduces the revenues coming to the city. Occupational taxes don’t get the full tax benefits of new jobs created with incentives, but in terms of spin-off jobs it does. What’s the spin-off effect of 3,000-3,100 new jobs? It’s anywhere from three to seven additional new jobs, depending on who you believe. What percentage of the spin-off jobs are in Jefferson County is another question. We expect Ford and GE to have half a percent, maybe a little more, positive effect on the local unemployment rate.
EL: Many of Kentucky’s counties and cities are experiencing serious financial pressures due to the cost of defined-benefit pension plans and health insurance benefits. How are these costs impacting Louisville’s budget?
GF: It’s a serious financial problem, and it really impedes the city’s ability to invest in other areas. Since the merger nine years ago, the cost of Louisville’s pension contributions have gone from $32 to $75 million annually. That’s obviously a large percentage of Louisville’s general fund expense. The city’s pension and healthcare costs are out of control. You’re seeing other cities around the country having significant pressure – up to bankruptcy – over this issue.
EL: What is your general fund revenue projection for the coming year?
GF: It’s around $515 million. Louisville had an 8 or 9 percent revenue increase, but it was eaten up by out-of-control pension and healthcare expenses. Our healthcare cost forces Louisville to reduce services and cut back on other programs and investments that the city has provided in the past.
All the stakeholders need to come to the table. Louisville does not have to look far to imagine what could happen here when you project the city’s financials out five and 10 years. It’s plain to see that there is a serious financial problem. One of the roles of an elected official is to make sure problems get solved.
Citizens around the country are speaking loudly about pension reform as well. I don’t know if you followed the recent San Diego and San Jose votes – 66 percent and 70 percent of their citizens said we’ve got to get the pensions fixed. So, everything needs to be on the table. Louisville participates in the state retirement system, so the city just receives an annual notice of how much it needs to contribute. The city does not have control over its destiny. Louisville is working with its friends in Frankfort to encourage them to adopt a long-term legislative fix to the pension problem.
GF: Arena management was changed from the State Fair Board to AEG Facilities, with a 10-year agreement that provides some guarantees on performance and some up front monies. This is a state-operated facility. The city is obligated to pay between $6.5 million to $9.5 million a year, depending on how profitably the arena is managed. The city is very interested for the new manager to meet its performance target so the city will just need to make its minimum contribution.
EL: Do you have a closing comment?
GF: Another thing that is critical: expense control. The biggest expenses the city has are people related. All of the city’s finances are online so people can understand how their money is spent. In the next month, Louisville will be putting its performance matrix online in a program called LouieStat, which will post the city’s key performance measures in terms of service delivery as a government.
Innovation has been a big part of our administration. Louisville received a $4.8 million grant from Bloomberg Philanthropy. Louisville is one of five cities to receive a grant. The city is doing a lot of work in innovation as it relates to vacant and abandoned properties, rezoning, recycling and animal services. You’re seeing Louisville being recognized as one of the most innovative cities. The city has received social media awards, so we’re putting that underlay into the business culture of our city as a place where innovative and progressive activity is happening.
EL: How did Louisville earn the Bloomberg Innovation grant?
GF: Bloomberg was just looking for cities they thought had the capacity to innovate. It saw that attribute in Louisville, electing a new mayor with an entrepreneurial background. Then it was more of an interview process with Bloomberg – just seeing what your view on the world was. Mayors feel the federal level is paralyzed and at some state levels there is also not much action going on. Mayors have to figure how to innovate from the city level up. A city is a smaller unit, and therefore it is easier to manage change. Bloomberg was looking for other cities to help prove that theory.
One of the things I want point to is the partnership between Louisville and Lexington. Kentucky is one of the smaller states, so it needs to be more flexible, nimble and closer to the customer. Kentucky’s two biggest cities should be a model of that, so I’m very honored to have this collaborative working relationship with Mayor Jim Gray. We knew each other before we were mayors. We’re both entrepreneurs. Louisville has taken a big chunk of that Bloomberg money and dedicated it to the BEAM project. Lexington and the central Bluegrass region are actually benefiting from the Bloomberg relationship. Some people say all the Bloomberg money should have been focused on Louisville. I think Louisville’s got to show it’s all about making a bigger pie and not stealing pieces from each other, so we’re happy in helping this region.