On Pensions & Promises

Introduction.

Today is when I make a lot of people mad. My preference would be just the opposite. I treasure my municipal family. I am also a taxpayer, as are we all. But mostly I’m a realist – or at least I try to be. In the end, however, I simply respect arithmetic.

From 1973 to 1980, I was an employee of local government, almost five years in the City of Garland and two years at Dallas County. While in Garland, I was part of the Texas Municipal Retirement System (TMRS). The last thing on my mind at that time was retirement. We received a printout each year of our projected retirement pay under TMRS. All I remember is how large the numbers were. To be honest, I didn’t believe them.

It would be years before I would be fully aware of the story behind those numbers. The Governmental Accounting Standards Board (GASB) imposed on governments the obligation to disclosure unfunded liabilities. GASB was formed in that era due to the great embarrassment when the bankruptcy of New York City got largely blamed on the accounting profession.

In recent years here in Texas, Bob Scott, ACM/CFO of the City of Carrollton dug into what everybody considered to be the most conservative and most secure pension fund of them all, TMRS. Bob found a number of things that did not make sense. He inquired, then challenged and before long he was the voice of truth in the eyes of his peers, the finance directors in Texas. However, he stepped on some toes. His city manager, Leonard Martin, was getting some calls from his peer level and some HR directors wanting Bob to keep his mouth shut. If you know Leonard and Bob, you know full well that was not going to happen.

Before long the executive director of TMRS was gone. And so were the actuaries that had been advising for a half-century.

The Arithmetic.

The concept behind the complicated actuarial math is not too hard to understand. Contribute money into a pot that can be invested in things that earn money. And then subtract the payouts to retirees based on the health of the fund. Lastly, stay whole. By that I mean stay up with the current value of those payouts.

Each city in TMRS has their own plan, and plans vary widely. So, let’s tinker with the City of Fiscal Bliss, my imaginary city I’ve used since I taught MPA classes at SMU back in the 1970s. None of the cities started out this way, but let’s assume that the Contribution side was the employee only. The payout wouldn’t be too impressive but, hey, any annuity at a decent earnings rate rolls up into a nice sum of money given several years of dollars contributed.

Now, let’s add a contribution from the city. Let’s start with a 1:1 match, then 1.5:1 match and round out with a 2:1 match. Whoa! Look at that payout. Put the payout on steroids by assuming the future investment rate of return is 5%, 7%, 9%. Hey, it will NEVER be less than 5%, so why not build a minimum guaranteed earnings rate into the plan? Wait, we can do better than that by adding a feature that says the payout will be automatically adjusted for big portion of CPI. And the payout will be until you die. Or your spouse dies.

Lastly, let’s take the retirement age and conditions down. Instead of being eligible after 25 years of service, let’s make that 20 years. No, let’s make vesting at 15 years, then 10 years! Let’s do better than that. Let’s be a little more generous on how we count the years with credit given for other kinds of service.

Now, why would anybody agree to all of those pension features?

First, many of those increases in benefits were vouched for by actuaries in financial models nobody but they understood.

Second, in tough times when a city can’t give pay raises, there are efforts to give something else – something that doesn’t reveal its full impact for years later. Even things like giving all employees an extra day off seem like it doesn’t cost much. However, taking the City of Dallas as an example, one extra day off is the equivalent of the loss of productive for 52 full-time employees! In this case, some benefits were motivated by trying to substitute for other compensation that wouldn’t fly politically.

A third reason involves faulty assumptions. When you promise a 5% investment earnings minimum when a bank CD yields more than that level, it sounds good. But what if the best and safest investment instruments earn virtually zero like they have for several years now? You might be tempted to invest in riskier things that could yield 10-15%. But they could lose by that same magnitude. Maybe even 100%! Also, what happens when you start to slow in population and city employment growth while the number of retirees continues to grow?

Where Are The Risky Pension Funds?

