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State
Warns Cities of Pension-Fund Shortfalls
September 11, 2003 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
pensionplan 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." Warning list The
following public pension plans are on the state's warning list because of
underfunding as of Sept. 1: • El
Paso Fire • El
Paso Police • Harlingen
Fire • Longview
Fire • Teacher
Retirement System • Lufkin
Fire • Marshall
Fire • DFW
Retirement Plan DPS • Fort
Worth Employees • Austin
Employees • Dallas
Police and Fire • Texas City Fire Copyright
© 2002 Global Action on Aging |
