Dallas’ pensions are underfunded by billions of dollars, and the city is looking for a fix. The police and fire pension has faced financial trouble since 2015, almost folding in on itself in 2017 before the state got involved. Failure to fix pensions could make it difficult to attract or retain employees in the city, including police and firefighters. We’re going to try to break it down for you here.
Jack Ireland, Dallas’ chief financial officer, aimed to explain it all to members of the Ad Hoc Committee on Pensions earlier this month. The committee is made up of several Dallas City Council members, and even some of them had trouble keeping up with Ireland at times.
State of the City’s Pensions
Ireland explained that the city has two primary employer benefit pensions that provide retirement, disability and death benefits for permanent city employees. There’s the Dallas Police and Fire Pension System for uniform employees. Then, there’s the Employees’ Retirement Fund for civilian and non-uniformed employees. The Texas Pension Review Board oversees all of the state’s public retirement systems for soundness and compliance with state reporting requirements.The Texas Pension Review Board funding guidelines require that both pensions be fully funded within 30 years. But both of the city’s pensions are underfunded and exceed the Texas Pension Review Board’s 30-year requirement, Ireland said. As of Jan. 1, 2022, the Dallas Police and Fire Pension system was projected to be fully funded in 68 years. It’ll take the Employees’ Retirement Fund 51 years to be fully funded, as of Dec. 31, 2022. The police and fire pension is short some $3 billion, and the employee pension is short more than $1 billion.
“I don’t know how we can retain or even attract employees," City Council member Paula Blackmon said when asked what would happen if the pensions didn’t get fixed.
“If you can’t meet your obligations, and this is an obligation, then I don’t know why anybody would come work at the city,” Blackmon, a member of the Ad Hoc Committee on Pensions, said. “So, that’s what’s at stake, I guess, with our organization to some degree.”
The boards of the two pensions and the city are working to come up with a funding soundness restoration plan to comply with the 30-year requirement. These plans must be submitted prior to Sept. 1, 2025, in accordance with state law.
However, legislation passed in 2017 aimed to stabilize and improve the Dallas Police and Fire Pension requires its board to adopt a funding plan to comply with the 30-year requirement and submit it to the pension review board by Nov. 1, 2024.
Originally established in 1916, the Dallas Police and Fire Pension now has 5,085 active employees. About 18% of them are Dallas residents, and the rest come from outside of the city. Their average salary is about $88,740. The retiree and beneficiary headcount for the pension is at 5,289. About 8% of those individuals live in Dallas. Their average annual retirement benefit is about $51,732.
The Employees’ Retirement Fund was established in 1944 and now has 7,464 active employees. About 44% of them are residents of Dallas and they make an average salary of $60,816. The pension’s retiree and beneficiary headcount is slightly higher at 7,766. The average annual retirement benefit is $40,883. The Employee Retirement Fund is about 73% funded as of Dec. 31, 2022.“I don’t know how we can retain or even attract employees.” – Dallas City Council member Paula Blackmon
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Why are the pensions so underfunded?
One reason the police and fire pension is underfunded is poor real estate investments. The pension sunk more than $1 billion in ill-advised direct real estate investments from 2005 to 2009. The 2008–09 real estate decline obliged the pension to write down these assets by hundreds of millions of dollars, resulting in its first report of financial challenges in 2015. Before 2017, the pension board also authorized Deferred Retirement Option Plan provisions that severely harmed the fund, Ireland explained. The Deferred Retirement Option Plan had several harmful provisions: there was a floor of 8% interest annually; it allowed deferral of monthly deposits in the Deferred Retirement Option Plan after retirement; there was no limit on time in the plan; and it allowed active members to take unlimited distributions from the plan.
Deferred Retirement Option Plan balances grew to more than $1.5 billion, or 58% of total assets by 2016. Members began to worry about losing access to Deferred Retirement Option Plan accounts. So, a “run-on-the-bank” occurred with more than $600 million being withdrawn from the plan before it was closed for withdrawals in 2016.
A decrease in the number of employees beginning in 2008 and projected payroll growth compared to actual payroll growth affected the Employees’ Retirement Fund’s funding. The active employee headcount is 11% lower than it was in 2008, and payroll growth assumptions are based on projected number of active employees and changes in pay.