There are 8 State Plans in Texas with an Unfunded Liability of $47.9 billion covering 2.13 million employees or about $22,488 per employee. TMRS is at $20,636 per employee and has a high funded ratio of 85.79%. Also, they have a very good (short) Amortization Period of 17.10 years. The state, county and teachers retirement systems are also relatively under control. These aren’t likely to collapse.

The story is quite different with the 85 Local Plans. You can regularly read negative news stories about the biggest ones in this group. The Unfunded Liability for the Dallas Police & Fire Pension Plan is $213,712 per member and is only 63.80% funded. The Amortization Period is … get this … Infinite. I’ll let you review the spreadsheet recap on your own.

Red Flag. Red Flag. Red Flag.

Out of the 85 Local Plans, there are 12 called Title 109 Plans. They were created under a different state legislation than the other 73 Local Plans. Why is this important to know? Yesterday, the State Attorney General revealed a request for a formal opinion from the Chair of the Texas House of Representatives Committee on Ways and Means.

March 8, 2016

Dear General Paxton,

I am writing to request your formal opinion on a question related to those municipal retirement systems of which some or all of their pension plans have been put into state statute.

As of 2015, Texas has thirteen local retirement systems specifically enabled by state statute, with their provisions located in Article 6243, Vernon’s Civil Statutes (also known as Title 109). Local retirement systems established in Title 109 have “their contribution rates, benefit levels and the composition of their board of trustees set in state statute,” according to the Texas Pension Review Board.

Rising pension and healthcare costs, unpredictable revenues, aging infrastructure, high debt load, and increasing costs for the delivery of city services threaten municipalities’ ability to balance budgets and maintain strong credit ratings. When these challenges put municipalities at risk for defaulting, does the oversight role played by title State Legislature in these specific municipal retirement systems cause the State to assume some or all of the liability? Should one of these specific municipal retirement systems fail to meet its obligation, is the State responsible for ensuring that agreed upon payments are made?

With respect to the size of these pension systems and their impact on city budgets, and the role played by the State Legislature in their creation and maintenance, it is imperative that the Legislature have a clear understanding of the consequences of decisions made in regards to these municipal retirement systems.

Thank you in advance for your consideration of this matter. Please contact me if you need any additional information regarding this request.

Best regards,
Representative Jim Murphy

I could only find 12 of the 12 plans or funds mentioned in the letter to the AG. They are:

Austin Employees’ Retirement System
Austin Fire Fighters Relief & Retirement Fund
Austin Police Retirement System
Dallas Police & Fire Pension System
El Paso Firemen’s Pension Fund
El Paso Police Pension Fund
Fort Worth Employees’ Retirement Fund
Galveston Employees’ Retirement Plan for Police
Houston Firefighters’ Relief & Retirement Fund
Houston Municipal Employees Pension System
Houston Police Officers Pension System
San Antonio Fire & Police Pension Fund

What does this sound like to you? Good luck with cities trying to tell the state these bad boys are their fault. Or maybe it is the state hearing about what is coming and wanting to go ahead and knock out this legal path before the next legislative session.

In Closing.

One of the things I thought I would never see and hear in my career is the decision for a state or local government to declare bankruptcy. Now it is happening all over the country. In my mind, the last state that could possibly declare bankruptcy or to break a promise on a pension is Texas. Now here is what blows me away. We’ve got this Texas Swagger ad nauseam about how robust things are at the same time we FINALLY have some signs like this letter that somebody is trying to figure out how to get out of their financial problems. The City of Dallas recently lost the cherished AAA bond rating. Why? The pension funds. The CFO has lost her job (moved over to another position) and she isn’t even directly responsible for the pension funds.

The reality is that promises were made based on faulty arithmetic. And when confronted with correct math, those in charge of solving the problem are beneficiaries of the numbers that don’t work.

Ah, but the can has been kicked down the road for decades and has finally hit a wall. LFM

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