Multiple groups, from an outside firm to a city council member-led effort, are developing draft plans to fix the Dallas Police and Fire Pension System that will be presented starting in November. But financial experts and political observers say the system’s latest funding projections are alarming, especially years after the state legislature passed a law in 2017 to overhaul the pension amid estimates it would go broke a decade later.
“The state of that pension right now looks terrible,” said Michael Granof, an accounting professor emeritus at the University of Texas. “It’s less than 50 percent funded, the city and employee contribution is very high, and there don’t appear to be many obvious solutions. The situation is not improving, it’s getting worse.”
The latest estimates based on 2021 pension data show the system that gives around 10,000 active and retired police officers and firefighters retirement, disability and death benefits is facing a $3 billion shortfall and is around 41 percent funded. The system won’t be able to do cost-of-living adjustments until 2073, and full funding of the pension won’t happen until 2090, projections show.
The shortfall has drawn some concern that it could impact the city’s ability to retain and recruit first responders. Meanwhile, the heads of the largest associations representing Dallas’ police officers and firefighters are pushing for the city to consider using pension bonds to help close the funding gap, but experts say current interest rates make it not as viable of an option.
The state Legislature is requiring Dallas to have a plan that would see the system fully funded by 2055. The 11-member board that oversees the city’s police and fire pension is supposed to approve that plan by Nov. 1, 2024. The plan would then go to the state pension review board and to lawmakers during the 2025 legislative session for final approval.
Earlier this month, the presidents of the Dallas Police Association and Dallas Fire Fighters Association asked city officials to consider using bond money to help address the shortfall. They also want the City Council to delay until November 2024 a proposed May election seeking voter approval for a bond package of at least $1 billion for infrastructure projects. The delay could give the city more time to improve it’s bond rating and could mean an increase in the amount of bond money, the associations said.
“We recognize the recommended solution for the police and fire pension and employee retirement fund may not include any city bonding, but because of the size and urgency of the issue, we believe it is inappropriate to proceed with a general obligation bond until we know these funds are not needed to secure the pension plans,” read separate Oct. 2 letters from Dallas Fire Fighters Association President Jim McDade and Dallas Police Association President Mike Mata.
City financial officials said in August the city had capacity for $1.1 billion in bond money to pay for streets, parks and other projects around the city and up to another $400 million in bond money that could be dedicated to covering pension costs.
Ultimately, the City Council will decide when to put the proposal on an election ballot and the amount.
The suggestion from the police and fire associations has been rejected by City Manager T.C. Broadnax, who said in an Oct. 6 memo that pension bonds likely won’t be used and called it a “false narrative” to suggest the pension issues and the latest bond package couldn’t be addressed independently of each other.
He said city staff still recommend the City Council move forward with a May election, which would need to be approved to go to the ballot by mid-February. Broadnax said the full City Council will hear recommendations for both topics in January.
“At that time, the City Council will be able to make a much more informed decision instead of conflating these two critical but distinct concerns,” Broadnax wrote.
Dallas wasn’t the only large Texas city facing pension woes requiring a state Legislature fix in 2017.
Houston had an estimated $8 billion funding gap by 2017 after pension benefits increases between 1997 and 2001 led to the city’s costs spiking. The city annually for the next several years put in hundreds of millions of dollars to its police, fire and municipal pension systems, but were still contributing less than what was needed to keep the funding gap from getting larger.
State lawmakers in 2017 passed a series of reforms spearheaded by Houston Mayor Sylvester Turner that cut Houston retiree benefits by nearly $3 billion, reconfigured the city’s annual payments to its three pensions, and capped future costs. Houston voters that same year also approved $1 billion in pension obligation bonds to boost funding levels.
As of January, Houston appeared to be on track to erase its pension systems debt in 30 years.
Dallas police and fire pension officials in 2016 proposed something similar in benefit cuts and an at least $1 billion bailout from the city, but it was later voted down by pension members. The plan also didn’t have support from elected leaders, like then- Dallas Mayor Mike Rawlings.
Dallas in 2005 used $535 million in bonds to help shore up its other pension system, the Employees’ Retirement Fund, but hasn’t gone that route with the police and fire pension.
Dallas is set to receive updated numbers on the financial condition of the pension on Nov. 9 from Cheiron Inc., an actuarial consulting firm selected by the state to analyze how Dallas’ police and fire pension is funded and recommend changes to make sure the system can be fully funded within 30 years. A second report from Cheiron is planned to be released in February.
