Texas Officials Warn Cities of Pension-Fund Shortfalls

Sep. 11–The retirement funds relied upon by thousands of North Texas public employees are short more than $1 billion needed to pay promised benefits, according to a Star-Telegram review of nine local pension plans. Several of the plans, which collectively have more than $3.5 billion in assets, have gaps that can be closed through stock market improvements, managers say. But three funds — including plans for thousands of public employees of Fort Worth and Dallas — are on the state’s watch list because they may never be able to meet obligations at current funding levels. The state has mailed warning letters to the three urging them to address shortfalls.

“We don’t encourage them to panic but to start doing something,” said Virginia Smith, executive director of the Texas Pension Review Board, the state agency that oversees more than 370 local public pension plans.

The board cannot force public employers to increase contributions.

Nor can it make employees add more money. It can only offer guidance.

Soon, however, the pensions of firefighters, police and other local government employees could be protected by the Texas Constitution.

Saturday, Texans will be asked to vote on a constitutional amendment that would prohibit local public pension plans from cutting benefits of current participants.

That change, Proposition 15 on the ballot, could affect as many as 1.47 million active and 349,000 retired pension participants across the state. The nine North Texas plans have about 32,000 participants.

If the amendment passes, local governments would have to either increase funding or cut benefits to future employees if their plans have shortfalls. Among the options for improving funding: raising taxes, shifting money from other programs, or requiring higher employee contributions.

Local public pension plans throughout Texas are dealing with funding shortfalls because of investment losses. Some won’t be able to pay off unfunded liabilities for more than 30 years — the benchmark used by the Governmental Accounting Standards Board to determine financial soundness.

There is no organized opposition to Proposition 15. Taxpayer groups, such as Texas Citizens for a Sound Economy and the Texas Taxpayers and Research Association in Austin, are not taking a formal position.

State legislators unanimously approved a bill to require Saturday’s vote. They were spurred by the Texas Association of Public Employee Retirement Systems, which has lobbied for the guarantee for three years, President Randy Stalnaker said. It formed a political action committee, Committee for Secure Retirement, to campaign for the measure.

If necessary, “we’ll trot out the little old lady with her walker and say, ‘You want to take this woman’s pension away?’ ” said Stalnaker, a Dallas Water Utilities manager and 25-year employee.

The Texas Municipal League initially opposed the bill but agreed to it after a few compromises, Stalnaker said.

Among them, the amendment would not block a local government from curbing benefits for future employees. It also offers voters a chance to exempt their communities from the pension guarantee.

Voters would be asked to decide whether they want the exemption during a special election in May.

“All the cities, after they understood the scope of how it would apply, pretty well agreed that there needed to be some protection for their employees,” said Sen. Kim Brimer, R-Fort Worth, a bill sponsor.

It’s hard to oppose an amendment that aims to protect promises made years ago to employees, said John Kennedy, a senior analyst with the Texas Taxpayers and Research Association.

“You can’t go back and change the rules on somebody after you’ve bought into the game,” he said.

The amendment does not cover state government pension plans, which also struggle with underfunding. As of last year, 79 percent of state pension plans were underfunded, up from 51 percent in 2001 and 31 percent in 2000, according to a survey of 123 state plans by Wilshire Associates of Santa Monica, Calif.

The plans assumed that they would receive an 8 percent annual return on investments based on past investment performance.

Among state plans, Texas has the third-highest unfunded liability, at more than $19 billion, according to Wilshire. But judged by funding ratios, Texas is in better shape than two dozen other states, the company said. Employees of many cities participate in the Texas Municipal Retirement System, rather than a local plan.

Many corporate pension plans are also strained by investment losses.

The federal Pension Benefit Guaranty Corp., which insures most corporate pension plans that promise a specific monthly benefit, has warned that a federal bailout could be needed unless corporations improve pension funding.

Pension managers say it’s not yet time to suggest the sky is falling. Employers can reduce benefits for future employees, for example. The stock market most likely will return to more typical gains, others say.

“Just because they have a number of years where investments are lower than expected doesn’t mean they can’t make them up over the long term,” said Cynthia Moore, counsel for the National Council on Teacher Retirement.

But even if the markets improve, as they have been doing in the past six months, governments will have to step up, said Louis McLain, associate professor of business administration at Texas Wesleyan University.

“There’s still going to have to be increased contributions, there’s no question about that,” said McLain, who is also the university’s chief investment officer. “The gaps are still too great.”

In its survey of nine local pension funds, the Star-Telegram reviewed the actuarial health of defined-benefit plans.

These are among the survey findings:

— The catch-up date for the D/FW Airport DPS and Fort Worth plans has been characterized as “infinite” — meaning that plans will never eliminate their unfunded liability at current funding levels, according to the Texas Pension Review Board.

— The D/FW Airport DPS plan, which serves more than 300 Department of Public Safety employees, is $16 million short and has the lowest ratio of assets to liabilities, at 70.9 percent, according to the most recent actuarial evaluations submitted to the Texas Pension Review Board.

The plan was started in 2000, after DPS employees pressed to be separate from a plan covering other airport workers. Last week, the D/FW board approved removing any limit on airport contributions to the fund, and it set employee contributions at 10.4 percent of compensation plus any amount needed to cover the costs associated with improved benefits approved in February.

Darryl Thornton, D/FW vice president of human resources, said the airport would use its general fund, if need be, to pay promised retirement benefits. “No one is in danger of losing any funding or not being able to retire,” he said.

— The Fort Worth Employees Fund, which has more than 8,400 members, is in the hole by $282.4 million, with a funding ratio of 81.4 percent. Its accrued liabilities have increased by $17 million since 2000; its actuarial assets have dropped by $60 million.

Fort Worth officials briefed the City Council last month on the fund’s status, acting Assistant City Manager Richard Zavala said.

The city is taking “a wait and see” approach that is dependent on future stock market returns, he said. “Action is yet to be determined at this point,” he said.

— The Dallas Police and Fire fund is short $750 million, the highest dollar amount of the three local plans on the state list.

Today, 11 states have constitutional guarantees of public pension benefits. Thirteen other states have statutory protections, an additional 17 rely on case law.

Texas is among the nine states that do not offer specific guarantees to public pension plan members. The state constitution, however, prohibits diversion of pension assets for nonretirement purposes.

Most governments would cringe at the idea of reducing pension benefits, said Keith Brainard, a researcher with the National Association of State Retirement Administrators.

“It’s not been a strategy or tactic used in order to save taxpayer dollars,” he said.

But Stalnaker points to a 1937 Texas Supreme Court ruling that allowed the city of Dallas to cut employee pensions.

Brimer said the constitutional amendment will prevent another such move.

“We’re having to respond to the court case from the past,” he said. “We have to get clarification.”

Staff Writer Bryon Okada contributed to this report.

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