In December 2016, changes were made to the employee pension to improve funded percentage and projected years to reach full-funding. Those changes are projected to result in $2.15 billion in savings through 2055.
How did the city and state respond to the pension problems?
In 2017, the Texas Legislature passed House Bill 3158 to address near-term issues and provide a long-term solution for the police and fire pension by 2025. The Police and Fire Pension Board also went through some changes as a result of the legislation. Instead of being dominated by police and fire personnel and council members, it would have six mayoral appointees and five trustees elected by members. Changes were made to employee contribution rates and the city’s fixed-rate contributions. Future benefits were reduced for active employees, retirees and beneficiaries. The bill also reduced the unfunded liability by $1 billion and increased the funding ratio to 49% with full funding projected for 44 years.Additionally, the bill mandated an independent review of the police and fire pension and plan changes to be submitted to the Pension Review Board by Nov. 1, 2024.
What can the city do about its pension woes?
The financial analysis firm Cheiron Inc., selected to review the police and fire pension, had several preliminary recommendations. It said the city’s fixed-rate contribution needs to move to an actuarially determined contribution. According to the Texas Comptroller, an actuarially determined contribution is the total contribution rate needed to pay for the normal cost of benefits and pay down any unfunded liabilities over a certain period of time.The firm noted that member contributions should not be increased, and may need to be decreased over time. And it recommended granting some cost of living adjustments sooner to protect the adequacy of retirees’ lifetime income and to remain competitive with other public safety plans. Under current plans, cost of living adjustments won’t be available until the pension is 70% funded, which could take until 2073.
But city staff have some concerns about Cheiron’s recommendations, Ireland explained. For one, providing cost of living adjustments before 2073 could increase the unfunded liability and make achieving the 30-year-timeline more costly. The firm’s analysis assumes 2.5% growth in payroll but does not recognize pay increases provided through meet and confer agreements or intentions to increase staffing for either Dallas Fire-Rescue or the Dallas Police Department.
At the request of the city, a study group made up of local financial experts came up with its own list of recommendations. It suggested the city make contributions in addition to its current annual contributions of 34.5% of regular pay plus $13 million. The city’s additional contributions would begin with fixed incremental payments that increase by $20 million per year over the first three years of the plan period. The study group advised that the city’s fixed-rate contributions could be changed to an actuarially determined contribution beginning in 2028 to achieve full funding within 30 years. Another recommendation included cost of living adjustments once the pension is 70% funded. The city could also seek additional funding by monetizing its assets.
There are several options on the table for the Employees’ Retirement Fund to become fully funded in 30 years. It could eliminate the maximum contribution cap of 36% of pay starting in January 2025. Eliminating the contribution cap would require voter approval, a point of contention for at least one City Council member, Cara Mendelsohn. She doesn’t want residents to vote on changes to the employee pension before there’s a plan for the police and fire pension.
“I have no intention of voting to put this on a ballot when we don’t have a solid plan for the police [and] fire pension fund,” Mendelsohn said, according to The Dallas Morning News. “I think it’s extremely objectionable that we would even dare to do that when our most desperate staffing in this entire city is the police and fire departments, and we’re currently not meeting our staffing goals.”
Mendelsohn later told the Observer she’d like to know other options for fixing the Employees’ Retirement Fund. “There are options we have not yet considered like converting to a 401k plan or similar individual retirement account system with an employer contribution or evaluating a move of this pension to the state retirement system,” she said.
Higher contributions from the city could be phased in at 2% per year over five years, Ireland said. The city would use an actuarially determined contribution rate from there. It could increase the employee contribution rate to a maximum of 14%. A lump sum contribution by the city would have a positive impact on the actuarially determined contribution and Dallas' future annual contributions.
From there, the city could submit its plans to the pension review board by August or September.
Blackmon said the city is looking for long-term solutions. “You don’t want to put something in place that is a stop gap measure,” she said. “You really want something in place that has long-term effects. I believe that’s what the council is looking for. What is that long-term plan that makes these pensions funded, not just in five years or in 30 years, but in 60 years?”
