A new report funded by an influential Texas billionaire is warning about the precarious state of Dallas’ Police and Firefighter pension fund, which is facing a $4 billion shortfall because of chronic underfunding and poorly-performing investments in questionable real estate. The report urges city officials to enact several reform measures that will put the fund on the road to solvency. From the report:
1. First, the city must adopt a better funding policy. It must make adequate funding non-negotiable and should commit to paying down its current unfunded liabilities in 30 years or less. Going forward, it should commit to paying down any new debt in 20 years or less, as recommended by the Society of Actuaries Blue Ribbon Panel on Pension Funding. The city should also require that the plans use more conservative assumptions for calculating annual contributions to ensure that the payments cover the full costs of workers’ benefits.
2. Second, plan managers must establish prudent investment policies that take into account market risk as well as the city’s ability to make up for investment shortfalls. These policies should also set appropriate limits on asset allocation and fees
3. Third, the city should consider enrolling new workers in plans that are simpler and easier to manage, like a Defined Contribution or Cash Balance plan. Both types of plans can be designed to place workers on a path to a secure retirement while also protecting the city’s financial interests.
Sounds sensible. Yet even as the city scrambles to patch up a $220 million hole in the fund caused by pensioners exploiting a special benefit to create a kind of “run on the bank”, the usual suspects are not having any of it. The Dallas News:
Paul Brown, president of the Texas Association of Public Employees Retirement Systems, accused the Arnold Foundation of “fear-mongering” on pensions.
Brown also said local control isn’t a guarantee of a well-managed plan. For instance, the city issued $535 million in pension obligation bonds in 2005 to fill a budget hole in the locally controlled ERF.
“That’s not what’s going to fix this situation,” he said. “You have a pension system that can easily be fixed.”
Pension officials also hope the city will pitch in with hundreds of millions of dollars to keep the fund afloat. That means higher taxes, cuts in services or both.
The only thing that is for sure is that schemes that defy basic arithmetic aren’t sustainable indefinitely. The proposals in the report are not the only way forward. But if Dallas intends to avert a Detroit-style bankruptcy, it will have to get a handle on the city’s public pension shortfalls. Somehow.
Read the full report here.