Fort Worth pension unfunded liability hits $1.12 billion

06/16/2014 9:31 PM

06/16/2014 9:31 PM

Despite unilaterally cutting pension benefits for its employees, the city of Fort Worth’s efforts to curb its billion-dollar deficit aren’t paying off yet.

Fort Worth pension’s unfunded liability — or the amount the city can’t afford to pay off — increased from $1.07 billion in 2013 to $1.12 billion in 2014 in a report released last week by the Fort Worth Retirement Board.

But Susan Alanis, assistant city manager for Fort Worth, said the city expected the debt to go up initially because the fund adopted a lower rate of return — 8 percent instead of 8.25 percent.

The pension fund’s deficit also grew this year because of a new guaranteed 2 percent cost-of-living adjustment increase, or COLA, which had not been offered to employees. Previously, only a fluctuating cost-of-living boost based on the health of the fund was provided to employees and was not part of the funding formula.

“We think the changes are an excellent start and if the economy comes back that the fund will continue to be stronger,” Mayor Betsy Price said. “What we needed was a defined end of the unfunded liability — it was continuing to increase with no end in sight.”

Still, Jim Tate, president of the Fort Worth Professional Firefighters, is concerned that the city is manipulating the numbers, and Rick Van Houten, president of the Fort Worth Police Officers Association, is worried that the city is too focused on making short-term changes to the fund.

Both police and firefighters have pending lawsuits against the city over the pension changes, which reduced the multiplier used to calculate benefits from 3 percent to 2.5 percent, raised the number of high-salary years used to five years and does not include overtime.

“I have concerns about the way the city is manipulating the numbers of the pension fund. It appears the city’s plan is to do everything they can through changing assumptions to make it appear that the fund is unsustainable,” Tate said.

Being more transparent

Alanis says the city’s outlook in previous years has been unrealistic, and using the lower rate of return and including the cost-of-living adjustments in the report make the fund balance a much more transparent figure.

If the unfunded liability continues to climb — the pension is currently 63.9 percent funded though industry experts agree that the healthiest plans are funded at 80 percent or more — the taxpayers become the “backstop,” she said.

“There would be a risk in the future that there is not the funds available to pay the benefits owed,” Alanis said. “At the end of the day, the state constitution indicates that we as a city, and hence the taxpayers, are responsible for those bills as they come due. So it could definitely affect the health of the city overall and the ability to deliver services.”

The 2014 report included benefit reductions made in 2012 to police and general employees, but it does not account for the reductions that were adopted for firefighters in January.

A hard line on pensions

The city’s contributions have more than doubled since 2005, when the city’s contributions were only $31.7 million.

In 2013, however, the city contributed $77.5 million to the fund, a 144 percent increase in less than a decade. Employee contributions have increased at a slower rate, going from $25 million in 2005 to $33 million in 2013, a 32 percent increase.

Price said the City Council has been committed to capping the city’s contributions and making the unfunded liability transparent.

“We knew we had to make changes so that the pension would be there when our employees retired, so it would be stable for them, and because we had to keep our budget sustainable,” Price said.

The city’s uncompromising stance on pensions comes as pension funds across the country are coming under fire for their instability. Most notably, Detroit is going through bankruptcy proceedings at least in part because of an unsustainable pension fund. Closer to home, the Dallas Police and Fire Pension System lost its administrator last week after questionable investments came to light.

The combined unfunded liability for just state pension plans across the United States in 2012 is $4.1 trillion, and they were only funded at 39 percent, according to a report from the nonprofit organization, State Budget Solutions.

Texans also have cause for concern, according to State Comptroller Susan Combs, which is why she pushed for House Bill 13 in the last legislative session, which requires more transparency in reporting pensions and has prompted a review of pension plans statewide.

The Pension Review Board is in the process of studying the financial health of all public retirement systems in Texas, said Christopher Hanson, executive director of the Pension Review Board. The board is looking at each system’s ability to meet long-term obligations and plans to make recommendations to systems at risk of not meeting their obligations.

The minimum guideline for a fund to be “sound” is to have an amortization period of no more than 40 years, but the recommended range is 15-25 years, Hanson said.

Fort Worth’s amortization period in the 2014 report is 49.3 years.

“Each pension plan is different, but really if you are underfunded over the long term, you either have to adjust the contributions or look at the level of benefits. There are really only so many ways to improve the health of a public retirement system,” Hanson said.

Fort Worth is a “unique situation” because of the lawsuits filed, Hanson said, and his board is following how the lawsuits progress in court.

Taking the battle to court

Van Houten and former President Steve Hall are suing the city in federal court, accusing Fort Worth of contract impairment, violation of due process, unlawful taking of property and violating the U.S. and Texas constitutions in reducing pension benefits for future service.

Van Houten said the police officers want the fund to be healthy but said he does not think the health of the fund is in trouble.

“In a pension fund, you are dealing with long-term investments so you need to make changes with the long term in mind. The Employees Retirement Fund Board has intentionally made changes today that is, in the short term, causing the unfunded liability to go up,” Van Houten said, adding that some changes, like reducing the rate of return, “will make the fund healthier in the long run.”

But he said reducing the pension benefits for employees, especially after police had offered to increase their contributions to keep the multiplier at 3 percent, was not the right thing to do. And lowering pension benefits makes Fort Worth less competitive in recruiting, he said.

A federal judge has ordered the city and the police association into mediation.

“The options are endless if both sides return to the table and are willing to work out what is in the best interest of the city and the best interest of the employee. I believe those are one and the same,” Van Houten said.

Like police, firefighters offered to increase their contributions to keep the pension benefits up.

“We are trying to do everything we can to maintain our benefits, and we are willing to pay the entire cost of maintaining our benefits,” Tate said. “How can anyone say that is not a viable option if the employees are willing to put their own money in and assume the risk going forward?”

A state district judge ruled June 5, however, that he could not impose the firefighters’ terms for a new contract. The firefighters association is expected to announce if they plan to appeal that decision this week.

A second allegation in the firefighters’ lawsuit — that the city failed to negotiate in good faith with the firefighters association — is still pending in the court.

“The city has continued to bargain in good faith. Our goal, however, is to ensure that we come up with a contract that is sustainable and affordable for the taxpayers,” Alanis said.

“I think the challenge is the benefit reductions. There were a lot of years when the fund was performing very, very well as the market was performing very, very well, and benefits were ratcheted up like they would continue forever,” Alanis said. “It is hard for people to accept reductions in the benefits they anticipated.”

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