A separate group created in 2021 by Mayor Eric Johnson to study and suggest ways to improve the police and fire pension system says they are still working on recommended fixes to come before the end of the year. The mayor also created a new council committee that began meeting in September to address issues with both city pensions, which also include the Dallas Employees’ Retirement Fund.
That council committee’s chair, Mayor Pro Tem Tennell Atkins, appointed council member Paula Blackmon to lead another group tasked with also coming up with recommended police and fire pension changes before the end of the year.
“The pension fund is stabilized now because what the legislature did was put a tourniquet on to stop the bleeding,” said Bill Quinn, a co-chair of the mayor’s pension study group and has served as chair and vice chair of the police and fire pension board from 2017 to August 31. “But it’s still significantly underfunded. That’s what we need to get going again, to find a way to get additional contributions into the plan to make it viable.”
Before the law changed, the police and fire pension was on the brink of collapse after its board approved unsustainable benefits and made poor investments, such as owning a 3,100-acre California resort bought for close to $111 million in 2006. The pension system later sold the California resort for $22 million in 2018.
Discussions to overhaul the system led to veteran cops and firefighters leaving in droves and pension members in 2016 withdrawing around $500 million from the system over five months. It left the pension about 36 percent funded and estimates that it could be insolvent in 10 years.
As of October 2016, the city had close to 3,340 police officers and almost 1,900 firefighters. By the same time the next year, the city had 3,070 officers and 1,810 firefighters. The police department reported this month having around 3,025 officers at the start of October this year and the fire department said it had more than 2,000 firefighters.
House bill 3158 banned just about all large lump-sum withdrawals from retirees’ accounts, boosted the city and employees’ annual contribution rates to the fund, revamped how the pension board was structured and other changes.
Kelly Gottschalk, the pension system’s executive director, told council members part of the Ad Hoc Committee on Pensions earlier this month that selling existing investments, like the resort, has largely been what the board has been tackling in the years since the law went into effect. She said the goal is to liquidate the remaining real estate and private equity investments they have and buy new investments that would yield a better return.
“It’s taken a long time, and we’re still working through that,” Gottschalk said during an Oct. 13 meeting. “So that’s been a drag on our fund over time, selling these assets in a responsible way so it’s not a fire sale, and we’re not taking bigger losses than we need to.”
She said the city’s contribution rate in 2022 was close to 37 percent, and that the pension system’s latest projections show the contribution would have to be 52 percent to fully fund the pension within 30 years. According to police and fire pension records, the city was contributing at least $165.5 million as of the end of December 2021. To get to 52 percent, the city is estimated to have to kick in at least another $63 million.
Aleena Oberthur, public sector retirement systems project director at The Pew Charitable Trusts, told The Dallas Morning News that while increasing the city’s contribution rate is a viable option, pension bonds are more of a gamble. They can give governments some budget relief, but the savings aren’t guaranteed.
“Current interest rates, which increased sharply last year, make issuing (pension obligation bonds) riskier because they increase the cost of repayment on the bond,” Oberthur said. “At the same time, investment returns are expected to be lower, around 6 percent, in future years, making it less certain that return on plan investments will exceed borrowing costs.”
Blackmon told The News she is in favor of pushing the bond election to November 2024 so the council can have a better idea of the financial landscape and get more community input.
“We’re already planning for a charter review election in November and with the bond, I want us to have a sound program that is ready to go to the voters,” Blackmon told The News. “My problem is, I don’t think we have one that is ready to come to us yet and it may need a little more time.”
Atkins told The News he believed “all options should be on the table,” but it may be too early to lean toward one until the actuary analysis is presented next month.
“I believe we are going to resolve the issue, but right now, it’s premature to say what plan or action we’re going to take until we get all the information on the table, so we know what option to take,” Atkins said.
James Quintero, policy director of the Texas Public Policy Foundation, said he believes it should happen sooner than later. He cited online state pension board records showing the pension system was estimated to be fully funded in 68 years in 2022, down from 63 years in 2021, 55 years in 2020 and 38 years in 2019.
“This is an issue that can impact a city in a number of ways, including being a detriment to attracting new recruits,” Quintero said. “Candidates can look at the situation and come to the conclusion that the benefits system offered by the city of Dallas isn’t sustainable and not going to be there when they’re looking to retire. Because of that, they’ll just look elsewhere for police and fire jobs.”
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