Dallas should use actuarially determined contributions for its troubled police and fire retirement system in order to reach full funding by 2055, according to preliminary recommendations from an independent actuary firm.
The suggested move to allocate more city revenue to the system comes as the unfunded liability is rising and the use of pension obligation bonds to reduce it remains undetermined.
A presentation this month by Cheiron actuaries to the city’s Ad Hoc Committee on Pensions indicated current contributions, which are largely based on a fixed percentage of payroll, would only result in a projected funded percentage of 24% in 2055.
The actuaries noted city contributions would need to increase and remain higher for some time.
“Our preliminary recommendations are that the city’s fixed-rate contribution needs to change to an actuarially determined contribution so that contribution amount would fluctuate with the experience of the plan and make sure that the plan meets the funding guidelines today and meets the funding guidelines in the future,” Bill Hallmark, a consulting actuary at Cheiron, said.
While the police and fire unfunded liability stood at $3 billion at the end of 2021, he said the number is closer to $3.5 billion for 2022.
Cheiron’s analysis, which was based on the fund’s 2022 valuation, along with an assumed negative 13% investment return that year, included no change to the employee contribution rate, benefits, or retirement age. Actuaries also recommended providing cost-of-living increases to retirees sooner than projected in order to keep and attract public safety workers and provide them with an adequate retirement benefit.
Lackluster investment returns in 2022 compared to 2021 decreased the median funded ratio for the 20 largest cities, including Dallas, according to a recent S&P Global Ratings report on pension funding performance in fiscal 2022.
“While some losses from 2022’s volatile markets could recover slightly in fiscal 2023, S&P Global is forecasting relatively slow growth over the next few years and…believes it is unlikely that funded ratios will return to near-2021 levels in the near term,” the report said.
Dallas lagged a S&P metric, which measures material progress in paying down unfunded pension liabilities, along with four other Texas cities, with Houston coming the closest to that metric.
Cheiron’s draft recommendations for the Dallas pension fund were presented for feedback purposes with the intention to return in the spring with updated recommendations based on the 2023 valuation, followed by a final report, according to the actuaries.
The Texas Pension Review Board has until December 2024 to issue a report on whether Dallas has a plan to fully fund pensions within 30 years. Depending on the report’s findings, state lawmakers, who return to session in 2025, could mandate additional pension reforms, analysts have said.
Only six years have passed since the last state effort to put the Dallas public safety pension on track.
A 2017 state law made several changes, including increasing contribution rates by both the city and its employees.
The law was spurred by the city’s projection that its police and fire fund, which then had an unfunded liability of nearly $3.7 billion, would become insolvent within 10 years. The pension crisis led to downgrades of the city’s bond ratings.
Some members of the ad hoc committee brought up a lump sum payment, possibly via the issuance of POBs, to ease the unfunded liability — a move that was not included in Cheiron’s presentation.
Hallmark said the faster money comes into the pension fund, the better off it will be.
“So whether that’s a lump sum or even higher contributions than we’ve anticipated here for the near term that would always be better for the system,” he said.
In August, Dallas Chief Financial Officer Jack Ireland told the city council $400 million of available debt capacity for a 2024 general obligation bond referendum was being set aside for potential pension bond issuance.
He also noted the municipal market was “in a bad place” in terms of interest rates for borrowing a significant amount for pensions.
“It is too early to determine if pension obligation bonds will be recommended, and the Ad Hoc Committee will look at various strategies,” a city spokeswoman said last week.
Meanwhile, a task force recommendation to place $1.1 billion of GO bonds for infrastructure, recreational, housing, and other projects on the May ballot is expected to be considered by the city council next month.
Dallas police and fire unions are pushing for the November 2024 ballot instead.
“We have requested that the city delay the vote on municipal bonds so all options can be weighed, including the issuance of bonds,” Jim McDade, president of the Dallas Firefighters Association, said in an email.
His union and the Dallas Police Association want a later referendum to give the city time to decide if any debt capacity should be tapped as part of a pension funding solution.
In an Oct. 6 memo, Dallas City Manager T.C. Broadnax contended the bond election and addressing the pension liability can move forward on separate tracks, adding while POBs are an option, current interest rate levels make them less likely to be the best option.
The Reason Foundation analysts issued a warning this month to Dallas about using POBs.
“As stakeholders discuss viable proposals to address unfunded liabilities in Dallas, the speculative risk and funding nature of pension obligation bonds must be recognized,” a foundation commentary said, adding “the spread-reversal risks of POBs are heightened in times of high interest rates with uncertain forecasts — escalating the risk of the bond leading to an increase, rather than a decrease, in the long-term costs of unfunded liabilities.”
It also said risk of investment returns not performing as expected and “the illusory effect POBs have on funding ratios must also be recognized.”
Dallas has about $95.315 million of debt outstanding from a previous POB sale in 2005. That deal included $186.6 million of current interest bonds and $137.7 million of capital appreciation bonds with both series having final maturities in 2035. Another $75 million of step-up coupon bonds sold at that time were refunded in 2010 in a deal that was subsequently refunded in 2020.
In conjunction with another 2017 Texas reform law, Houston sold $1 billion of pension bonds to fund a portion of the unfunded liabilities for its police and municipal retirement systems.
The law put into place a 7% rate of return on investments for calculating actuarial assumptions and a requirement for the city to meet its annual contribution to eliminate the unfunded liability in 30 years. Since then, the unfunded liability for the city’s three retirement systems, which had climbed as high as $8.2 billion, shrank to $1.5 billion.
This year Houston, Texas’ largest city, addressed its growing unfunded liability for retiree benefits like health care by creating a trust.